Many home buyers are so excited and eager to jump into their journey to homeownership that they don’t educate themselves on the many different types of mortgage loans that lenders offer.
Are you one of them?
If so, it’s time to rethink your approach. One of the most important steps to doing that is to learn about the different mortgage loans available to aspiring homeowners. After all, some types of home loans may work well for other homebuyers but they may not be right for you.
In this post, we provide some key information about the loan options available for both first-time homebuyers and seasoned pros. Keep reading to learn more about which one is best for you.
Types of mortgage loans for all homebuyers
There are several types of mortgage loans that fit the needs of different homebuyers, whether you’re a military veteran who’s lived in several homes or a first-time homebuyer.
Down payments, mortgage terms, interest rates, closing costs, and eligibility requirements vary by the type of loan, as well as the loan amount.
Conventional mortgage loans
As the name suggests, a conventional mortgage is the most common type of real estate mortgage. Like all other loans, these loans have eligibility requirements. For example, qualifying typically involves a need for a higher credit score (minimum of 620) and a lower debt-to-income (DTI) ratio.
With a conventional mortgage loan, you can buy a home with as little as 3% down upfront as long as it’s going to be your primary residence. But if you have a down payment of at least 20%, the mortgage lender won’t require you to buy private mortgage insurance (PMI). And that’s a pretty big deal because a mortgage insurance premium can really put a strain on your cash flow.
Mortgage insurance rates are usually lower for conventional loans compared to other loan types like Federal Housing Administration (FHA) loans. If you’re a borrower who wants to take advantage of lower interest rates with a larger down payment, then a conventional loan is a great choice.
30-year fixed-rate mortgages
One of the most common mortgage options for single-family homes is a 30-year fixed-rate mortgage, which has an interest rate that doesn’t change throughout the life of the loan. If payments are made on schedule, the loan will be completely paid off once the 30-year term is over.
This loan is best for home buyers who want a lower monthly payment since the loan will be stretched out over a longer period of time than, e.g., a 15-year fixed-rate mortgage. At the same time, borrowers have the flexibility to pay off the loan faster by paying more than the minimum amount.
Who knows? If you win the lottery, you might be able to pay of your loan in one lump sum!
15-year fixed-rate mortgages
Want to pay off your home faster? Do you want a mortgage loan program that allows you to refinance your home for up to 97% of its value?
If those options are appealing, consider a 15-year fixed-rate mortgage loan. A 15-year fixed-rate mortgage is similar to a 30-year fixed-rate mortgage, except that the interest rate stays the same over a 15-year term, instead of 30 years.
Of course, this route means you’ll have higher monthly payments. But by paying off your mortgage sooner, you’ll be able to save money in interest payments.
Adjustable-rate mortgages
An adjustable-rate mortgage is the opposite of a fixed-rate mortgage. It’s a home loan in which the initial interest rate is set below the market rate on a comparable fixed-rate loan. Then, as time goes on, the rate rises.
At first, borrowers can benefit from a lower interest rate as well as lower monthly payments. If you don’t plan on having the mortgage for long, then this may be a good option for you. You might also consider an adjustable-rate mortgage if you believe interest rates will be lower in the future.
FHA mortgage loans
If you’re looking to finance a home purchase, the federal government may be able to help. The government offers several mortgage options, including FHA loans.
FHA loans are government-backed mortgages geared towards borrowers with low to moderate incomes, who are often purchasing a home for the first time. With an FHA mortgage loan, buyers can often put down as little as 3.5% of the home’s purchase price.
These loans also have lower credit score requirements. Believe it or not, you may be able to qualify with a minimum FICO score as low as 500.
VA mortgage loans
A VA loan is a type of government loan backed by The U.S. Department of Veterans Affairs. This financial vehicle is designed for veterans, service members, and their surviving spouses.
They can purchase homes with a low down payment, or even no down payment, as well as no PMI. Thanks to their service to the country, these borrowers can also benefit from more competitive interest rates, which can make it easier to afford higher home prices.
USDA mortgage loans
A USDA home loan is a zero-down payment mortgage for eligible rural home buyers. Backed or issued by the U.S. Department of Agriculture, USDA loans typically don’t require a down payment.
So, if you’re considering buying a home in a rural area and aren’t keen on putting any money down, then a USDA mortgage may be a viable option. You can also use USDA funds to build, repair, renovate, or relocate a home.
Jumbo mortgages
Are you thinking about financing a home that’s too expensive for a conventional conforming loan? If so, you might consider a jumbo mortgage loan. In most counties, the maximum amount for a conforming loan limit is $647,200. So, if you’re looking to buy an expensive home in an expensive state like New York or California and the price tag exceeds this amount, you may be able to get a jumbo loan.
Because they’re larger loans, jumbo mortgages typically require a credit score of 700 or higher. You might also need a down payment of 10% or more. For these reasons, you should absolutely apply for pre-approval before beginning the house-hunting process.
Interest-only mortgages
An interest-only mortgage is a type of mortgage that requires the borrower to pay only the interest on the loan for a certain period.
This makes your monthly mortgage payments lower when you first start making payments. However, you’re not building up any home equity during this time. And, once your interest-only period ends, you’ll start paying the interest and principal. Also, the amount of time you have for repaying the principal is shorter than your overall loan term.
This type of mortgage may be ideal for you if have ample assets, good credit, and a short-term ownership outlook. You can also pay down the principal balance if you receive large annual bonuses.
Reverse mortgages
If you’re thinking about refinancing or are looking for extra cash, you can also consider a reverse mortgage. Essentially, these vehicles are geared toward older homeowners who are looking for cash. Each month, a lender sends the homeowner a check, and those funds essentially turn into an interest-bearing loan.
Unless you are interested in giving up equity in your home, you probably should avoid this financial instrument.
Purchasing a home with a more informed outlook
Now that you know about the different types of mortgage loans, you can make a more informed decision when choosing a mortgage. And that’s a great thing. When you go into purchasing a home without knowing your options, you could be stuck in a situation that isn’t ideal for you and your family.
For most folks, buying a home is usually a massive long-term financial commitment. That being the case, it’s best to embark on your journey with as much knowledge and insight as possible.
Good luck finding the perfect loan and ending up in the home of your dreams!
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