Just like every house on the market, the mortgages consumers take out to obtain their homes are not created equal. From the land the structures are built on to the amounts and terms of the loans, several factors come into play when packaging up the right mortgage for your home purchase. To make sure you obtain the right loan for your family and budget, it’s important to know the differences in mortgage types. Here are the five main mortgage options you will need to understand before taking out a home loan.
5 Different Mortgage Options You Need to Know About
An adjustable-rate mortgage is a good option for a borrower who doesn’t plan to own the home for long or for someone who intends to earn more income in the future and has plans to refinance the loan. These types of mortgages are also known as ARM loans. ARM home loans begin with a lower interest rate that can and will adjust over time based on the market. ARMs are ideal if you’re looking to own a home now but need the lowest possible mortgage rate to get started.
Unlike ARMs, fixed-rate mortgages are one of the best options for buyers who intend to remain in their homes for the term of their mortgage repayment period. These loans are what the name implies — the interest rate is fixed, it will not change, and homeowners can expect to pay the same mortgage payment every month. There are two types of fixed-rate mortgages that buyers may consider. Depending on how much of a house payment you can afford each month, you may choose between a 30-year fixed-rate mortgage, where you pay off the loan after 30 years, or a 15-year fixed-rate mortgage, which lasts 15 years.
Homebuyers have the option to obtain their mortgage loan through a private lender like a bank or credit union. The most common home loan obtained from these lenders is a conventional home loan. These mortgages are not secured by a government entity, but they tend to meet the down payment and income requirements set by Fannie Mae and Freddie Mac. There are options when it comes to the potentially low-interest loans in that they can be conforming (hence meeting the down payment and credit requirements of Mae and Mac) or non-conforming, in which case a private lender could loan you an amount far greater than those set by Congress’ housing finance system. And these jumbo amounts lead us into the next mortgage type…
A jumbo loan is a mortgage that exceeds the conforming loan limit set by the federal government. If the amount you seek to borrow for a home exceeds $647,200, you’ll need to consider a jumbo loan to help you make the purchase. A few things to note about these mortgages are that the loans cannot be guaranteed by Freddie Mac or Fannie May, so if you default on payments, you have no protection from loss. Also, not only will jumbo lenders require a credit score above 700, but since they want to know they can trust the financial health of their borrowers, these private lenders will likely want to see a year’s worth of mortgage payments saved up in your bank account.
Government-insured mortgages are best for borrowers with low credit scores and very little to put down on the home. Such loans include FHA, which are loans backed by the Federal Housing Authority, and VA loans, which are affordable loans made available to veterans by The United States Department of Veterans Affairs. Buyers with a credit score as low as 580 can obtain FHA loans, and VA loans may not require a credit score evaluation at all, as the underwriters for VA loans will perform a more holistic evaluation of your finances and income.
By educating yourself on the different mortgage types, you’ll be more prepared to make a smart financial decision when buying your home. If you want sound advice from a trusted financial source, head over to the Consumer Financial Protection Bureau. Here you can use their tools and resources to find out what to expect — and what questions to ask — at every step of your home-buying process.