What Budget-Friendly Mortgage Options Can I Enjoy?

Find out how you can make owning your dream home a reality

Budget-friendly mortgage options to choose from

You're thinking about either buying or refinancing a home. You've heard that this – in some circumstances – can be a budget-friendly move.

If you're buying a home, you might be able to make lower payments than your current rent (depending on what area of the nation you live in). You can also start building equity.

If you're refinancing, you could capture a lower interest rate and lower your monthly payments.

But you don't really understand what type of mortgages are out there. What are your options?

Here's a rundown.

Types of Home Loans  

"Conventional loans" are the fixed-rate loans that most people immediately think about. These are 15-year to 30-year loans offered at a fixed interest rate. Most require a downpayment of at least 10 to 20 percent, although an FHA-backed loan (Federal Housing Administration) can allow qualified homebuyers to purchase with as little as 3.5 percent down.

"Adjustable rate loans" lock in an interest rate for a limited number of years, such as 3, 5 or 7 years. After that time period, the rate can "adjust" to a different number.

These are two common types of home loans. But there are others, as well.

The following are some of the different types of home loans:

Assumable mortgage

Although rare, assumable mortgages are worth a mention. Essentially, any homeowner that has an assumable loan can simply transfer the remaining balance on the loan to a buyer instead of paying it off using proceeds from the home sale.

Balloon Mortgage

With a balloon mortgage, the borrower makes regular monthly payments for a set term and then pays off the balance in a lump sum. If you don’t have money for the lump sum, you would have to refinance your mortgage. These types of mortgages are typically only available in rural areas.

Construction-to-permanent mortgages

If you're interested in building your own home instead of buying an existing home, you many need to apply for a construction to permanent loan. These loans feature a two-step process by which, during construction, money paid is used for paying contractors. After the home is completed your mortgage payments would go towards paying the interest as well as the remaining balance in a standard fixed-rate or adjustable-rate mortgage.

Seller financing

With seller financing, the seller of the home agrees to accept payment directly from the buyer instead of selling the home with a conventional mortgage. Essentially, with seller financing would make monthly payments to the seller instead of the bank.

Additional Options if You're Buying

If you're buying a home (not refinancing), here are two other types of mortgages you may be able to explore:

VA home loan

Veterans Affairs Home Loans are available to any eligible retired, active duty, or honorably discharged members of the military. A VA loan may be used to buy, build, or improve upon any primary dwelling (you must live there) with 0 percent down payment.

If you have a VA loan, you do not have to pay mortgage insurance. You can fund 100 percent of the purchase price with no down payment and no mortgage insurance.

If you make a 5 percent down payment, your VA funding fee can be paid by the seller at closing.

In order to move forward with closing by using a VA home loan, you must submit a Certificate of Eligibility (COE). This COE form verifies to the lender for the property that you wish to purchase, that you are in fact eligible for a VA-backed loan, and the process can take 3-5 business days.

USDA Rural Development Loan

The USDA provides loans “to low- and moderate-income rural Americans" an opportunity for the opportunity for homeownership through these loans.

If you qualify for a USDA loan, you can borrow 100 percent of the loan amount, with no money down. You'll need to pay for mortgage insurance, but USDA mortgage insurance rates are lower than an FHA or conventional loan.

Final Thoughts

Before signing or refinancing on any type of home loan, always explore your options and make sure that you clarify and understand every detail.

Don't be afraid to ask as many questions as needed. After all, you're making the biggest purchase of your life.