Let’s talk mortgages. Today’s homebuyers have varied financial dynamics, and the lending industry (and the government) has responded by developing a full suite of various mortgage types to meet the different demands. From subsidies to loan terms, down payments to closing costs, and every option in between, today’s mortgages could present in a host of different ways.
To help you understand the core elements of each unique mortgage type, this is the ultimate guide for the eight most common. Here is a breakdown of each mortgage type, along with some of the general requirements and how they’re intended to help certain homebuyers.
These mortgage types are often referred to as conventional mortgages and have no government agency backing. These loans do abide by Federal Housing Finance Agency guidelines, with most parts of the U.S. capping out just under $650,000. States with higher costs of living will have higher lending limits upwards of $970,000, according to Business Insider. Borrowers for these mortgage types will usually need to have at least a 620-credit score, a less than 50% debt-to-income ratio, and a 3% to 10% down payment.
Most people, buying a home or not, are at least familiar with the FHA loan. These mortgage types are insured by the Federal Housing Administration (thus the name) and designed to help homebuyers with a more modest means of home purchasing power and lower credit scores. Down payments can become as low as 3.5%, and those with credit scores in the 500s can still be eligible. Mortgage insurance premiums will continue to be a requirement for the FHA loan.
Jumbo mortgages are, as the name implies, for jumbo home loans. For homebuyers with an eye on an expensive house or property or for those looking to refinance jumbo mortgages, the jumbo loan is the only way to go. These mortgage types can have adjustable or fixed rates but generally require the borrower to have a minimum overall credit score of 700 and a 10% down payment. The limits and terms might vary depending on the county or municipality guidelines.
If you’re affiliated or in the military, a VA loan is likely the best option. These mortgage types are backed by the Department of Veteran Affairs and don’t require down payments for the borrowers. Mortgage insurance is also eliminated, and an upfront VA funding fee should be expected. In general, these loans provide low-interest rates and make homeownership more affordable for veterans or military service members.
The U.S. Department of Agriculture issues the USDA mortgage and eliminates down payments for more properties. This is a great mortgage type for anyone looking to explore grants and home improvement loans. There are some caps and value guidelines to know regarding income limits. However, the USDA loan works well for rural and some suburban markets with borrowers who value the low or no down payment.
The Fixed-Rate Mortgage
We can’t offer an ultimate guide to mortgage types without distinguishing those determined by rate structure. The fixed-rate mortgage is a home loan with a locked-in provision to enforce the same interest rate throughout the complete term of the loan. These are great for those who like to pay a consistent and predictable mortgage payment every month. And these terms can apply to 15-year loans as well as 30-year loans, making them great options for homebuyers who like to pay off their loans quicker.
The Adjustable-Rate Mortgage
Opposite the fixed-rate mortgage is the adjustable-rate mortgage type. This home loan starts off with one interest rate for the suggested period and can then fluctuate based on terms. Because the rates can essentially be locked in for the first five or seven years, they’re ideal mortgages for people who don’t plan to have the mortgage for much longer. Borrowers should be mindful of the ARM because the teaser rates, in the beginning, could be appealing, but the larger payments later could be problematic in terms of affordability.
An interest-only mortgage only requires borrowers to pay the lender’s interest charge on a monthly basis. The mortgage balance, also known as the principal, isn’t affected by these monthly interest-only payments. So these loans are reserved only for those who are disciplined enough to make substantial, periodic payments to those principal amounts. These mortgage types are ideal for those who don’t plan to be in the house for long-term residency. And they’re also great options for anyone whose monthly cash flow or income varies, with significant income bonuses or annual payouts that can be used to pay the mortgage balance.
Keep this guide to understanding mortgage types handy for reference when you need it. And don’t forget, for all things title work or questions relating to how New Door can be a titling partner, contact our team!