There are many types of mortgage loans available to people looking to buy a house. Depending on your current financial situation and personal preferences, there is an option that could be right for you. Some types of mortgages include adjustable-rate mortgages (ARMs), fixed-rate mortgages, FHA loans, and VA loans. ARMs have an interest rate that fluctuates with the market rate; whereas fixed-rate mortgages offer predictable monthly payments throughout the course of your loan.
FHA loans are insured by the government and are targeted towards first-time homebuyers who may not have as much money saved for a down payment. VA loans benefit those who have military experience or family members with military service and allow for extended repayment plans with low or no down payments. Many other types of mortgage options exist so it is important to speak with a mortgage broker to determine which one is best for your long-term goals.
Types Of Mortgage Loans
A conventional loan is one that is not guaranteed by the federal government. Conventional loans demand a higher minimum credit score than other loan kinds – normally 620 – and are more difficult to qualify for than government-backed mortgages. Borrowers who make less than a 20% down payment on this form of mortgage loan are often forced to pay private mortgage insurance (PMI).
A conforming loan is the most popular sort of conventional mortgage. It follows Fannie Mae and Freddie Mac criteria and has loan limits that are often adjusted yearly to account for improvements in property prices. In much of the United States, the conforming loan maximum for a single-family house in 2022 was $647,200.
Borrowers with a consistent income and job history, good credit, and at least a 3% down payment are ideal.
As the name implies, a fixed-rate mortgage is a kind of mortgage in which the interest rate does not change over the life of the loan. Unless you get a new mortgage, the interest rate disclosed at closing is the one you’ll be stuck with for the whole life of your loan.
A 15-year and 30-year fixed-rate mortgages are two of the most popular choices. In comparison to mortgage loans with variable interest rates, fixed-rate mortgages are more stable and predictable, allowing you to better budget for home expenses.
Ideal for: Mortgage holders who would want consistent monthly payments (including principle and interest).
These mortgage loans are guaranteed by the Federal Housing Administration (FHA) and are designed for applicants with imperfect credit histories and small down payments. A credit score of 580 is required for an FHA loan, along with a 3.5% down payment at closing. In the range of 500-579, a 10% down payment will be required. For single-family houses, the FHA loan ceiling in most U.S. counties for 2022 was $420,680. The maximum loan amount that could be obtained under an FHA program was $970,800 in high cost locations.
Premiums for FHA loan mortgage insurance are required up front. You will be required to pay FHA mortgage insurance on a loan with a down payment of less than 10% until you have 20% equity in your home, at which point you may refinance into a conventional loan without this premium. Put down at least 10% and the term is reduced to 11 years.
Ideal for: Those borrowers with poorer credit ratings and little resources for a down payment will benefit the most from this loan.
A mortgage loan with a changing interest rate is known as an adjustable-rate mortgage (ARM). In contrast to a fixed rate, this one varies throughout the course of the loan’s payback period. The 5/1 adjustable-rate mortgage (ARM) is a popular choice because it combines the stability of a fixed-rate term with the flexibility of periodic rate adjustments.
The interest rate on a 5/1 ARM remains stable for the first five years of the loan and then fluctuates yearly afterwards. Initially, adjustable-rate mortgages (ARMs) provide lower interest rates than fixed-rate mortgages do, but after the initial adjustment, they may increase to five percentage points or more than the fixed rate.
Ideal for: Beneficial for borrowers who want to sell their home or refinance before their current fixed-rate loan term expires.
Another sort of conventional loan is a high-balance loan. In a nutshell, it’s a loan with an amount that exceeds the conventional conforming loan limit, but it’s still deemed conforming since it keeps within the loan limit established by the Federal Housing Finance Agency (FHFA) for high-cost locations.
In 2022, the high-balance loan maximum for single-family houses was $970,800, which is 150% of the above-mentioned normal loan limit.
Ideal for: Borrowers looking for a conventional loan in a region with higher-than-average property prices.
A jumbo mortgage is a bigger conventional loan that is often utilized to purchase a high-end house. Jumbo loan amounts surpass all conforming loan limitations and sometimes need a substantial down payment of at least 20%.
Jumbo loans vary from high-balance conforming loans in that they do not follow the rules established by Fannie Mae and Freddie Mac. If you are qualified, you may be able to borrow more with a jumbo loan than with a high-balance loan – maybe $1 million or more.
Jumbo mortgage rates have not been appreciably higher or cheaper on average in recent years when compared to conforming conventional loans.
Ideal for: Borrowers who need a mortgage that exceeds conforming loan limitations.
Veterans, active-duty military, and their spouses may be able to apply for a loan guaranteed by the U.S. Department of Veterans Affairs (VA).
The majority of VA loans do not need a down payment. While the VA does not have a minimum credit score requirement, VA lenders may expect a credit score of at least 620. Borrowers who have never utilized VA loan benefits or whose current VA loans have been paid in full are also not subject to VA loan restrictions.
Ideal for: Eligible service members who may benefit from a zero-down payment financing.
USDA loans are guaranteed by the United States Department of Agriculture (USDA) and made available to poor and moderate-income homebuyers in rural regions. These mortgages have no down payment or mortgage insurance requirements, however there are income restrictions.
Ideal for: Low-income borrowers who want to avoid putting any money down.
Second Mortgages: Home Equity Loans And HELOCS
Another way to get into your home’s growing equity is via a second mortgage, which is a subset of the mortgage loan category. A second mortgage is also a loan secured by the house, much as the first mortgage used to purchase the property. Second mortgages, however, are paid back after first mortgages in the event of foreclosure.
HELOCs and home equity loans are both examples of second mortgages. To put it simply, a home equity loan is a one-time, lump sum of money. A fixed-rate loan is one that incurs a constant rate of interest and is repaid in equal annual or monthly payments over a predetermined period of time. A home equity line of credit (HELOC) is a credit line that may be repaid in installments and has a variable interest rate, much like a credit card. As long as the line of credit is active, the money may be borrowed, paid back, and used again.
Ideal for: Homeowners who have equity in their homes and wish to borrow against it to pay for other expenses or investments.
Homeowners aged 62 and above may be eligible for a reverse mortgage, which varies from a standard “forward” home mortgage. Instead of you paying payments to your lender, your reverse mortgage lender pays lump sum or monthly payments to you from your available equity.
The most prevalent kind of reverse mortgage is the home equity conversion mortgage (HECM). It is FHA-insured and has many upfront and continuing expenditures. HECM loans, like FHA loans, have loan restrictions. The maximum loan ceiling for a HECM in 2022 was $970,800. You may repay a reverse mortgage by selling your house or refinancing to take out a new, forward mortgage to cover the amount due.
Ideal for: Older homeowners (62 and up) with significant equity who want additional retirement income.
With so many types of mortgage loans available, it is crucial for people to thoroughly research and decide which one works best for their financial situation. They should take into account the requirements, terms, closing costs, interest rates and other factors to evaluate what type of loan will meet their needs and objectives. Ultimately, people have to be aware that whatever type of loan they choose, they will carry the liability for a significant amount of time. Hence, it is essential that the right choice is made based on due diligence and correct information.
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