Shopping around for different mortgage rates can be stressful, especially if you aren't sure what type of mortgage is best suited for your current financial situation. All of the different mortgage options on the market make it difficult to choose the right loan.
Understanding your home loan options will help you narrow down what options are best suited for your financial needs. We've created this mortgage guide to help you best understand the different types of mortgages that are available on the market.
Fixed-Rate vs. Adjustable
There are two main choices that you have to make when it comes to choosing a mortgage: a fixed-rate mortgage or an adjustable-rate mortgage.
Choosing between these two will depend on your current financial situation and what your forecasted financial crisis is expected to be. You also have to consider how much risk you're willing to put into your loan and the current state of the economy.
Fixed-Rate Mortgage
With a fixed-rate mortgage, you won't ever have to worry about your interest rate increasing. By choosing an adjustable-rate mortgage, there is a chance that your mortgage payment could significantly increase in the future.
If you're somebody that doesn't like to take a lot of risks, taking out a fixed-rate mortgage loan will be the safest choice for you to make. By investing in a fixed-rate mortgage, you won't have to worry about the interest rate fluctuating at all throughout your loan. This means that you won't see a change in how much your monthly mortgage payment is to the lender.
Adjustable-Rate Mortgage
An adjustable-rate mortgage is fixed for a certain period of time. However, after this timeframe has ended, the rate turns into an adjustable-rate. This typically lasts for the first five years of the mortgage and will transfer into an adjustable-rate for the remaining time frame of the loan.
What Are the Different Types of Mortgages?
Once you get a full understanding of the different types of mortgage loans available on the market, it makes it a lot easier if you choose the best type of mortgage for your situation. Here's a closer look at the different types of mortgages you'll find.
Conventional Mortgages
A conventional mortgage is the most commonly used type of mortgage. This is the mortgage that most homeowners will use when they don't qualify for any other loan program type. A conventional mortgage is a type of home loan that doesn't have any federal government insurance.
You will typically find two types of conventional loans. These are non-conforming loans and conforming loans.
A conforming conventional mortgage loan means that the entirety of the loan falls within a specific limit developed by Freddie Mac or Fannie Mae. These are three enterprises that back up the majority of mortgages in the United States.
A non-conforming loan doesn't meet the guidelines better set by Freddie Mac or Fannie Mae. In most instances for a conventional loan, you will have to pay for PMI if you put down less than 20% of a down payment.
PMI is an abbreviation for private mortgage insurance. You won't have to pay a monthly PMI if you put down at least 20% of the home's purchase price when you purchase the home.
Jumbo Mortgages
A jumbo mortgage is a type of conventional mortgage that doesn't have the limitations that come with a non-conforming loan. Typically, jumbo mortgages will be applied to homes that exceed the Federal Loan's total amount of limitation.
As of 2020, the maximum load limit for a single-family home to qualify for a jumbo mortgage is $510,400. However, this amount does fluctuate depending on the area that the home is located. In areas where there is a higher cost of living, this amount increases to $765,600.
Many jumbo mortgages take a lot more documentation and paperwork to prove that the homeowners can qualify for the loan compared to conventional loans. However, the biggest downside that comes with jumbo mortgages is a minimum of a 20% down payment needed to qualify for the mortgage. Plus, many homeowners need at least a 700 FICO score to qualify for a jumbo mortgage.
Government-Insured Mortgages
There are three agencies that back up government-insured mortgages. These are the Federal Housing Administration, the United States Department of Agriculture, and the United States Department of Veteran Affairs.
The Federal Housing Administration backs FHA Loans. The United States Department of Agriculture backs USDA loans. Also, the US Department of Veterans backs VA loans.
FHA Loans
FHA Loans are a type of home loan that makes homeownership possible for buyers who don't have a large down payment. Plus, FHA loans are often ideal for people who don't have a high credit score to qualify for a home loan. To qualify for an FHA loan, you have to have a minimum of a 580 FICO score with a minimum of a 3.5% down payment.
However, individuals with a FICO score of 500 qualify for an FHA loan if they are able to put at least 10% of the total property volume down for a down payment. There are two premiums that FHA loans require for homeownership. One has to be paid upfront, while the other is paid throughout the mortgage's entire life.
VA Loans
VA loans provide low-interest mortgage rates for members of the United States military. This includes both active duty and veteran service members, as well as their families.
VA loans don't require a PMI or a down payment. In addition, closing costs are capped out and may be required to be paid by the home seller.
USDA Loans
USDA loans help low-income to moderate-income buyers purchase homes in rural areas. For you to qualify for a USDA loan, you have to live in a certain area to qualify. Also, income requirements may also determine your eligibility for a USDA loan.
Depending on the applicant's location and income requirements of a USDA loan, you may not be required to put a down payment on a home backed by a USDA mortgage.
By learning about the different types of mortgages in this mortgage guide, you can choose the best mortgage type that works for you and your family. Before you move forward with a specific mortgage, make sure that you carefully consider your current financial situation and what you'll be able to pay for your monthly payment comfortably.
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