If you’re looking into buying a home, you may be a little lost when it comes to financing it. Did you know there are eight different types of mortgages? Here is a list of the different types of mortgage loans, so you can learn about them and discuss with your financial advisor which might be best for you.
These mortgages, the “garden-variety mortgage,” make up about two-thirds of home loans in the U.S. They’re considered a “safe bet” because they are consistent, meaning that your monthly payments won’t change during the life of your loan. Conventional fixed-rate mortgages are available in 10, 15, 20, 30, and 40-year terms, but the most commonly used are 15- and 30-year loans. These are not federally insured loans like FHA and VA loans, but they are available from and insured by private lenders, such as banks, credit unions, and mortgage companies. Their interest rates tend to be higher than those of government-insured mortgages.
An interest-only mortgage gives the buyer the option, during the first five or ten years of the loan, to pay only the interest on the loan instead of the monthly payment. However, you can still pay the monthly payment if you want; paying only the interest instead of the monthly payment is not required. If you choose to pay the interest instead of the monthly payment, it will slow down your repayment, but it can be useful for people like those who need or will need more space than they can currently afford.
Adjustable Rate Mortgage
Though there are many varieties of adjustable rate mortgages (ARMs), the main concept is that the interest rate of the loan changes throughout the life of the loan. The rate and any changes in the loan reflect economic changes and the cost of borrowing money. ARM interest rates apply to the unpaid balance on the loan. Initial interest rates on an ARM are fixed for a period of time, and after that time, the interest rates change periodically, usually in yearly or monthly amounts. Adjustable-rate mortgage caps ensure that there are limits on how much and how often rates can rise.
FHA loans are federally insured loans for lower- to middle-income borrowers with lower-than-average credit scores. They require lower down payments and credit scores than many conventional mortgages, and they are issued by approved banks and institutions. They come with restrictions and loan limits that a conventional mortgage does not.
VA loans are mortgage loans available to service members, veterans, and eligible surviving spouses of military personnel. These loans, offered by private lenders such as banks and mortgage companies, are available through a program established by the Department of Veterans Affairs, who sets the qualifying standards, dictates the terms of the mortgages offered, and guarantees a portion of the loan. These loans not only help qualifying individuals and families buy homes; they also help build, repair, retain, and adapt homes for those individuals and families to maintain and improve the home’s livability and usability.
A combination or piggyback loan is most commonly used in active housing markets, where prices are high, because they allow buyers to borrow more than the amount of their down payment may otherwise allow. This type of loan is comprised of two separate mortgage loans from the same lender to the same borrower. A combination or piggyback loan can be used to avoid paying for private mortgage insurance (PMI) if the buyer doesn’t have the full 20% down payment.
A balloon mortgage is a short-term loan that requires that a borrower fulfill repayment of the loan in a lump sum. These loans may be payment free, or instead may require interest-only installment payments. Balloon mortgages are typically unsecured loans with high interest rates issued to borrowers, and are usually used in the construction industry. They can have fixed or variable interest rates and can have durations of two to thirty years. They must be paid completely at full maturity.
This mortgage may sound like the kind only for million- or billionaires, but what the term “jumbo” refers to is the fact that this type of mortgage loan exceeds conforming loan limits set by the Federal Housing Enterprise Oversight office. Loan limits are set based on the median home values in the metropolitan area where the home sits. If a mortgage loan is over the limit by even $1 for the county where the home is located, it is considered a “jumbo loan.” The qualifications for this type of loan tend to be more strict; typically, the criteria for a conforming mortgage need to be met, or even exceeded, for a jumbo mortgage. Many mortgage lenders will provide loans above conforming loan limits. Though investment banks tend to have the most competitive rates for these types of loans, interest rates on jumbo loans do not tend to differ greatly from those on conforming loans.
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