5 types of mortgage loans: which one is best for you?
A mortgage loan can be a great way to purchase a home, but there are several different types of mortgage loans available. Find out which one is best for you!
The different types of mortgage loans explained
So you’re thinking about buying a house. Congrats! It’s a big decision, but it’s also a very exciting one. And if you’re looking for the best types of mortgage loans to help you with that, you’re in the right place!
This post will outline 5 types of mortgage loans available and give you a breakdown of each one. Knowing the differences, you’ll make the right choice for your needs. So, let’s get started.
What is a mortgage?
A mortgage is a contract between you and your lender that ensures the bank will finance the costs of buying, building, or maintaining real estate.
Usually, in this type of loan, you get to borrow the amount and repay it in regular monthly payments subject to interest rates. In most mortgages, the terms give you 15 or 30 years to pay back.
Also, the property itself is used as collateral for this type of loan, as a security to ensure you will pay your debts. So if you don’t stay on top of your payments, the lenders can take this property if necessary.
Mortgages are known for their rigorous application requirements. The lenders will review your credit and payment history. They will make sure you meet several requirements before accepting any applicants.
Compare mortgage loans: 5 different types
Before applying for a mortgage loan, you need to know what options are available in the market. There are many types of loans out there, so let’s take a look at the most common ones and compare their advantages and disadvantages.
This is the most common one. Conventional mortgages refer to loans that the government does not endorse. There are two forms of conventional loans: conforming and non-conforming.
Conformed loans meet the maximum limits of Fannie Mae or Freddie Mac. These standards are set by the Federal Housing Finance Agency (FHFA).
The non-conforming doesn’t meet these standards. With the loans, you can borrow more money with lower credit and use no down payment.
- Generally offers lower costs than other types of mortgage loans;
- This type of loan can be used for a primary house, second home, or even an investment property;
- The private mortgage insurance (PMI) can be canceled or refinanced if you’ve reached 20% equity;
- If the loan is backed by Frannie Mae or Freddie Mac can put as little as 3% as a down payment.
- Requires at least a 620 FICO score;
- Your debt to income must be less than 50%;
- You must pay mortgage insurance in case you don’t put down at least 20%;
- It requires a lot of documentation to verify if you might qualify or not.
As the name suggests, Jumbo loans exceed the federal loan limits for a conventional conforming loan. They’re primarily used in higher-cost areas. Therefore, you can get up to $2 million for a loan. So it can be worth it if you have special requirements for your property.
- The most obvious advantage is that it allows you to borrow a substantial amount of money to buy a high-end house;
- The rates are often competitive with other conventional loan options;
- Can offer fixed or adjustable rates;
- You must put a payment of at least 10% – 20% to even qualify for it;
- Requires a high credit score. It would be best if you had a FICO score of 700 or higher;
- You must have a debt to income less than 45%;
- You have to prove you have significant assets.
In this type of mortgage loan, the government agency makes the loan viable for everyone involved. It is backed by three agencies: FHA, USDA, and VA.
The Federal Housing Administration (FHA) qualifies applicants with a minimum FICO score of 580. It offers competitive rates, allowing you to put down as little as 3.5%. And if you have a 500 credit score, you might still qualify if you put a least 10% down.
The U.S. Department of Agriculture (USDA) loan is destined to purchase homes in rural areas. It was designed to moderate to low-income individuals. However, the house must be in a USDA-eligible area. It does now require a down payment.
Lastly, we have the U.S. Department of Veterans Affairs (VA). It offers low-interest rates and is available for the U.S. military and their families. The VA loans don’t require a down payment or mortgage insurance.
- Allows home buyers that wouldn’t qualify for conventional loans to get approved;
- Applicants can qualify with lower credit history;
- This type of loan accepts first-time and repeat home buyers.
- The borrowing costs are higher;
- The borrowers must live in the financed property;
- Requires a lot of documentation from its applicants.
With a fixed-rate mortgage, you know exactly what your interest will be for that loan’s entire term. The average terms are 15 years or 30 years.
- The monthly payments won’t change over the life of your loan;
- It allows you to budget your expenses easily.
- It usually offers higher interest rates than other types of loans;
- In case the rates fall, you must refinance if you want to maintain lower rates.
An adjustable-rate mortgage is a loan that has variable rates. In the introductory period, it charges a fixed interest term. After that, rates will be based on the market’s conditions.
- Get a lower fixed rate in the first few years;
- Save your money on interest payments.
- If the rates go higher, the monthly mortgage might get expensive;
- If home prices fall, it will get harder to sell or refinance the property.
How to choose the right mortgage loan for you?
There are some factors you need to consider before closing a mortgage loan. The best type of mortgage loan for you will depend on your situation and preferences.
So first, consider how long you intend to live in the house and what are your job prospects for the future. It would help if you also considered your potential earnings for the future.
It is also essential to review the costs of purchasing and refinancing to determine how much you’ll need from a mortgage lender. By doing that, you can start considering which type of mortgage loan fits you best!
Well, in case you need some help improving your credit history to get your mortgage loan, we have the best tips for you! Read the following article and understand how credit scores work.
About the author / Beatriz Vieira
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