Mortgage loans are a convenient and effective tool that provide the necessary capital to be able to obtain the home or property of your dreams.
If you are interested in obtaining a mortgage or home loan to purchase a home or real estate property, it is important that you know what types there are and how they work. There are a range of loans on the market that, although they offer many options to choose from, can also be confusing.
Here are 5 types of conventional mortgage loans:
1. Fixed-rate loan
Fixed rate mortgages are one of the most common and conventional types of loans that exist in the market. They have a fixed interest rate and a monthly payment for the life of the loan.
These types of fixed loans usually come in terms between 15 and 30 years.
Best for: Homebuyers or homeowners who want a low monthly payment that comes from spreading the payment out over a long time. The fixed rate makes the payment predictable.
2. Adjustable-rate mortgage
An adjustable rate mortgage is a mortgage loan with a fixed initial interest rate for a fixed period, which is then adjusted periodically.
These types of loans offer a generally lower interest rate than you would get with a fixed-rate mortgage for a period of time, such as five or 10 years.
Another point to take into consideration is that if interest rates skyrocket, so do your monthly payments; if they plummet, you’ll pay less in mortgage payments.
Best for: Home buyers who don’t plan on having the mortgage for a long time, or who believe interest rates will be lower in the future.
3. Government-insured loan
The U.S. government plays a role in helping more Americans become homeowners. Three government agencies back mortgages: the Federal Housing Administration (FHA loans), the U.S. Department of Agriculture (USDA loans) and the U.S. Department of Veterans Affairs (VA loans).
- FHA loans
Is a home loan insured by the Federal Housing Administration. They are designed to help borrowers of more modest means buy a home.
What does a borrower require to apply?
Borrowers need a minimum FICO score of 580 to get the FHA maximum of 96.5 percent financing with a 3.5 percent down payment; however, a score of 500 is accepted if you put at least 10 percent down.
FHA loans require two mortgage insurance premiums, which can increase the overall cost of your mortgage. Lastly, with an FHA loan, the home seller is allowed to contribute to closing costs.
Best for: Borrowers with lower credit scores and a down payment less than 20%.
- USDA loans
This loan is designed for families in rural areas. The government finances 100% of the home price for USDA-eligible homes. In other words, no down payment necessary and offers discounted mortgage interest rates to boot.
Best for: Income-qualified buyers in rural and some suburban areas who want a low or zero down payment.
- VA loans
VA loans are mortgages backed by the Department of Veterans Affairs and are available to military service members and veterans. If you qualify for a VA loan, you can score a home with no down payment, no mortgage insurance requirements and no a minimun credit score.
VA loans charge a funding fee, a percentage of the loan amount, which can be paid upfront at closing or rolled into the cost of the loan along with other closing costs.
Best for: Military-qualified borrowers who appreciate a low interest rate and no down payment minimum.
4. Jumbo mortgage
Jumbo home loans fall outside FHFA limits and are above a certain dollar amount.
Jumbo loan limits vary by county and are adjusted periodically. They are more common in higher-cost areas such as Los Angeles, San Francisco, New York City and the state of Hawaii, where home prices may well exceed the conforming loan limits.
They feature fixed or adjustable rates, often require a credit score of 700 or higher and generally require a down payment of 10% or more.
Best for: Buyers of expensive homes and owners who want to refinance jumbo-size mortgages.
5. Interest-only mortgage
With an interest-only mortgage, the borrower pays only the interest on the loan for a set period of time. After that time is over, usually between five and seven years, your monthly payment increases as you begin paying your principal.
Can be appropriate for borrowers who are disciplined to make periodic principal payments. Also can be useful to home buyers who don’t expect to remain in a house for the long term.
Best for: Borrowers who know they can sell or refinance, or who can reasonably expect to afford the higher monthly payment later.
If you are still not sure what type of loan is the most adjustable for your convenience, you can contact us and we will advise you with pleasure.
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