We all know that many homes come in all shapes and sizes. The same thing can be said about the way in which they’re financed. Determining the type of mortgage that works the best for you requires a decent amount of research; however, there are all sorts of loan types to choose from, and many lenders can take the time to walk you through all of these options. Here are the three main categories that you should make note of and understand.
Conventional/Government-Backed Loan
While government-backed loans are rather self-explanatory, conventional loans are loans that are not backed by the government. Below are the types of loans that are considered to be government-backed:
*Federal Housing Administration Loans: FHA loans are designed for borrowers who are either unable to come up with large down payments or have credit that is less than perfect. This is also a very popular loan among those who are looking to purchase their first home. These loans allow for down payments as low as 3.5% and credit scores of 580 or higher. They also accept credit scores as low as 500; however, you must also be able to provide a 10% down payment as well.
*Veterans Administration Loans: VA loans are zero-down loans offered to military families, active military, and qualifying veterans. The VA guarantees the loan itself for the lender, and the loan also comes with many benefits that no other type of loan possesses. For instance, you won’t have to make a down payment or pay any mortgage insurance.
*USDA Loans: This loan is backed by the United States Department of Agriculture and is designed to help those in low or moderate-income households repair, renovate, or purchase a home in a rural area. However, there are some urban areas that qualify for this loan as well. Those who qualify for this loan can purchase a home with no down payment and lower mortgage rates.
Fixed-Rate/Adjustable Rate Loan
When the time comes to decide what type of loan may work the best for you, one important factor to consider is what type of interest rate you are comfortable with the most. Here are some of the most common:
*Fixed-Rate Mortgages: This is perhaps the most traditional and can be paid off in 10, 15, 20, or 30 years at a specific interest rate. The most common timeframe is 30 years. Security is the first thing that people think of in terms of this type of mortgage, as they won’t have to worry about their interest rate rising; however, monthly payments may fluctuate a small bit thanks to property tax and insurance rates. On the other hand, if you plan to move in five or ten years, then this type of mortgage may not be the best choice for you, as this is better for those who plan to live in a home on a more long-term basis.
*Adjustable-Rate Mortgages: This type of mortgage provides you with a lower interest rate; however, there’s no guarantee that it will always stay there. In fact, it will regularly fluctuate with an indexed rate and a set margin; however, the fluctuations will never be huge – the intervals are predetermined. The best thing about these mortgages are the lower interest rates that are attached to them, especially if you don’t plan to stay in your home for too long or are planning to refinance at a later date. Furthermore, you may also be able to qualify for a higher loan amount thanks to the lower interest rate. On the other hand, the rates could also increase after the end of the adjustment period, so if you don’t feel that you’ll be able to save enough money to offset the increase, chances are you may want to avoid this kind of mortgage.
Jumbo/Conforming Loan
This is the final type of loan that you should consider. This is a loan that follows conforming guidelines that have been established by both Freddie Mac and Fannie Mae including credit, assets requirements, loan amount, and income. The current limit in many areas of the country is $417,000; however, it can be as high as $938,250 in more high-prices areas. Loans that exceed this amount of money are referred to as jumbo loans. These loans are good because it will allow you to purchase a higher-priced home if you’re able to afford it; however, at the same time, they also don’t have the same flexibility that conforming loans have due to the fact that the interest rates are much higher. Additionally, they often require higher down payments and excellent credit, which can make them difficult to pay back in the end.
If you have any further questions please don’t hesitate to contact us. We would be more than happy to help you with any further mortgage questions.
