When buying a house, the vast majority of people need take a mortgage… But out of the many different options, how do you know which one is right for you? In this guide, we will take a quick look at the different types of mortgages available.
A regular loan is any mortgage loan, not guaranteed or insured by a government agency… it’s the same the most common type of mortgage loan and is probably the first thing that comes to mind for any home buyer when they need to apply for a loan.
Conventional loans are provided through private lenders, banks or credit unions. Generally, buyers should have minimum credit rating 620 apply for a regular loan with debt-to-income ratio (DTI) no more than 43%… Conventional loans come in different shapes and sizes, each with its own benefits. Here are the most common types to look out for:
Fixed rate mortgage
These mortgages are designed for several years and have an interest rate that remains the same throughout the term. This will ensure that your monthly payments are predictable, making them much easier to compile. However, the duration of the loan affects the amount of monthly payments:
- A Fixed rate mortgage for 30 years is one of the most common and ideal for home buyers looking for a lower monthly payment.
- Mortgage with a fixed interest rate for 15 years allows you to pay off the loan in half the time, but the monthly payments will be significantly higher. On the positive side, the interest rate is usually lower than on a 30-year mortgage and you will pay less general interest payments. These short term loans are great for refinancing and for customers with a small amount of change in their pockets.
The minimum term for a regular loan is 5 years, which is ideal for those buyers who want to avoid paying too much interest and have cash for larger monthly payments.
Adjustable rate mortgages
The interest rate on an adjustable rate mortgage can change over time. It can be great if interest rates fall, but an expensive gamble if they rise over the life of the loan. However, the introductory rate is usually much lower than most fixed rate mortgages, sometimes resulting in significantly lower monthly payments. Moreover, it is locked for 1, 3, 5, 7 or 10 years…
After this initial speed, it will periodically adjust, often annually, although different schemes can be discussed with your lender. Adjustable rate mortgage loans are available in a variety of lengths and are ideal for buyers who believe rates will drop in the future.
Most non-traditional loans with the support of a government agency… They are designed to help those segments of the population who would otherwise find it difficult to obtain a conventional loan. Here are the most common types of non-traditional mortgages.
Insured by the Federal Housing Association, FHA mortgage aimed at buyers who do not meet the credit rating or DTI requirements conventional loans. You can get an FHA loan with credit rating from 500although you will need 580 to make a down payment of just 3.5%. FHA loans are great for both new buyers and experienced buyers with lower credit ratings who want to avoid a 20% down payment.
Guaranteed by the Office of Veterans Affairs, VA credits intended for assistance to military veterans and their spouses… There are several advantages, including no down payment, no mortgage insurance requirements, and competitive interest rates. You will need to pay a VA financing fee, either up front or included in your mortgage payments. It is relative modest cost from 1.4% to 3.6%, depending on the amount of your down payment.
Supported by the USDA, USDA loans designed to “improve the economy and quality of life in rural America.” Only buyers are looking for a property in the countryside will meet the requirements, although there are other criteria that need to be met. USDA loans do not always require prepayment and set limits on property prices and income limits… Ideal for buyers looking to settle in the countryside.
Appropriate and inappropriate mortgage
The loans discussed above are categorized as eligible loans. They comply with government loan limits (Federal Housing Finance Agency – FHFA). In addition, the qualifying loans comply with the underwriting guidelines set by Fannie Mae and Freddie Mac.
Inappropriate mortgages, on the other hand, exceed the limits set by the FHFA and fall short of guidelines. Large loans are the most famous type.
They are reserved for buyers who meet the most stringent criteria, with a minimum down payment of at least 20% and a higher credit rating (at least 700) and DTI requirements. They are designed to finance high-value real estate in which the appropriate loan limits will be breached. Jumbo loans fit for buyers of expensive houses who have the means and credit to make high payouts.