Types of Mortgage Loans: Know Your Options
If you are looking to buy a house, you will need to choose the most suitable mortgage loan for you. There are many different options available, and each one of them has its own pros and cons. Here are some of the most popular types of loans:
- Fixed-rate mortgages
- Adjustable-rate mortgages (ARM)
- Government-insured mortgages
- Conventional mortgage
- Interest only mortgage
- Jumbo mortgage
- Balloon mortgage
What Is a Mortgage Loan?
A mortgage loan is most commonly used to finance a purchase of a property. Typically they are paid over a period of years, with monthly payments given to the lender. When it comes to interest rates, they are usually lower compared to the interest rate on credit cards or personal loans. This type of loan can be used to buy a house or car or even repay the existing mortgage.
How Does a Mortgage Loan Work?
Once you take out a mortgage loan, you are borrowing money from a lender to buy a house. A mortgage loan is secured by the property itself, meaning that if you are unable to repay back the money, the lender can seize the property to cover their loss. With this type of loan, you have a specific time of repayment, usually 15 to 30 years, although shorter or longer repayment periods are available. Once it comes to monthly payments, half of it goes to pay the principal of the loan and the rest to the interest rate.
This type can either have a fixed-rate or adjustable rate. With a fixed rate, the interest rate stays the same for the entire repayment period. This can be easier, and it can help you to know exactly how much is your total monthly payment. An adjustable-rate mortgage can start with a lower interest rate, but after the start-up period (usually five years or less), your rate can go up annually.
What are the Different Types of Mortgage Loans?
Mortgage loans offer multiple different options for borrowers to choose from. Of course, it can be tricky to manage your way through them and find the most suitable one for you. Here is a guide to some of the most common types of mortgage loans:
This type of loan is not backed up by the government. A conventional loan is available for you to get through private lenders and is usually the most popular type of mortgage. It can either be with fixed-rate or adjustable-rate.
The main advantage these loans offer is that they tend to have a lower interest rate compared to other loans. In addition, they offer a smaller down payment. Because of those reasons, conventional loans are usually a better option for borrowers who have good credit and can afford to have higher monthly payments.
This type of loan is insured by the Federal Housing Administration. They are available to borrowers who have a credit score of 580 or higher. The biggest benefit of an FHA mortgage is that it allows borrowers to put down a smaller down payment that they wouldn’t get with a conventional loan. Another benefit they offer is that it can be easier to qualify for them than for a conventional mortgage.
This is a type of mortgage that is government backed. If you’re a war veteran, you may be eligible for a VA mortgage. They are backed up by the Department of Veterans Affairs, and they are available to active-duty service members, veterans, and eligible spouses. With this type of mortgage, you can get 100% financing, which means you don’t have to make a down payment. You can also benefit from low nterest rates and no private mortgage insurance .
In the world of mortgages, bigger isn’t always better. A jumbo mortgage is a loan that exceeds the limit set by government-sponsored enterprises Fannie Mae and Freddie Mac. These types of loans are available in both fixed-rate and adjustable rates, but because they aren’t backed by Fannie or Freddie, they usually come with higher interest rates.
If you are considering getting a mortgage, but you don’t want to put a down payment, you should consider a USDA mortgage. This type of loan is available to borrowers who meet certain criteria regarding income and credit score. USDA mortgage is also backed by the government, to be specific, by the U.S. Department of Agriculture, and it can be used to finance homes in rural or suburban areas.
They come with some benefits, such as low interest rates and no down payment needed. Even with that said, there are some downsides to consider. Typically USDA mortgages have higher fees and insurance premiums than other loans. On top of that, these loans are only available to borrowers who meet the criteria.
As the name already states, this type of mortgage offers a fixed rate that stays the same for the life of a loan. It’s mostly used to finance a purchase of a house. Because you have a fixed rate, the monthly payment will stay the same even if the interest goes up or down. This type of loan can make budgeting easier since you will always know how much your mortgage payment will be.
If you are looking to take a fixed-rate mortgage, be sure to check various offers from different lenders to find the best rate. Also, consider a shorter term to pay off your mortgage faster, but keep in mind that you will most likely have higher monthly payments.
ARM is a home loan that has an adjustable rate that can change over time. With this type, the interest rate may go up or down, depending on economic conditions. If you have an adjustable rate mortgage, your monthly payment may vary from year to year.
This can be a good option for borrowers who plan to refinance or move within a couple of years. It’s also a good option if you don’t mind the risks of changing interest rates.
Interest only mortgage
With this type, the borrower is required to pay only the interest of the loan for a certain period. Once that period ends, it will require from you to make a lump sum at specified day or to make consecutive payments. Interest rate mortgages can be a good option if you are looking to buy a home and to use that time you didn’t pay the principal of the loan to save some money.
If you are looking to take out this type of mortgage, make sure to use an interest rate calculator to see what is the amount you will be paying and if that is something your finances can manage.
This is a home mortgage loan that offers initial low interest payments. A balloon mortgage is a short-term loan that lasts only about 5 to 7 years, where in the end, the borrower is required to pay off the balance in total. This type of mortgage can be good for people who are looking to buy a house in a short time but can be very risky for both sides.
Before taking out this loan, make sure you are aware of the risks they bring and if you are able to pay back the money at the end of the mortgage.
In the world of mortgages, there is plenty to choose from, and it can be hard to know which loan is the best for you. In this little borrowers guide, we provide you with a list of the most common types of loans and what they offer. Make sure to consult with a financial advisor to find out the best loan for your purchase of a home.
Many people have different needs, that’s why it is very important to do your research to find the best mortgage that suits you and your finances.