6 Different Types of Mortgages
When thinking about purchasing a home, an important piece to think about early on in the process is how you are going to finance your property. There are so many loan products available to consumers now, so sometimes it is hard to know which one is best suited for your needs. Below you will find a description of some of the most common types of mortgage loans. However, if you want to get suggestions on the best types of mortgage loans for your situation, you should contact a mortgage loan originator who can get you pre-approved.
Fixed Rate Mortgage Loan
To get a basic idea about mortgage loans, you need to know about a fixed rate mortgage. A fixed rate mortgage is offered for a specific term of years where the interest rate remains the same on the note throughout the entire term and is a fully amortizing mortgage. The most common type of fixed rate mortgage is the 30-year. However, you can have a fixed rate mortgage with a term between 10 and 50 years. The average hold time for a home with a fixed rate mortgage is 5 years.
Adjustable Rate Mortgage (ARM) Loan
Contrary to the fixed rate mortgage, the adjustable rate mortgage is one where the interest rate on the principal amount due fluctuates periodically. With an ARM, you can choose a variety of payment options and index rates. However, if you choose to make minimum payments in an ARM, you may negatively amortize your loan.
Federal Housing Administration (FHA) Loan
FHA loans are mortgage loans that are entirely backed by the government, but require the buyer to pay mortgage insurance until the loan-to-value ratio is 80%, or in other words, when you have 20% equity in the home. Often, these types of mortgages are great for first-time home buyers because there is a very minimal down payment required and FICO credit scores do not matter as much as with other loan products.
If you are a U.S. Armed Forces veteran, you should look into financing your home through a VA loan. For this type of loan, the borrower does not need a down payment. The loan is guaranteed by the Department of Veterans Affairs, but is funded by a conventional lender. The only thing you might be wary of and may need to ask your lender more information about is the VA Funding Fee and what costs are associated with it.
Reverse mortgage loans have become very popular loan products with consumers over 62 years of age. Instead of making monthly payments on the mortgage, the equity in the home instead pays the consumer until they no longer reside in the home or pass away. The interest rates with these types of loans can be fixed or adjustable. To qualify for one of these loans, you must go through some mandatory counseling to make sure you are informed about the effects that this loan has on your home.
If you have any lingering questions about which mortgage loan product you should choose, please do not hesitate to reach out to me via phone or email and I would be more than happy to assist you in this process.