5 Types of Mortgages to Consider When Buying a Home
For most people, the home-buying process involves applying for and receiving a mortgage. Although a 30-year fixed-rate loan is one of the best-known mortgages, there are several other options as well. The right one depends on the buyer and their credit history, income, expectations, and the cost of the home. With the following information, people will know the most common mortgage types and how to compare them.
In many cases, interested buyers start by considering loans from a bank or credit union. Lenders may offer a variety of loan options, some of which are considered conventional. Conventional loans are the default in that they are not insured by the government or part of a niche loan program. Home buyers should keep in mind that a conventional mortgage is not the same as a conforming mortgage, which meets the requirements for the debt to be purchased by Fannie Mae or Freddie Mac. Most conventional loans are conforming, but some, such as jumbo loans, are not.
Some home buyers do not qualify for a conventional mortgage, and they may choose from a variety of government-backed loans to help. Several government organizations offer insurance on certain types of loans as a way to make homeownership more accessible to people who meet the requirements. These organizations include:
Government-insured mortgages have requirements that are easier for people with lower credit scores to meet. These mortgages may have a smaller minimum down payment or lower closing costs. In some cases, borrowers must be a part of an organization or make a purchase in certain areas.
A fixed-rate mortgage is one of the most common types, and most home buyers are familiar with it. The fixed rate refers to the interest rate that the borrower pays over the life of the loan. The rate set at the beginning of the loan remains the same until the loan is paid off. With the same interest rate, homeowners can expect the same payment each month, with exceptions for changes in property taxes, homeowners insurance, or private mortgage insurance. If average interest rates go down, the loan rate remains the same. However, many homeowners will have the option to refinance to a lower rate when it is available.
Unlike a fixed-rate mortgage, an adjustable-rate loan can change over time. Typically, the rate remains the same for a specific period of time at the beginning of the loan, usually a couple of years. Once that period ends, the rate may change on a regular interval, often six months or one year. As the rate changes, the monthly payment changes as well. Homeowners with an adjustable-rate loan must be able to anticipate these changes and continue to make regular payments. In exchange, the initial rate of these loans is typically lower than a fixed-rate loan. As with fixed-rate mortgages, homeowners may be able to refinance these loans to a different type.
Jumbo mortgages may be very similar to conventional loans with the maximum amount as the primary exception. Conventional loans, especially conforming loans, have a set maximum based on the area. People who are looking for homes in a region with a high cost of living may need to consider a jumbo loan in order to afford to make the purchase. Due to the higher amount, borrowers usually need to have a higher credit score and income to qualify.
Understanding the types of mortgages makes it easier for borrowers to consider their options. Starting this research helps buyers to make the choice that will work best for them.