Mortgage loans vary in the nature of their offers. There are different down payment requirements, diverse loan term options, and even more disparate interest rate offers that cater to what you need as a potential home buyer. This article familiarizes you to the different types of mortgage loans based on the nature of interest rate, the dispensing institutions, and loan size. Know the difference and the combinatory possibilities of the types so you can take advantage of what works best for you.
Fixed Rate Mortgages
A fixed-rate mortgage is mortgage that sustains the same interest rate throughout the life of the loan. This translates to the same payment amount per month over the term that you signed in. It is the more popular mortgage loan choice among borrowers and comes in terms of 10 years, 15 years, and 30 years.
Adjustable Rate Mortgages
Mortgage loans that change in interest rates after a fixed period of time is what is known as an adjustable rate mortgage. They have lower initial interest rate offers compared to the more popular fixed rate mortgage. This is to compensate for the risk owing to rates that could unpredictably bounce to unfortunate extremes throughout the loan term.
These are mortgage loans that are sponsored by the federal government. That means when the borrower fails to pay, it is the government that pays the losses to the lender. The three types of government-insured loans include:
VA Loans are backed by the United States Veterans Affairs department and is offered to military veterans and their families. VA loans offer 100% financing which means it does not ask the qualified borrower to hand a down payment.
An affordable loan offer funded by the US Federal Housing Association, an FHA loan requires borrowers to pay a 3.5% in down payment, in which case, a borrower’s credit score must be 580 or higher. If your credit score is between 500 and 579, you will have to pay 10%. Those who have credit scores of 500 and below are ineligible. This loan type asks the borrower to pay for a mortgage insurance but still has more flexible eligibility requirements than conventional mortgages.
This loan type is managed by the housing Rural Service and offered by the United States Department of Agriculture to eligible borrowers in rural areas. Also called RD loans, it also offers 100% financing and reduced mortgage insurance premiums.
Conventional mortgages refer to those loans that are not insured by the government. It is offered by the bank and could have a fixed rate or a variable interest rate. Conventional mortgages usually have stricter qualification requirements as opposed to loans backed by government insurers.
This type of mortgage loan means it has met, passed, and “conformed” with Freddie Mac and Fannie Mae’s underwriting criteria in terms of loan size.
A category still based on loan size, a jumbo loan exceeds the size limit that has been established by Freddie Mac and Fannie Mae. Thus, stricter requirements are asked from jumbo loan borrowers – higher credit scores, higher interest rates, and higher down payments.
Note that these categories are not singular by themselves. A government-insured loan can have a fixed or adjustable rate, for example. Knowing these is a good start to assess what you really want, and make smart decisions onwards your next steps to owning your dream home.