Types of Mortgages

Consider the advantages and disadvantages of each type of home loan listed below. Be sure to discuss your needs with your mortgage lender as well. The lender can tell you more about the different home loans as well as whether or not you will meet the requirements for some of them.

Conventional 30-year loans enable you to purchase a home with as little as a 3% down payment. You’ll pay monthly mortgage premiums at a fixed rate for the entire 30-year term of the loan. If interest rates are currently low, you can secure a great rate and ensure low monthly premiums.

However, you will also need to pay Private Mortgage Insurance (PMI) each month unless you put down at least a 20% down payment. This can significantly add to the amount of your monthly premium.

Overall, it’s a great option for homebuyers wishing for low monthly premiums, provided they have enough cash for a 20% down payment. It’s also a relatively easy loan to get approved for if you have a minimum credit score of 620, a low debt-to-income ratio, and a stable income. If you have a lower credit score and more debt, there are other types of mortgages that might suit you better.

This is a popular option for those wishing to pay off their mortgage quicker. As with the 30-year loan, you’ll pay the same monthly premium for the loan term. The interest rates for 15-year loans are typically higher than 30-year loans. However, because you are paying off the loan quicker, you actually pay less interest over time.

These types of mortgages feature interest rates that can fluctuate as the market changes. When you first get approved for an Adjustable Rate Mortgage (ARM), there is an introductory period in which the rate doesn’t change. The introductory period can vary according to loan terms with the lender. It is typically a period of 5-10 years. The interest during this introductory period is usually lower than the rates with fixed-rate mortgages.

Introductory Period

After the introductory period, the rate can move up or down depending upon market conditions. Each loan also has a cap; the maximum amount the interest rate can be increased by. This helps ensure that your interest won’t keep climbing each year even if market rates do.

This can be a good loan for those who intend to pay off their mortgage before rates start to rise. Paying off the loan early can help you save thousands. It can also be a good option for those who don’t plan on staying in their home for a long time or are planning on refinancing at some point. The initial low-interest rates help you to save on interest and secure lower monthly payments.

An FHA loan is a government-backed loan that is insured by the Federal Housing Administration. FHA loans are more suited to individuals who wish to buy a home but don’t have a lot of money for a down payment, or have issues with their credit or debt. They also have lower interest rates than many other types of mortgages.

Credit Score

To qualify for an FHA loan, you need only have a credit score of at least 580. You are also only required to have a down payment of 3.5%. However, if you can pay a larger down payment, you can potentially secure the loan with an even lower credit score; as low as 500. These requirements will vary by lender. You will also need to pay mortgage insurance on these loans.

Another government-back loan, these types of mortgages are insured by the United States Department of Agriculture. The mortgage insurance requirements are not as strict as FHA loans. You can also purchase a home with a USDA loan with no down payment. However, in order to qualify for a USDA loan, you must meet certain income requirements. Additionally, the home must be located in a qualifying rural or suburban area.

These types of mortgages are backed by the Department of Veterans Affairs. To qualify, you must be a veteran or military service member.  VA loans don’t require you to pay mortgage insurance or make a down payment. They are ideal loans for military personnel or veterans who want a low-interest rate or don’t have money for a down payment.

Jumbo loans are more suited to homebuyers seeking to purchase a high-value property. A jumbo loan is available as either a fixed-rate loan or an adjustable-rate loan. To be approved for a jumbo loan you will usually need a credit score of 700 or higher. A down payment of at least 10% is also a typical requirement.

Other requirements for jumbo loans, such as your DTI, can also be stricter than other types of mortgages. But if you have a good credit score and low DTI, a jumbo loan is a good option for anyone needing to borrow approximately $550,000 or more.

When you have an interest-only mortgage, you are required to pay only the interest charge on a loan for a specified period of time. This period is usually 5-10 years. During this time, the loan balance remains the same.

The loan enables homeowners to pay a smaller monthly amount during the interest-only term. However, when the period ends, the new monthly premium can be significantly higher. This can be a good loan for those who don’t plan on staying in the home for the length of the loan or plan to refinance. However, the homeowner is also not building any equity during the interest-only period. And, some mortgages will require a lump-sum payment at the loan term.

Before choosing any type of mortgage, be sure to carefully and thoroughly read all the loan terms. Terms and requirements can vary from lender to lender.