Different Types of Mortgages
If you’re considering buying your first home, you may be wondering about all the mortgage options available to you. There are many types, and not every one will be right for you. Your real estate professional and lender will be able to guide you in this decision based on your credit history, budget and more. From FHA to conventional to VA, here we will go over the various mortgage types.
1. Conventional Mortgages
A conventional mortgage is a home loan that is not insured by the federal government, and there are two basic types: conforming and non-conforming loans.
A conforming loan involves a loan amount that falls within maximum limits that have been set by Fannie Mae or Freddie Mac, the two government agencies that back most U.S. mortgages. Loans that don’t meet those guidelines are known as non-conforming loans, of which jumbo loans are the most common.
You will have to pay private mortgage insurance (PMI) when putting down less than 20 percent of the purchase price. Your lender may cancel PMI once you have gained 20 percent equity. You must have a minimum FICO score of 620 or higher, so not everyone can qualify.
2. Government-Insured Mortgages
Three U.S. government agencies back loans: the Federal Housing Administration (FHA loans), the U.S. Department of Agriculture (USDA loans) and the U.S. Department of Veterans Affairs (VA loans).
- FHA loans: This type of loan makes homeownership possible for borrowers who can’t come up with a large down payment and who don’t have the best credit. A minimum FICO score of 580 is needed to get an FHA loan.
- VA loans: These are flexible, low-interest mortgages for members of the U.S. military (active duty and veterans) as well as their families. You do not need to come up with a down payment and you don’t have to worry about PMI, with closing costs capped and often paid by the seller. You will be charged a funding fee as a percentage of the loan amount to offset the cost to taxpayers.
- USDA loans: These loans make it possible for moderate- to low-income borrowers to purchase homes in rural areas.
3. Fixed Rate Mortgages
These types of loans carry the same interest rate over the life of the loan, so your monthly mortgage payment stays the same. They are available in 15-year, 20-year or 30-year increments. While your monthly principal and interest payments will remain stay the same throughout the life of the loan, you will pay more interest with a longer-term, fixed-rate loan. This is a good choice if you are planning to remain in your home for seven to 10 years.
4. Adjustable Rate Mortgages
ARMs have fluctuating interest rates that can increase or decrease with the market conditions. Many have a fixed interest rate for a few years before they convert to a variable interest rate for the remainder of the loan. While you will get a lower fixed rate in the first few years of homeownership and save a lot on interest payments, your monthly mortgage payments could become unaffordable, leading to a loan default.
This is a good type of loan for those who are comfortable with a certain level of risk and for those who don’t plan to stay in their home beyond a few years.
Contact Berkshire Hathaway Premier Properties
To learn more about the different types of mortgages, contact the professionals at Berkshire Hathaway Premier Properties today at 832-626-4889.