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Demystifying Home Loans

Buying a home can be intimidating—after all, it’s probably the biggest purchase you’ll ever make. A house can provide access to financing for more of life’s major expenses, so it can be well worth the investment. But for newbies and longtime owners alike, keeping up with all the basic home loan options can be a challenge. Here’s a primer to get you started.Deciphering the code

Deciphering the code

All the terms related to mortgages and other types of home loans can make the uninitiated feel isolated, as if everyone in the room is speaking a different language. It’s hard not to get lost amid the acronyms being tossed around. Here are the top terms to know:

  • Fixed-rate mortgage: Sometimes referred to as conventional loans, this option sets a specific interest rate for the life of the loan. Monthly payments will stay the same, even if market rates are rising. Lenders such as Dominion Energy Credit Union offer terms of 10, 15, 20, or 30 years. Generally the longer the term, the lower the monthly payments, but you will pay more in total interest over the life of the loan. If you want to avoid the effects of rising rates in the future, this is a good bet.
  • Adjustable-rate mortgage (ARM): Payments on this type of loan can change over time, as the interest rate periodically adjusts to market levels. Some ARMs come with a fixed rate for a period of five years, for example, and then the rate floats and usually resets based on a market index.

Dominion Energy Credit Union has options with lower down payments to avoid the cost of PMI, and no origination fees that can help you get into a new home sooner. Plus, we have a cap on how much your rate could rise.

  • Federal Housing Administration (FHA): Loans backed by the FHA can help those buyers who might not be able to afford a 20% down payment. FHA mortgages usually involve a much smaller down payment. You may be required to pay insurance on the mortgage, which can raise costs.

Dominion Energy Credit Union has a low down payment option, and the seller can contribute towards closing costs.

Other factors to consider

The actual rate you’ll receive is partly based on your credit score, on a range that tops out at 850. Experian, one of the three large credit rating companies, says the average American scored 666 last year. If you have a score under 700, it might be worthwhile to build up your credit for a year or two before applying for a new home loan.

Now that you have some basic familiarity with the terms and what they mean, when you’re ready to start looking for a home loan, you’ll be in a better position to make the right choice.

Cait Klein, NerdWallet

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