There are several types of mortgages out there, and each has its own unique features. It’s important to understand the various types of mortgages available, so you can choose the one that fits your financial situation best and suits your needs. This guide will provide you with an overview of some of the most common mortgage options, including fixed rate, adjustable rate, and graduated payment mortgages, so you can make an informed decision about which mortgage option is right for you.
Fixed vs. Adjustable Rate
Fixed-rate mortgages have the same interest rate and monthly payment regardless of how many years you choose to pay them. Term lengths usually range from 15 to 30 years, though you can request a shorter term from your lender.
Fixed-rate mortgages are about as much as luxury cars are: very reliable, but you’ll pay more for the comfort. Monthly interest and principal payments for a fixed-rate mortgage will be exactly the same for the loan’s entire life. Still, the interest rate you’ll pay for the term of a fixed-rate mortgage is generally about 1 percentage point above what you would pay for an adjustable-rate mortgage (ARM). However, for that extra percentage point of interest, you’ll be secured against the chance that interest rates will go up over the life of the loan.
With an adjustable-rate mortgage, the interest rate varies as the underlying interest rate (the prime index rate) changes, with the interest rate for your loan fixed for a set period of time. If the prime rate lowers, your monthly payment decreases, and your payment goes up when the prime rate rises.
ARMs generally limit the amount and frequency of interest rate changes so that mortgage holders are not subjected to wild and frequent changes in their loan payments. This cap also minimizes the bank’s losses in the case of very low interest rates.
The majority of private lenders also offer government-backed mortgages, which are intended to help first-time homebuyers, those with low to median incomes, and those with past credit problems. Unless they have government insurance, lenders are likely to reject these loans.
- FHA Loans: FHA loans are popular because they require a low down payment and credit score. You can get an FHA loan with a down payment as low as 3.5% and a credit score as low as 580. A Federal Housing Administration loan is backed by the FHA; this means lenders will be reimbursed if you default on the loan. As a result, lenders can offer these loans to borrowers with lower credit scores and smaller down payments with less risk involved.
- VA Loans: Veterans Affairs, a department of the U.S. armed forces, will fund a loan for an active-duty member, qualified reservist, or eligible National Guard personnel. The VA will provide a VA-backed loan to eligible survivors if a service member dies. VA loans are attractive because they let you buy a home with no money down and a less expensive up-front fee that can be rolled into the loan instead of costly private mortgage insurance.
- USDA Loans: In order to qualify for a USDA loan, you must live in an eligible rural area, be approved for one of these loans, and your annual household income must not exceed 115% of the area median income. USDA loans are a good option for qualified borrowers because they allow you to buy a home with no down payment. For some, the cost of a USDA guarantee fee is less than the cost of a mortgage insurance premium from the FHA.
The term conventional mortgage refers to any type of home buyer’s loan that is not offered or secured by a government entity. Typically, conventional mortgages are acquired through private lenders, such as banks, credit unions, and mortgage companies. That said, mortgages may be supported by two governmental organizations: the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).
Mortgages are loans with fixed interest rates. Their interest rate cannot change throughout the duration of the loan, also known as a conventional mortgage. In addition, conventional loans or mortgages are not backed by the government, so they require more strict borrowing requirements and are less common than government-backed loans.
Know Your Options
Some mortgage products have more stringent requirements than others. A pristine credit score may be required. Some lenders require a 20% down payment, whereas others require only 3%. Several of these are geared towards borrowers with poor credit ratings.
Unlike banks, the U.S. government is not a direct lender but acts as a guarantor for a few specific types of loans for certain customers. Here is an overview of what types of mortgage loans are possible for certain kinds of people.
Fundamentally, you should listen to your instincts because it really all comes down to what you need from a mortgage and your level of comfort with risk.
When thinking about buying a house, here are some factors to consider and questions to ask:
- What the current mortgage rate is, and how much would different lenders charge you?
- Whether you think interest rates are going up or down.
- Rising interest rates may not bother you as much, depending on how long you’re staying.
- will your income rise enough to offset a rate increase in the future?
- How comfortable you are with taking risks?
The best time to lock in a fixed-rate mortgage at a low rate is when interest rates are very low. Doing so ensures low fixed rates and protects you from future rate increases.
How Are Interest Rates Determined?
The rate you’ll have to pay for a mortgage will depend on several factors. Interest rates depend on a number of variables, some of which have nothing to do with the borrower or the lender.
The current market rates and the lender’s risk tolerance determine a loan’s interest rate. Current market interest rates can’t be controlled, but you can influence how a lender views you as a borrower. The higher your credit score and the fewer red flags on your credit report, the more you’ll appear to be a responsible borrower. In the same way, the lower your debt-to-income ratio (DTI), the more available cash you’ll have for your mortgage payment. These all confirm to the lender that you are a less risky borrower, which benefits you by lowering your interest rate.
The amount of money you can borrow will depend on what you can afford and, most importantly, the home’s appraisal value. The lender cannot lend more than the appraised value of the home.
Ways to Get the Best Interest Rates
Current market rates are beyond your control, but if you manage your DTI and maintain a respectable credit score, lenders will view you as a responsible borrower.
To qualify for the loan, a person must meet certain eligibility requirements. As a result, people who get mortgages will most likely be someone with a stable and reliable income, a debt-to-income ratio of less than 50%, and a good credit score (at least 580 for FHA loans or 620 for conventional loans).
Which Mortgage Type Is Best For Me?
Many different types of mortgages are available, and it can be tough to decide which one is right for you. Here are a few things to consider when making your decision:
- How long do you plan on staying in your home?
- What type of interest rate do you qualify for?
- Do you need or want the flexibility of a variable-rate mortgage?
- What are the terms and conditions of the mortgage?
- What are the fees associated with the mortgage?
- Is there a prepayment penalty?
Once you’ve considered all of these factors, you’ll be able to decide which type of mortgage is best for you.
Final Remarks: Different Types Of Mortgages & Which One Is Right For You
There are various types of mortgages, and it’s up to you to decide which one is right for you. However, that doesn’t mean you can’t get help from a real estate attorney, who can help you understand more about the different types of mortgages. They will be able to review your financial situation and determine what type of loan best suits your needs. As the mortgage industry continues to evolve, so do its offerings. To find out which one is best for you, contact a local mortgage lender or real estate attorney today!