Buying a home is a big moment and one of the most important aspects of that moment is deciding what type of mortgage program to go with. If this is your first home purchase, then deciding on a mortgage can be pretty intimidating. That doesn’t have to be the case though. As you read on, you’ll see that there really isn’t much to understanding different mortgage types. Today’s market has several options to choose from. No matter what your needs might be you’re sure to find a mortgage program that’s right for you. To get you started here are the main mortgage types available to home buyers.
The most common type of mortgage is a conventional fixed-rate mortgage. These allow you to lock in one interest rate for the duration of the loan. From beginning to end you’ll pay the same amount in interest each month. The best part about this program is that they provide stability and predictability. They’re available in 10, 15, 20, 30, and 40-year terms, but 15 and 30-year terms are the most common choices. The shorter your term is the higher your monthly interest payments will be. As such, most buyers chose to spread their monthly payments out over 30 years. This is a great option now since interest rates are at their lowest point in years.
Adjustable-Rate Mortgage (ARM)
ARM’s have an adjustable interest rate that changes once a year. The rate change reflects changes in the economy and the costs of borrowing money. What makes them attractive is that they’re usually offered with an initially lower interest rate than fixed-rate mortgages. These mortgage types carry more risk as your monthly payments will go up as interest rates rise. They can be useful for some buyers – even first-time buyers – but you need to understand what you’re agreeing to. If you’re just starting out in a new career and expect pay rises in the future, then they can be a great way to get your foot in the door. The most common type of ARM is called the 5/1 loan. The interest rate stays the same for the first five years, after which it changes each year for the duration of the loan.
Even if you’ve got less than stellar credit and not much saved for a down payment you still have options, one of which is the FHA loan. This is a government-subsidized loan that requires a down payment of only 3.5%. Since it’s backed by the federal government there is virtually no risk to the lender. Because of this, they can be offered to riskier borrowers. FHA loans come in fixed-rate and adjustable-rate products. They’re highly popular with first-time buyers and the 30-year fixed-rate loan can usually be had at lower interest rates than conventional loans. However, they come with the catch of having to pay an upfront and annual premium.
Like FHA loans, VA loans are backed by the federal government. What makes them different though is that they’re only available to current or former members of the U.S. armed forces and in some cases, their spouses. Another difference is that you can get them with a 0% down payment. They do however come with a funding fee that goes directly into the program and keeps it running for future generations. This fee will vary depending on the borrower’s circumstances but will usually be 2.25% of the purchase price of a home. Borrowers with service-related disabilities are exempt from the funding fee. VA loans also limit closing costs for buyers and allow sellers to pay most or even all of those expenses.
For those looking to buy an expensive or luxury home, a jumbo loan may be the answer. This refers to any type of loan that is too big for the federal government to back or guarantee. Fanny Mae and Freddie Mac have limits on the size of loans they can buy from lenders and these limits change annually. This limit will also change depending on the state and even county. As of 2019, the limit is $484,350 for most of the country. You’ll usually need superb credit and an acceptable debt-to-income ratio to support a large loan like this. They come in both fixed-rate and adjustable varieties.