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There numerous types of mortgage loans available these days. They may have different interest rates, terms, fees, flexibility and amortization period.
These factors have a potential to influence the cost of borrowing. Choosing the right type of mortgage can be an energy-sapping and time-consuming task. As there is no one single mortgage solution, prospective homeowners should perform research to find the most suitable option that fits their finances and preferences. When getting a mortgage, first of all, you should consider your financial state and specific needs.
To help you choose the type of home loan suitable for you, we have outlined the most popular mortgage loan types.
there are government and conventional home loans.
mortgage loans’ types are divided into: fixed rate mortgages, adjustable (or variable) mortgages and the mix of both.
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Mortgages Federally insured home loans include three main types: FHA, VA and RHS loans.
FHA home loans are insured by the Federal Housing Administration.
FHA loan programs require lower qualification criteria than conventional mortgages and allow the loan recipients who have a low credit rating or can’t make a high down payment deposit to purchase a home they otherwise couldn’t afford.
VA home mortgages are insured by the U.S. Department of Veterans Affairs
and are available to the veterans, service persons and widows of fallen service persons, on condition that the widow doesn’t remarry. Usually, VA loan programs provide favorable loan conditions without introductory payment and less qualification criteria required. However, the loan conditions depend on minimum active duty service requirements as well as the type of discharge.
The third most popular type of governmental mortgages is RHS mortgages, assured by the Rural Housing Service.
This mortgage loan type is eligible only for rural residents and requires no down payment and minimal closing costs.
The applicants must be ineligible for a conventional home loan and are required to reside in the purchased home. Eligible applicants can only earn up to 115% the area’s median income. RHS loans don’t require private mortgage insurance since the federal government insures the loan.
The main disadvantage of government-insured mortgage programs is that they are available to a restricted number of applicants and involve strict property minimum standards and disclosures.
Unlike government-insured mortgages, conventional mortgages are not insured by federal agencies. Conventional mortgages involve a down payment which is typically between 5 to 20 percent and stringent qualification criteria: a permanent job, full package of documentation about the loan recipient’s assets and sources of income. Conventional loans are divided into two major categories: conforming and non-conforming loans.
Conforming loans feature a limited loan amount, depending on location.
Like all conventional mortgages, conforming loans are not insured by the government; however they comply with the guidelines of Fannie Mae and Freddie Mac.
In order to be qualified for a conforming loan, a potential homeowner should have a solid payment history and a stable source of income.
Those people who are not eligible for a conforming loan can apply for a non-conforming loan.
This mortgage loan type doesn’t follow Fannie Mae and Freddie Mac’s guidelines and features higher interest rates than conforming loans. Non-conforming loans are a good opportunity for those who haven’t qualified for conforming or FHA loans. Sometimes, it is possible to decrease the payment by refinancing a non-conforming loan into a conforming one.
All home loans types are basically divided into the fixed-rate and the adjustable-rate mortgage with some variations within these categories.
Fixed mortgages include monthly payments with an interest rate remaining equal over the life of a mortgage.
With a fixed mortgage, economic conditions and the borrower’s financial state can’t influence a mortgage rate if they continue making their monthly payments. The most common life span of fixed mortgage is a 30-year fixed mortgage. A fixed mortgage offers the greatest level of consistency with its monthly payments. However, this mortgage loan type can be more expensive when compared to its adjustable rate counterpart. Fixed mortgage is the best option for those who have enough funds to afford a high monthly payment and are going to live in the house for 10 or more years.
Adjustable mortgages feature varying interest rates. Usually, adjustable loan programs offer a lower introductory rate than fixed mortgages.
The adjustable mortgage rate depends on two main factors:
– an index value
– a fixed percentage called a margin.
The margin stays equal over the life of a mortgage, while the rate index may change. Therefore, the borrower may benefit when the interest rate goes down adjusting to current market trends but may pay more when the rate becomes higher. There is also a capped mortgage characterized by the fixed ceiling mortgage rate that can’t be increased, but may go down if the floating rates become lower than a capped rate.
A balloon mortgage is a fixed short-term loan. It has an amortization period like usual 30-year fixed mortgages, but typically it requires lower monthly payments and interest rates that make it more similar to adjustable rate mortgages.
With the balloon mortgage, a borrower pays monthly for a specific time period and at the end of the mortgage term he/she has to pay off the resulting so-called “balloon” payment. Some of the balloon mortgage programs have an option to convert a balloon mortgage into a long-term fixed mortgage at the end of the initial mortgage period.The balloon home loan type may interest people who like the stability of a fixed-mortgage, but can’t afford long-term financial obligations. It could be a good option for those people who are planning to put the house up for sale in a relatively short time period.
With the interest-only mortgage, a potential homeowner pays just the interest rate that remains the same over the mortgage term.
However, it doesn’t mean that the borrower will only ever pay just interests. An interest-only mortgage merely gives the option to pay a lower payment during the initial years of the mortgage term, but the homeowner will then pay a larger monthly amount for the remainder of the loan amortization.
This home loan type is useful for first-time home buyers, enabling them to balance their budget and save money until their monthly payments rise.
Reverse mortgage are available for borrowers who are at least 62 years old. Reverse mortgages allow retirees to turn the value of their home into cash with no need to pay each month, sell the property or move out.
In this case, the traditional mortgage concept is reversed, hence the title: instead of making payments to a lender, the lender pays the borrower. After the borrower’s death, the heir, if any, has a right to repay a reverse mortgage and retain the house, otherwise, it becomes the lender’s property. The procedure of reverse mortgage transactions varies depending on the local laws of each jurisdiction.
P.S. Despite the fact that governmental mortgages can be potentially easier to be qualified for, they are available to a restricted number of applicants. In this case, conventional mortgages could be a good backup plan. When you are choosing between fixed or adjustable mortgages, it is better to focus not only on the amount of interest rate you will be charged, but the type of the rate you are planning to pay. We hope that the above information will be helpful to you.