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Understanding alternative mortgage options

Maybe you don't qualify for a traditional mortgage, or maybe it's just not right for you. Let's look at some nontraditional options.

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Understanding alternative mortgage options.

So, you’ve decided to buy a home. Nice! Whether it's a small cabin in the mountains, an apartment in the city or ranch in the 'burbs, you're probably going to need a mortgage to pay for it for the next 15 to 30 years.

But what kind of a loan do you look for?

Well, for starters, you should know the difference between fixed and adjustable rate mortgages.

In short, a fixed rate mortgage has an interest rate that doesn't change over time. So your payment always stays the same.

By contrast, an adjustable rate mortgage's interest rate goes up and down, so your monthly payment may fluctuate over time.

If you want an in-depth overview or want to learn about how loan terms can affect what you pay every month and over time, our video, Fixed Versus Adjustable Rate Mortgages can help.

Another way to slice up the mortgage pie, is to look at conventional versus government insured mortgages.

A conventional mortgage is a loan that is not insured by a government agency and meets the criteria of Fannie Mae and Freddie Mac.

Most of the mortgages made in the US today are guaranteed by one of these corporations which set maximum loan amounts as well as other loan requirements for eligible borrowers.

If you have 20% of the home's price set aside for a down payment, this is the type of loan you'd likely consider.

If you put down less than 20%, in most instances you'll be required to pay Private Mortgage Insurance or PMI, above and beyond your monthly mortgage payment.

This type of insurance protects the lender if you default on your loan.

But what if you don't have 20% to put down?

Well, there are a number of government-insured mortgage programs that could help.

Some programs can seem a little complicated, so we'll just give you a brief overview of the basics.

Let's start with mortgages insured by the Federal Housing Administration.

FHA mortgages have more flexible income and credit requirements than other loan types.

They are also designed to help you purchase a home with a limited down payment amount and minimal closing costs, which makes them appealing to those, who might not qualify for a typical Fannie Mae or Freddie Mac mortgage.

You can get more information about these loans at hud.gov.

Another housing and urban development program might be a good option if you're the fixer-upper type.

Their FHA 203(K) renovation loan program was created to revitalize communities and neighborhoods and is intended for buyers who want to rehab single family homes and live there. These loans can cover the purchase price as well as renovation costs including materials, labor and expenses. You can even use the loan money for cosmetic improvements like new kitchen cabinets or appliances.

For more information on the 203K loan program visit hud.gov.

If you're a current or former member of the armed forces, you might want to look into what the Department of Veterans Affairs has to offer.

The VA loan program is for military personnel, veterans and eligible surviving spouses and has low down payment requirements and sometimes no down payment requirement at all.

This of course makes it much easier for a current or former member of the armed forces to own a home.

There are some fees to take into consideration though, including a one-time VA funding fee which can be fully or partially financed into your mortgage or paid at closing. Visit the VA's website for more information.

So remember, there are also many other types of government-sponsored mortgages depending on where you live and other factors.

To get more info on the programs we've described as well as other government offerings, visit govloans.gov.

Learning about the types of mortgages available to you is a great money habit, and the more knowledge, the better.

Need some help? You can take a home buyer education class or seek the advice of someone who specializes in mortgages, like a mortgage loan officer.

Be sure to have an open and honest discussion about your situation and what you’re looking for and then consider the pros and the cons of each option before deciding what loan is best for you.

But don't just take the recommendation of a loan officer. You owe it to yourself to do some leg work and research your options on your own before applying for anything.

Finally, if you're a first time buyer, or if you have a modest income, you might be eligible for programs through state or local government agencies, nonprofits or employers.

From grants to flexible or lower down payment options and closing cost assistance, there are many affordable housing programs that can help. You can even contact a housing counselor who is approved by the US Department of Housing and Urban Development for free or low cost advice.

Buying a home is one of the biggest financial decisions you'll ever make. It's also often one of the most rewarding things you can do for yourself or your family. So take the time to check out all your mortgage options first, because a loan you never knew existed might be the key that opens the door to the home you’ve always wanted.

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Disclaimer

The material provided on this website is for informational use only and is not intended for financial or investment advice. Bank of America and/or its partners assume no liability for any loss or damage resulting from one's reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment management.

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