Understanding the Different Types of Mortgage Loans
Buying a property is exciting but the financial side of things can feel overwhelming. Don’t worry, read our guide to learn the lingo and get better informed on which mortgage will fit your needs best.
Here are some of the common types of mortgage loans:
Fixed vs. Adjustable Rate
The most popular and most predictable is a fixed rate mortgage. For this loan, you pay the same interest rate for the full repayment term. Fixed loans typically come in terms of 30, 15, or 10 years.
A big advantage of fixed-rate is the stability, especially appealing if you plan to stay in the home for a long time. There is a peace of mind that comes with knowing monthly payments will stay the same, making it easy to budget.
Adjustable Rate (ARM):
An adjustable rate mortgage (ARM) begins with an initial “fixed rate” for a period of time then adjusts periodically as the interest rate changes throughout the life of the loan. It may go up or down with market conditions and changes in the economy.
ARMs are considered riskier as the monthly payment can change significantly. However they often start with a lower rate during the initial fixed period and can appeal to first-time homebuyers or those with a strict budget. This type of mortgage may appeal to those who don’t plan to own the home for very long.
Conventional Loan vs. Government-Insured
The most common type of loans, conventional loans are not backed by the federal government.
They are a good fit for those with excellent credit, stable employment, and low debt-to-income ratio.
There are 3 U.S. Government agencies which insure loans:
- The Federal Housing Administration (FHA loans)
- The U.S. Department of Agriculture (USDA loans)
- The U.S. Department of Veterans Affairs (VA loans)
FHA loans are backed by the Federal Housing Administration to help homebuyers who have weaker credit scores or less down payment saved. The down payment required can be as little as 3.5% and FHA loans come with built-in insurance to protect against the possibility of defaulting on the loan.
VA loans are available to military service members (and their families) and are backed by the U.S. Department of Veterans Affairs.
An enormous benefit is that there is zero down payment required with VA loans. Although there is an upfront VA funding fee.
Backed by the U.S. Department of Agriculture, USDA loans are for those in rural areas. No down payment is required in most cases but you must meet certain income limits to qualify.
This type of loan is ideal for moderate to low income borrowers looking to buy a rural home.
Conforming vs. Jumbo Loan
Conforming loans are those which meet the local loan limits set by the Federal Government.
Jumbo loans are too big for the Federal Government to purchase or guarantee. They’re issued on homes with values above a local limit, as established by the government.
Jumbo loans are ideal for affluent buyers who have excellent credit score and substantial down payment.
Homebuyers, get in touch!
The MOVE Real Estate team would love to assist you in the entire process of homebuying. We are experts in the Pacific Northwest area, and once we learn what it is that you’re looking for, finding your dream home is simple.
Please feel free to contact our team anytime.
Email: [email protected]