Buying a home is exciting, but finding out the financial side of things can be overwhelming. Choosing a mortgage is not that painful if you know the lingo. Once you have done your homework and established a budget and down payment amount and checked your balance, you will have a better idea of the loan that best suits your needs.
Here is an introduction to some of the most common types of mortgages.
- 4 types of mortgage:
- 1. Conventional mortgages
- 2. Jumbo mortgages
- 3. State-insured mortgages
- 4. Fixed-rate mortgages
1. Conventional mortgages
A conventional mortgage is a mortgage that is not insured by the federal government. There are two types of traditional loans: compliant and non-compliant. A compliant loan simply means that the loan amount is within the limits set by Fannie Mae or Freddie Mac, the government agencies that support most US mortgages. However, loans that do not meet these guidelines are considered non-conforming loans. Giant loans are the most common type of non-conforming loan.
Lenders generally require that you purchase private mortgage insurance on many conventional loans if you pay less than 20% of the purchase price of a home.
Advantages of traditional mortgages
- It can be used for a primary residence, a secondary residence or an investment property.
- The total cost of the loan tends to be lower than that of other types of mortgages, although the interest rates are slightly higher.
- You can ask your lender to cancel the PMI as soon as you have earned 20% of the principal.
- You can only pay 3% for loans supported by Fannie Mae or Freddie Mac.
2. Jumbo mortgages
Giant mortgages are conventional loans with non-conforming credit limits. This means that property prices exceed the limits of federal loans. For 2018, the compliant credit limit for single-family homes in most of the United States, according to the Federal Housing Finance Agency, is $453,100. In some high-cost areas, the maximum price is $679,650. Giant loans are more common in regions with higher costs and generally require more detailed documentation to qualify.
Benefits of Jumbo Mortgages
- You can borrow more money to buy a house in an expensive neighborhood.
- Interest rates tend to be competitive compared to other conventional loans.
3. State-insured mortgages
The United States government is not a mortgage lender, but it does play a role in helping more Americans become homeowners. Three government agencies support the loans: the Federal Housing Administration (FHA loan), the United States Department of Agriculture (USDA loan) and the United States Department of Veterans Affairs (VA loan).
FHA Loans – These loans are taken over by the FHA and allow borrowers who are not saving a large down payment and who do not have an impeccable loan to become a homeowner. Borrowers need a minimum FICO of 580 to receive a maximum of 3.5 percent of FHA funding. However, a credit rating of 500 with a discount of at least 10% is accepted. FHA loans require two mortgage insurance premiums: one is paid in advance and the other annually for the life of the loan if you pay less than 10%. This can increase the total cost of your mortgage.
VA Loans – VA loans offer members of the US military flexible mortgages at low-interest rates. United States (active duty and veterans) and their families. VA loans do not require a down payment or PMI, and closing costs are usually limited and can be paid by the seller. VA fees are charged as a percentage of the loan amount to offset the cost of the program to taxpayers. These costs, along with other closing costs, can be deferred on most VA loans or paid in advance at closing.
USDA Loans – USDA loans help low and moderate-income borrowers to buy houses in rural areas. You have to purchase a home in a USDA eligible area and meet certain income limits to qualify. Some USDA loans do not require a down payment for eligible low-income borrowers.
Benefits of State Insured Loans
- They will help you finance a home if you do not qualify for a traditional loan.
- Credit requirements are more relaxed.
- You don’t need a big deposit.
- They are open to rehearsals and new buyers.
4. Fixed-rate mortgages
Fixed-rate mortgages keep the same interest rate for the duration of your loan, which means that your monthly mortgage payment stays the same. Fixed loans generally have a term of 15 years, 20 years or 30 years.
Benefits of Fixed-Rate Mortgages
- Your monthly principal and interest payments remain the same for the duration of the loan.
- You can budget other expenses more precisely from month to month.