Choosing the right type of home mortgage can save you thousands of dollars, so it is essential to understand how they work. Once you earn the mortgage loan, you will pay the initial interest rates for a set period. This price can be fixed (guaranteed not to change) or variable (increased or decreased). The following is an introduction to some common types of mortgages. Visit our site RateChecker.com to use the recommended home mortgage and refinancing Calculator to compute numbers. Types of mortgage:
1. A Conventional Loan or Traditional loan
A conventional mortgage is a housing loan that the federal government does not insure. There are two types of traditional mortgages: conforming and non-conforming loans.
The conforming loan means that the loan amount falls within limits set by the Federal Housing Finance Agency. Types of housing loans that do not meet these requirements are considered non-conforming loans. Jumbo finances, which stand for large home loans above the FHFA limitations for various areas, are the most common type of non-conforming loans.
Generally, financing companies will require you to pay private mortgage insurance (PMI) for many traditional loans when your deposit is less than 20% of the home purchase price.
Pros of conventional mortgages
- It can be used for a primary home, second home, or investment properties.
- The total cost of borrowing is usually lower than other mortgages, even if the interest rate is slightly higher.
- You can request your lender to cancel PMI once you’ve reached 20% equity or refinance to remove it.
- You can only pay 3% of the down on mortgages backed by Freddie Mac or Fannie Mae.
Cons of conventional mortgages
- A minimum FICO rating of 620 or higher is usually required (the same applies to refinancing)
- Down payments are higher than government-granted loans.
- The income ratio (DTI) should not exceed 45% to 50% values.
- You likely need to pay PMI if your deposit is less than 20% of the selling price.
- Significant documentation is required to verify assets, income, employment, and down payment.
Who should get it?
Traditional loans are suitable for borrowers with good credit ratings, stable income, good work experience, and an initial deposit of at least 3 percent.
2. Jumbo loan
Jumbo mortgages are traditional home mortgages with non-conforming loan limits, which suggests the house price exceeds the federal credit limit. Mainly in the U.S., the maximum conforming loan limit for single-family homes is $548,250 by 2021. However, in specific high-cost locations, the ceiling is about $822,375. These home loans are more common in higher-cost areas and typically require more detailed documentation to qualify.
Pros of jumbo mortgages
- You can acquire more money to buy houses in expensive areas.
- Interest rates tend to be competitive than other traditional loans.
Cons of jumbo mortgages
- It demands at least a 10-20% down payment.
- A FICO score of 700 or higher is required, although some lenders accept a minimum of 660.
Who should get one?
Jumbo loans make sense for more wealthy buyers purchasing luxury homes. Jumbo borrowers must have a good or excellent credit rating, high income, and substantial down payment. Many reputable lending institutions provide jumbo loans at competitive interest rates.
Whether or not you need a large loan is determined solely by the amount you require, not by the purchase price of the mortgage.
You can use RateChecker.com to figure out how much you can afford to buy a house.
3. Government-insured loans
The U.S. government is not a mortgage lender, but it is helping more Americans become homeowners. The three government-approved mortgages are:
- Federal Housing Administration (FHA loans)
- United States Department of Agriculture (USDA Loan)
- The U.S. Department of Veterans Affairs (VA loan)
These types of mortgage loans can help borrowers who don’t have the large down payment upfront or have no perfect credit to purchase their own home.
Borrowers require a minimum 580 FICO score to obtain a maximum of 96.5% funding with the 3.5 percent down payment; however, a FICO rating near 500 may be accepted if you save 10% deposit fees. FHA loans require two home mortgage insurance premiums: one is prepaid, and the other is paid annually during the entire loan term. However, the overall cost of your mortgage will increase if you repay less than 10% of the initial deposit.
USDA loans help low- and middle-income borrowers buy houses in rural areas. You must purchase a home in an eligible area of the U.S. Department of Agriculture and meet certain income restrictions to qualify for USDA loans. Also, some USDA loans do not require a down payment for eligible low-income borrowers.
VA loan provides flexible low-interest mortgage loans for American soldiers (active-duty military and veterans) and their families. These loans do not demand down payment or mortgage insurance, and the closing costs are usually capped, which can be paid by dealers. These mortgages charge financing fees as a percentage of the loan amount to offset the taxpayer’s project cost. This fee and other transaction costs can be included in most VA loans or prepaid at closing.
Pros of government-insured loans
The government-insured types of mortgage will:
- Help you with house financing when you don’t qualify for a standard loan.
- Lower credit requirements
- Suitable for regular buyers and new buyers
- You do not need a large down payment
Cons of government-insured loans
- The overall financing costs may be higher.
- Additional paperwork, depending on the type of loan, to prove eligibility.
Who should get one?
Government-insured financing is ideal when you have very little savings or a low outstanding balance, and you are not eligible for regular loans. VA loans generally provide qualified borrowers with better terms and maximum flexibility as compared to other mortgages.
4. Fixed-rate mortgage
The interest rate of a fixed-rate mortgage remains the same throughout the loan term; that is, the monthly mortgage interest rate always remains the same. Fixed loans are available in terms of 15 years, 20 years, or 30 years.
Pros of fixed-rate mortgages
- Monthly principal and interest rate payments remain the same for the duration of the loan.
- You can plan other expenses more precisely with a fixed-rate monthly mortgage.
Cons of fixed-rate mortgages
- It takes longer to build home equity.
- The interest rate is higher than the adjustable-rate mortgage (ARMs).
Who should get one?
A fixed-rate mortgage will keep your monthly payments stable if you plan to reside at home for at least seven to ten years.
5. Adjustable-rate mortgage
Unlike fixed-rate loans, the interest rates of adjustable-rate mortgages will fluctuate in line with market conditions. Many ARM products have a fixed interest rate for several years before the loan is modified to a variable interest rate for the remaining loan terms. Search for an ARM that reduces your interest rates so you don’t wind up in monetary issues when the mortgage resets.
Pros of adjustable-rate mortgages
- Lower interest rates in the starting years of homeownership.
- You may save a lot of interest payments.
Cons of adjustable-rate mortgages
- Monthly mortgage payments may become unaffordable, resulting in loan defaults.
- Housing costs can be reduced, making it difficult to sell or refinance before the mortgage resets.
Who should get one?
You may be comfortable with some risks before acquiring an ARM. More so, ARM can save a lot of interest payments if you do not plan to stay at home for more than a few years.
Other types of mortgage home loans
In addition to these common types of mortgage loans, you can also find other types when shopping for loans, including:
- Construction loans
The construction loan may be a good choice if you want to build a new house. You can decide whether you prefer to receive a separate housing loan for the project and then get a separate mortgage for repayment or combine the two. In general, you need a higher construction loan down payment and proof that you can afford it.
- Interest-only mortgages
With an interest-only mortgage loan, the borrower only needs to pay the loan interest for a specific period. At the end of this period, which is usually five to seven years, your monthly payment will increase as you start paying the principal amount. These loans are best for those who can sell or refinance the property or reasonably expect the highest monthly payment.
- Balloon mortgages
Another type of home loan is a balloon mortgage, which requires a large payment at the end of the repayment period. Mostly, you’ll make a monthly installment plan based upon a 30-year term only for a short time, such as six to seven years. After that, you will manage large down payments on the principal balance. You can use the rate checker.com mortgage calculator to determine whether this type of loan is suitable for you or not.
Before applying for a mortgage, determine your financial condition carefully. Review your needs and circumstances and do your research to find out the types of mortgage loans that will most likely help you reach your goals.