Buying a home is exciting! Exhilarating, even! But it’s also super stressful, especially when you begin to consider your finances. How much home can you afford? How much will you be approved for? Will you qualify for favorable rates? And what type of loan should you get, anyway?
I’m here to help. Let’s take a minute to explore the five types of mortgages most commonly granted to homebuyers. Using this information, you can determine which is the best for you!
1. Fixed Rate Mortgages
Fixed rate mortgages are offered by most lenders, and they’re one of the most common types of mortgages homebuyers select. A fixed rate mortgage may offer a term of 15, 20 or 30 years – that’s up to you and your desired monthly payment.
Fixed rate mortgages offer the benefit of one consistent monthly payment amount for the entire duration of the loan. For instance, if you’re approved for aa loan with an $800 monthly payment, that amount will never change.
Fixed rate mortgages do have a disadvantage, though. The interest on these loans is sometimes a higher rate than others. That means you may pay more for your home over the duration of your mortgage and it’ll take a bit longer to build equity in your home.
2. Adjustable Rate Mortgages
Sometimes homebuyers will opt for an adjustable rate mortgage. The advantage to these loans is a lower interest rate (and monthly payment) for the first few years of the loan. Unfortunately, there’s a big “con” to ARMs. That is that your interest rate can be adjusted, as the name implies.
A small increase in your interest rate may not cause too much hardship. However, a big jump in your interest rate can result in mortgage payments which are, simply, not affordable.
3. Government Insured Mortgages
The government has many, many programs to assist homebuyers in purchasing a home. These programs are offered through the Veteran’s Administration, the Federal Housing Administration and the U.S. Department of Agriculture.
You may qualify for a government insured loan by meeting certain criteria. For example, if you’re a veteran you may be eligible for a VAloan. If you live in a rural area, there are USDA loans you may apply for.
Government insured mortgages offer advantages such as low interest rates, low down payments or loans for low income borrowers. They’re also guaranteed by the government, which is an added benefit.
4. Conventional Mortgages
Conventional mortgages are usually issued through private lenders and are not backed by the government. You’ll need a slightly higher credit score to qualify for a conventional loan. Usually your score will need to be at least 700 but some lenders will approve you with a credit score as low as 620.
Conventional loans are more flexible in the options available to home buyers. For instance, you may choose between a fixed rate mortgage and an ARM, or may have more flexibility in the length of time to pay off your loan. However, most lenders will require mortgage insurance which means an additional expense to you, despite potentially lower interest rates.
5. Jumbo Mortgages
Looking for a million dollar home? You’ll need to apply for a jumbo mortgage. Each year, the Federal Housing Finance Agency will designate a conforming loan limit for single family homes. If your loan amount is to exceed that limit, your loan is called a jumbo loan.
You’ve got to have very good credit to qualify for a jumbo loan, and your down payment must usually be at least 10% of the purchase price of the home. You’ve also got to have quite a few assets – usually around 20% of the purchase price – in savings or other places.
Jumbo loans are great if you’re looking to move to a more “expensive” part of the country. However, be sure you factor in interest loans to the total cost and work with a financial advisor to ensure you can afford your household’s monthly expenses.