Choosing the best home loan for your needs and budget is just as important as finding the right home. There are several options to choose from, and the loan you select will affect your down payment, monthly payments, how much interest you pay, and other factors.

A credit union can help you save on your home financing. Credit unions are not-for-profit financial institutions focused on serving their members' needs instead of investors. Earnings are passed on to members through lower loan rates and fewer fees. They offer personalized service and take the time to understand your needs to offer a customized home financing solution.

What Is a Home Loan?

A home loan is also known as a mortgage. It’s a special type of loan that’s used to purchase property where the property itself serves as collateral. But what is a mortgage, exactly? 

It’s a financial agreement in which a lender provides funds to buy a home, and the borrower agrees to repay the loan over 15, 20, or 30 years. Depending on the type of loan, the interest rate can be either fixed or variable.

Each type of home loan has important benefits to consider. For example, VA loans don’t require a down payment, while FHA loans are popular with first-time homebuyers because of their flexible credit requirements. Before you select a home loan, be sure to compare your options carefully to make sure you choose the right option for your needs.

Common Types of Home Loans

It’s important to understand how each type works before making a decision. Let’s break down the most common home loan options.

Residential Mortgages

A residential mortgage is used to purchase or refinance a home that you will live in. Some of the most common types include:

  • Fixed-rate mortgages

  • Adjustable-rate mortgages (ARMs)

  • FHA loans

  • VA loans

  • USDA loans

  • Jumbo loans

Home Equity Line of Credit (HELOC)

A home equity line of credit (HELOC) is a type of loan that allows you to borrow against the equity in your home for many different purposes. If you’re wondering what is the best loan option for home improvements, a HELOC is often a strong choice due to its flexibility and cost-effectiveness. HELOCs may be used for:

  • Home renovations or repairs

  • Unexpected expenses

  • Debt consolidation

  • Major life events

  • Large purchases

  • Other needs

A HELOC is a revolving line of credit that works similarly to a credit card. You can borrow as needed up to your credit limit during the draw period, which is the time the HELOC is active, and your credit limit is replenished when you repay the money you borrow. After the draw period ends, you enter the repayment phase, where you repay both the principal and interest with fixed monthly payments. 

HELOCs offer flexible access to funds, and they also have lower interest rates than other borrowing options. However, because your home is used as collateral, there is a risk that the lender could foreclose on your home if you fail to repay the money you borrow. 

Ready to crunch some numbers to see how much you may qualify to receive? Check out our helpful HELOC calculator. 

Unimproved Property Loans

An unimproved property loan can be used to purchase land for future development. “Unimproved” means the land doesn't have a road, utilities, water line, or sewer connection. These loans typically require larger down payments than loans for homes.

Lot loans and construction loans are two common financing options for unimproved land. A lot loan can be used to purchase land to build a home within a certain timeframe. Construction loans, on the other hand, can be structured to finance both the purchase of the land and the cost of building the home.

Investment Property Loans

An investment property loan is used to purchase real estate that earns income or is expected to increase in value, such as a rental property, vacation home, or commercial real estate. The requirements to qualify are usually stricter than for residential mortgages due to the potential for vacancies.

The type of loan required for an investment property depends on its use. Conventional investment property loans are generally used for residential rentals, while commercial real estate loans are used for retail spaces, offices, warehouses, factories, and other commercial properties. Owner-occupied multi-unit financing can also be used to purchase a duplex, triplex, or fourplex when the owner lives in one of the units.

Conventional Loans

A conventional loan is a home loan that is issued by a private lender — like a bank or credit union — and is not backed by the government. It’s the most common type of home financing. Conventional loans can be used to purchase a primary residence, a second home, or an investment property.

Conventional loans are popular because of their flexibility. They are usually available with terms of 15, 20, and 30 years, and they can also have either fixed or variable interest rates. Private mortgage insurance (PMI) is required until you have at least 20% equity in the property.

FHA Loans (Federal Housing Administration)

An FHA loan is a mortgage that is offered by private lenders and is backed by the Federal Housing Administration. It is designed to make homeownership more accessible and can only be used to purchase a primary residence.

FHA loans have flexible credit and debt-to-income (DTI) requirements. Because they are backed by the Federal Housing Administration, lenders typically offer competitive interest rates to qualified borrowers. However, the property must meet specific safety and livability standards, and an upfront mortgage insurance premium (MIP) is required at the closing, along with ongoing monthly MIP payments.

VA Loans (Veterans Affairs)

A VA loan is a mortgage that is offered by private lenders and is backed by the U.S. Department of Veterans Affairs. It is intended to help eligible service members, veterans, and certain surviving spouses buy a home.

