According to the research Mortgage loans are mainly two types of conforming loans that the government secured and non-conforming loans that not gov secured. And every mortgage belongs to these two categories. But if you are a Buyer And Refinancer who want to know different types of Mortgage Loans then here it is.
Generally, you found 8 types of Mortgage Loans For Buyers And Refinancers. The followings are Conventional Mortgage Loans, Fixed Rate Mortgage Loans, Adjustable-rate mortgages (ARM), Jumbo, USDA, VA, FHA, and Interest Only mortgages.
So are looking for residential real estate or commercial real estate?. Are you a first-time homebuyer? Doesn’t matter. Our detailed overview of the most common Types Of Mortgage Loans will definitely help to figure out what is the best loan as per your budget, plan, financial condition, and real estate profile.
8 Types Of Mortgage Loans For Buyers And Refinancers
Conventional mortgages Loans
These home buyer loans are not secured by the government agencies and are mostly backed by private lenders like banks, credit unions, etc.
Mostly two types of conventional loans are found, conforming and non-conforming loans. In simple words, conforming loans are issued by the Federal Housing Finance Agency where the mortgage amount is limited by the federal government. For example, FHA loans, VA loans, USDA mortgages.
On the other hand, Non conforming loans are not issued by the federal government because they don’t meet the federal standard. Here the mortgage is higher than the limit and interest is also factual by market condition. For example, jumbo loans, ARM mortgages.
Fixed-Rate Mortgage Loans
One of the most popular, stress-free, predictable, and convenient mortgage loans, best for home buyers and refinancers. Here you don’t need to think more about fluctuations of the market condition that influence monthly interest rates. Because once you borrow the fixed-rate mortgage it is locked for 10 to 30 years. Although, 15, 20, and 30 years are the most common life span of fixed-rate mortgages.
- It helps to build your equity, slow but steady.
- The monthly interest rate doesn’t change so your monthly and total amount is predictable
- The facility of a Lower monthly payment and faster loan repay
- If current living is your forever home then fixed-rate mortgages will make your long-term budget plans more convenient.
- In certain cases, your monthly rate may fluctuate because of local tax and insurance changes.
- Research and consultation with home loan experts are important in this mortgage. Because the interest rate varies in different areas differently. If your area interest is high, Still you are locked in a fixed mortgage, you are stuck and definitely run in a loss by paying a higher amount per month interest.
- Generally, the Monthly interest rate is higher than ARM rates.
Adjustable-rate mortgage loans (ARM)
ARM is the Opposite of fixed mortgage loans because here the interest rate fluctuates on market condition. Which is also called “market index rate”, a predetermined index that is monitored by your lender. If the index rate goes up your monthly charge will go up, if it goes down your payable amount also goes down. But the fact is, ARM works as a 5-1 or 10-1 loan facility, which means the first five or ten years need a fixed monthly rate after that the charges will depend on the economic condition for the next loan years.
- The first Five years’ monthly rates are lower than other types of mortgage loans.
- ARM is flexible if you plan to sell your current house before moving into your forever home.
- The lower monthly payment is possible if the market index rate goes down
- ARM also offers a rate caps facility that gives an assurance of benchmark interest rate. This means, if index rates continuously rise year after year then the rate cap will help to stop your increasing monthly payment when it touches the selected benchmark interest rate.
If rates increase continuously then some of the borrowers may suffer to pay higher amounts.
You may lose the home if you are unable to pay monthly payments after the fixed year’s rates closed.
Risk is a part of ARM because of market fluctuation rates, complex fees, and structure. So if your plan is poor then it ends with a loss of money.
Jumbo mortgage Loans
Jumbo mortgage is also referred to as a non-conforming loan limit where the amount is high for the federal government to take a guarantee. 2021 reports say, In the USA, a single-family home may have approx $600k conforming loan limits. Although, jumbo loans are well known for high-cost areas, where the average home selling price is approx $800k. In jumbo loans, interests are adjustable and almost similar to average conforming rates.
If you want to build an expensive real-estate portfolio.
If you want to refinance your expensive homes in jumbo size mortgages.
You need to run a healthy bank balance where the minimum credit score is 660-700
At Least 10-20% down payment is compulsory
You have to manage a sufficient finance profile
All your documents go through Strict regulation and rules to qualify for the jumbo loan
This type of mortgage loan comes with no or low down payments which are mostly borrowed by low-income-profile buyers in rural or sunburn areas. USDA mortgage is also called government-insured mortgage that is backed or issued by US government agencies. And this loan is backed by the US agriculture department to help those citizens who want to become homeowners. Government Agencies also help borrowers to give home improvement loans if they meet the USDA eligibility. So it is More helpful for low-income people who want to buy a home with zero or low investment.
VA Mortgage Loans
VA loans are issued by the U.S. Department of Veterans Affairs. And it is applicable for, duty veterans of the US military force who want to buy a home for their family with no down payment. It is a flexible and low-interest mortgage where closing costs are capped and doesn’t need mortgage insurance. If you meet the service requirements of the US armed forces then a VA loan is for you with a low-interest rate. Although closing costs and funding fees are included in VA loans.
FHA Mortgage Loans
This mortgage loan is granted or issued by the Federal Housing Administration, USA. If your credit score is low (minimum 500) and also want to buy a home with less than a 20% down payment. Then FHA mortgage loans help you to become a homeowner by maintaining your budget. For eligibility, you need to pay at least 3.5% down if your credit is 580 but if your credit score is 500 then at least a 10% down payment is compulsory. Lastly, the mortgage insurance premium is required to pay. But here you get two options which are upfront paid and annual paid.
Interested Only Mortgage Loan
This type of loan works to pay the lender’s interest amounts for a certain period though. Moreover, you can consider it as one type of adjustable-rate mortgage because the interest that you pay can last for certain years or throughout the loan duration. In this mortgage loan, you may need to manage lump sum payment if the home occurs to damage. If you go for this loan and after the contract ends then you get a couple of options like refinance after the loan duration ends. This could give you the opportunity of a low-interest rate by following the principle. If your loan is due then you may need to arrange a lump sum payment. Or you can sell the mortgage home to pay off the loan. So Interested Only Mortgage Loan is more beneficial for those who manage a strong, steady, and high monthly income profile.
- This mortgage loan keep you safe from large payments in future
- This loan is helpful If you don’t want to stay in a home for a long time.
- You need to have enough assets, documentation, and a strong bank balance to assure the lender that you are able to pay the periodic principal payments.
- Continues interest charges make it harder to build equity from the current property
- Homeowners may suffer if they go through sudden financial losses like a medical emergency. Because when the principal adds to payments the rate will rise up.
Other Mortgage Loans For Buyers And Refinancers
As we mentioned, government-issued loans are a concept to help more homeowners in America. VA, FHA, and USDA are some mortgage loans that belong to this category. Where the loan amount is limited or selected by the government agencies. Three loans are divided into three different departments like the FHA, the USDA, and the U.S. Department of Veterans Affairs (VA loans).
It is a mortgage loan for older people who are 62 years old or older than that. In this mortgage, they are allowed to take a higher fund than their current home value. And this fund will deposit as a lump-sum payment or per month payment. Moreover, the loan amount doesn’t need to be paid by the homeowner, instead, it’s automatically payable when the owner dies, or moves or sells the house permanently.
It also refers to combo loans or home equity loans that allow you to borrow additional funds to qualify for the main mortgage loans that you actually need. But Piggyback loans interest rate is higher than conventional loans.
Balloon Mortgage loans
If you are looking for commercial real estate then a Balloon Mortgage loan is for you where the final payment is higher. You can also call it a fixed-rate home loan.