Mortgage loans are one of the most prevalent forms of personal debt. Individuals use them to purchase a property, such as a home or commercial shop, without paying the full purchase price up front. Afterward, they repay the loan plus interest over an agreed-upon number of years until they own their property free and clear.
Mortgage loan types are available to borrowers, depending on their needs and financial situation. The 30-year fixed-rate mortgage is the most popular choice, but there are many more to consider. Whether buying your first home or searching for a better rate, there’s sure to be a mortgage that meets your requirements.
Conventional Mortgages
Conventional mortgages are the most popular type of home loan and usually backed by government agencies like the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA). These conforming mortgages follow guidelines set by Freddie Mac or Fannie Mae, offering lower interest rates than other home loan options if you have excellent credit.
Conventional mortgages require a minimum credit score of 620 and down payment of 20% or more. Those with less can still qualify, but may need to pay Private Mortgage Insurance (PMI). This insurance protects the lender if you default on your loan; PMI adds between 0.3-1.5% to monthly mortgage payments.
An FHA mortgage is another viable option for home buyers with bad credit and a large down payment. With an FHA loan, however, you must also pay mortgage insurance premiums throughout the life of the loan; these fees are included in your payments and can become costly if not taken into account.
In order to avoid being charged more for this insurance, it’s essential that you select a loan with the right features. If unsure, consulting a mortgage professional is always beneficial.
ARMs
An adjustable-rate mortgage (ARM) is a loan that fluctuates in interest rate over its duration. They’re popular because they start with lower rates than fixed-rate loans and their initial introductory period may be shorter. On the downside, these loans could have higher interest rates later if market rates rise.
They can be more complex to understand than fixed-rate mortgages, since you cannot predict when the interest rate will change. Some ARMs, like the 5/1 ARM, feature an introductory period where they provide a fixed interest rate for a specific amount of time.
Piggyback mortgages are loans that combine two or more loans, such as a traditional mortgage and home equity line of credit. The borrower uses the second mortgage as security for the initial one.
These loans are a popular choice for homeowners who require money for major renovations or other expenses. You can use them to pay off one major project, like adding an addition or building a garage, then use any remaining funds towards other costs.