Borrowers must obtain a Certificate of Eligibility (COE) from the VA to qualify. They must also meet at least one of the following criteria:

  • Active-duty service member with at least 90 consecutive days of service during wartime or 181 days during peacetime

  • Veteran who meets minimum service requirements

  • Served more than six years in the National Guard or Reserves

  • Surviving spouse of a service member who died in the line of duty or as a result of a service-related disability and has not yet remarried (with some exceptions)

VA loans offer benefits that most other home loans can't match. Borrowers can finance 100% of their homes, which eliminates the need for a down payment. Private mortgage insurance (PMI) is not required, and the VA also limits the closing costs, which helps borrowers save even more. Additionally, VA loans have flexible credit requirements, and lenders typically offer competitive interest rates because the loans are backed by the VA.

USDA Loans (United States Department of Agriculture)

A USDA loan is a mortgage that is offered by private lenders and is backed by the U.S. Department of Agriculture. It is designed to promote homeownership in certain rural areas. To qualify, a property must be located in an eligible area and be used as the borrower's primary residence. The borrower's income must also fall within the program's income limits.

USDA loans are an attractive financing option because they don't require a down payment. Since they are backed by the government, they also have competitive interest rates and flexible credit requirements. Also, private mortgage insurance (PMI) is not required.

Jumbo Loans

A jumbo loan is used to purchase a home that exceeds the loan size limits set by Fannie Mae and Freddie Mac. It is usually used to buy a luxury home or a home in a high-cost housing market. A jumbo loan can be used to purchase a primary residence, a second home, or an investment property.

The primary advantage of a jumbo loan is that it lets you borrow more than with other home loans. These loans have stricter requirements, however. You’ll need a higher credit score, a larger down payment, and you may have to provide more documentation to verify your finances. Jumbo loans may have higher interest rates than other home loans due to the increased risk.

Fixed-Rate vs. Adjustable-Rate Mortgages (ARM)

One of the most important decisions you'll make when choosing a mortgage is whether to go with a fixed rate or an adjustable rate. With a fixed-rate mortgage, your interest rate stays the same over the life of the loan. With an adjustable-rate mortgage (ARM), you start with a low fixed rate for an introductory period, which may be 5, 7, or 10 years. After that, the rate fluctuates based on the market.

A fixed-rate mortgage offers predictable monthly payments, which makes budgeting easier. It also protects you from future rate increases. An ARM can be a smart choice if you plan to move or refinance before the initial fixed-rate period ends. ARMs typically start with lower interest rates than fixed-rate loans, which may give you lower payments. Both loans offer valuable benefits — the right choice often depends on how long you expect to stay in your home.

How to Choose the Right Home Loan

Choosing a home loan isn’t something you should rush into. It’s important to carefully consider your financial situation and your long-term goals to make sure the loan you select aligns with your budget and future plans. Some factors to consider include:

  • Loan term: A shorter loan term helps you save on interest and allows you to pay off your loan faster. Longer terms offer lower payments.

  • Fixed or variable rate: A fixed rate offers predictable payments, while an ARM offers lower initial payments for an introductory period. After that, your payments may fluctuate.

  • Down payment: USDA and VA loans offer zero down payment options, while conventional loans generally require 3–20%.

  • Credit score and debts: Your credit score and current debts affect which loans you will qualify for and the rates you'll receive.

  • How long you plan to stay in the home: If you expect to own your home long-term, a fixed-rate mortgage might be a better option because it protects you from future rate increases. If you think you will move or refinance within a few years, an ARM could help you save.

Choosing a mortgage is a big decision. If you’re wondering which loan option is best for first-time buyers, be sure to talk to a credit union loan officer. A mortgage professional can review your finances, explain your options and their pros and cons, and make a financing recommendation that best meets your goals.

Benefits of Getting a Home Loan from a Credit Union

If you’re looking to buy a home, getting a home loan from a credit union — like Scenic Community Credit Union — can help you save. Credit unions are nonprofit financial institutions that don’t have to worry about earning profits for investors. Instead, they pass the savings on to their members in the form of lower loan rates and fewer fees. Credit unions also offer a variety of flexible loan options and dedicated support to ensure a smoother lending process.

Whether you’re a first-time buyer, you’re looking to refinance, or you want to tap into the equity in your home with a home equity line of credit, Scenic Community Credit Union is here to help. Our loan officers will take the time to understand your needs and goals and walk you through the mortgage process.
 

Contact Us For Home Loan Assistance

Back to News & Articles