Different Types of Mortgages
You maybe planning to buy a home and to that congratulations you about to take a big step in life. But you are thinking to yourself where on Earth am I get the money to afford the home of my dreams? Most people often take out mortgages from banks or lenders. But before you start going to the bank to request a mortgage loan you need to know that there are different kinds of mortgage loans and different criteria for each one. In this blog we will discuss what mortgages are best for you and the pros and cons of each one. At the end of this blog you will be able to decide what mortgage is best.
FHA Loan (Federal Housing Administration)
A FHA loan was made for individuals who might not have the best credit score or for those who are buying their first house or individuals who can only afford to make small payments.
Pros:
- Has a low down payment of at least 3.5 percent of the home
- low qualifications
- Can use any sort of funds from gifts as a down payment
Cons:
- A Mortgage Insurance Premium is required
- There are some lower limits to the loan
VA Loans
A VA loan is specifically for those who are retired veterans, soldiers who might be on active duty, and the spouses of those soldiers either alive or deceased. These loans were put in place by the Veteran Affairs and have great terms.
Pros
- Doesn’t require a down payment
- Competitive interest rates
Cons
- Can only be obtained by service members
- There can be some fees that may apply
USDA Loans (United States Department of Agriculture)
A USDA Loan is for individuals for those who low to moderate incomes are in areas of rural and suburban locations. This option is best for those who plan to buy a home in rural location.
Pros
- A down payment is not needed
- low interest rates
- Can be flexible with credit scores
Cons
- There are some upfront fees
- Some income limits
- Geographical restrictions
Fixed rate Mortgages
The fixed rate mortgage is the most common and most popular loan type used by home buyers. A fixed rate mortgage’s interest rate will stay the same throughout the term of the loan. The term length of the average fixed rate mortgage is often 15, 20, or 30 years. This loan is best for people who plan to stay in their home for a long time and have no trouble paying the mortgage on a consistent basis.
Pros
- Won’t have to worry about the interest rate going up
- Better budget for the long term
- Predictable monthly payments
Cons
- The rates of a fixed rate mortgage can be higher than adjustable rate mortgage
- if interest rates drop you will stay have to pay the current interest rate you agreed to
Adjustable Rate Mortgage
Adjustable mortgages start with a lower interest rate but however the interest rate can be adjusted based on current trends. This option is best for those who play to refinance or sell their home before interest rates go up.
Pros
- Low interest rates
- The Possibility of saving money if interest rates go down
Cons
- Possibility of interest rate increase based on market trends
- Payment totals each month can become erratic
Conventional Loans
A conventional form is not backed by the government is best for those who have good credit and a stable income.
Pros
- Flexible Loan Terms
- Avoid paying for any private mortgage insurance if the down payment is more than 20 percent
Cons
- Strict credit requirements and income requirements
- As stated in the pro column will have to pay for private mortgage insurance if the down payment is less than 20 percent
Jumbo Loans
A jumbo loan is for home that exceed the average housing price, i.e a loan for luxury homes like mansions, buildings, big homes, pretty much just a property that makes you say “dang” when you see the price. The loan is best for individuals who have a high income.
Pros
- Finance large or expensive homes
- Competitive rates for qualified buyers
Cons
- Very strict credit criteria
- Very large down payments
- High closing costs
Balloon Mortgages
A Balloon Mortgage payment has low down payments at the beginning of the loan term but nearing the end of the loan term you will need to pay off the remaining balance which could be a lot.
Pros
- Low payments at the beginning of the loan term
- Best for short term investments
Cons
- Might not have the money for the last large financial payment.
- Might not be able to refinance
Interest Mortgages
An interest mortgage only has the borrower pay the interest for the first part of the loan term, in most cases the first 5 to 10 years of the lean term, once then they pay the interest and principal. This option is best for those who plan to sell or refinance the home before the full payment part of loan sets into effect.
Pros
- Lower payments at the beginning of the loan term.
Cons
- Higher payments once the interest only part of the term ends
- Risky if the value of the property declines
How to know which loan type is best for you
Each type of loan has its perks and at the same time also has its flaws. Before you start choosing a loan it is best to understand what your current financial situation is and what you can afford.
- How long do you plan to live or own the property: If your intent is to own or stay in the property for a long time than a fixed mortgage loan is the best way to go or if the plan to own or stay in the property for short duration then it is best to pick a ARM loan.
- What is your credit score: If you have a good or exceptional credit score than a fixed loan or conventional loan is best however if you have a less than ideal credit score than a USDA, FHA, or a VA loan would be the best for you.
- Are you eligible for any sort of programs: If you served or are still serving in the military than a VA loan is best for you or even a USDA loan.
- To you plan to buy an expensive home: if you are interested in buying a home that is very expensive then a jumbo loan is best for you.
- How much can you put down for a down payment: If you can afford a large down payment or just an average down payment of 20 percent than a conventional loan, fixed interest loan, or a jumbo loan is best but if a down payment less than 20 percent is best than a FHA, USDA, or a VA loan might be your best option.
Conclusion
Choosing the right loan type is a pivotal part of the home buying process or any property purchasing process. Knowing what your financial status, credit score, and financial goals are determining factors in loan choosing. A wise course of action is to seek out a financial advisor to determine what you can afford and also follow up with a lender or broker to see what loan is best for you. With all this said I hope if you have a good understanding of what loan is best for you, happy house hunting.