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FHA Loan Types

When you are looking for good loan terms, low interest rates, and a no down payment requirement in order to purchase a home, an FHA Loan may be right for you. The FHA allows people to purchase homes with little to no out-of-pocket expenses and, because the FHA guarantees the loan to the lender, you can also get very favorable terms on your loan.

Important FHA Loan Issues

If you are considering an FHA Loan you should first know the type of loan you are interested in. ** Update: In early 2008, changes were made to the FHA Loan limits available to borrowers in many counties in the U.S. Sweeping changes to the FHA Loan program are also being discussed. Be sure to investigate these opportunities before obtaining any home loan.

The most widely used FHA Loan is the Fixed Rate 203(b) Loan. The following are some of the important issues you should know regarding fixed rate loans:

• You will choose a period of time - 15, 20, or 30 years - in which you want to pay back your loan. Keep in mind that interest rates are usually lower on mortgages that are for shorter periods of time, but your monthly payments are lower on mortgages that are for longer periods of time.
• Your interest rate will be higher than adjustable rate mortgages because the interest rate will stay the same throughout the lifetime of your loan.
• Your payments will be fixed and never increase with the exception of property tax increases and homeowner's insurance increases which may cause your payments to rise slightly.
• Fixed rate mortgages are a good choice for people who plan to stay in their new home for more than five years and build equity.

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Another type of FHA Loan is the adjustable rate loan. The following are some important things to keep in mind about the FHA Adjustable Rate Mortgage Program:

• You will have a lower interest rate than fixed rate loans initially, but the interest rate will rise over time. Usually ARM loans have fixed interest rates for the first three years and then become adjustable and the interest rates begin to rise.
• ARM loans do not guarantee a consistent monthly mortgage payment. Since the interest rates rise after the initial fixed period of time, your payments will rise as well.
• Adjustable rate mortgage are a good choice if you are only planning to live in the home during the fixed rate period of time. If you are planning to sell your home before your interest rate becomes adjustable, you may want an ARM loan because you can get a lower interest rate for that period of time.

Before deciding on which loan type to choose, make sure you consider what your future plans are so that you can choose the loan that is right for you.

See a related article: Natural Disasters and VA Guaranteed Loans