What are the different types of mortgages?

With so many different types of mortgages to choose from, how do you know which one might be the best fit for you? We're here to help as you prepare for the home buying journey. 

Tags: Home, Home buying, Mortgage, Military
Published: April 13, 2020

Now is a great time to do some research to better understand the types of loans that are available to you.  When you're ready to get out in the market, you'll feel more confident knowing which one is the right type for you. One of the first steps in purchasing a new home is deciding how you'll finance it. Unless you have the cash on hand to purchase your home outright, you may have to rely on a mortgage. There are several types of home loans available, so you can choose the mortgage program that best suits your financial situation.

A mortgage loan officer can help you sort through your options, but here are some of the basics to help get you started.
 

Mortgage programs

When you're comparing different types of mortgages, you should look at these key points:

  • Home requirements
  • Borrower requirements
  • How mortgage payments are structured

Not all types of home loans will work for all buyers, so it’s helpful to talk to your lender to sort through the best option for you, especially after learning the recent federal rate cuts due to COVID-19. To get you started on understanding what might be available to you, below are some types of mortgages you may want to consider. 
 

Fixed-rate vs. adjustable-rate mortgages

The matter of fixed-rate versus adjustable-rate mortgages will come into play with nearly all types of mortgage programs. As the name suggests, a fixed-rate mortgage is one that maintains the same interest rate throughout the life of the loan.

With an adjustable-rate mortgage (ARM), the interest rate can change after the initial fixed-rate period, which could be between 1-10 years. For example, the 5/1 ARM, has a fixed interest rate for the first five years, after this period, the interest rate changes annually for the remaining term. The monthly payments on adjustable-rate mortgages are based on the fully indexed rate figured over the amount of years still left on the loan. Buyers often choose them with the intent of refinancing or selling before the loan goes into the adjustable-rate period. Typically an adjustable-rate mortgage offers a lower interest rate than a fixed-rate mortgage, this can be a great option for buyers looking to minimize their investment on a particular home.
 

Conventional mortgages

Several types of home loans fall within the category of conventional mortgages. These mortgage programs are essentially anything that's not backed by the federal government. Conforming loans are those within the limits of the Fannie Mae or Freddie Mac programs. Non-conforming loans may offer higher sums, as they fall outside these guidelines.

For a conventional loan, many lenders require a minimum FICO score of 620 and a debt-to-income ratio of 45 to 50 percent. If your down payment is less than 20 percent of the sale price, you must pay for private mortgage insurance.


Government-insured mortgages

The government offers three types of mortgage programs to help Americans purchase homes.
 

FHA loans

Ideal for first-time homebuyers, FHA loans typically require a low down payment from qualified borrowers.
 

VA loans

Available to veterans, VA loans can offer financing with no down payment. This is one of the few loans that doesn't require you to purchase private mortgage insurance.
 

USDA loans

Homes in rural areas may qualify for USDA loans. These loans require no down payment and offer low mortgage insurance fees.

Understanding the different types of home loans will help you choose the mortgage  that's most appropriate for you.

 

If you’re ready to learn more about mortgages and have questions about the current market amid COVID-19, we're here to help. Reach out to a mortgage loan officer to discuss your situation. 

 

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