5 Common Mortgage Types and How to Tell Which One is Right for You

5 Common Mortgage Types and How to Tell Which One is Right for You

Looking to buy and finance a new home can be a stressful time. There are a lot of different types of mortgages to choose from, each with their own positive and negative aspects. So, how do you know which mortgage type is right for your financial needs?

First, you need to make sure that you know what you're looking for, your budget, and your credit score. Next, make sure you have the knowledge you need to make a decision. There are 5 major types of mortgages that you can get to finance your house. Knowing about each of them will help you make an informed decision for your future. 

The 5 Types of Mortgages

1. Convention Mortgages

Conventional mortgages are uninsured by the federal government. It is available through a private lender or two government-sponsored entities (Fannie Mae and Freddie Mac). For a conventional mortgage, you will have to fill out an official mortgage application and provide any required documentation, and they will look at your credit history and score. 

There are two types of conventional loans: conforming and nonconforming. Conforming loans fall within the approved maximum limit set by the Federal Housing Finance Agency. Conventional loans generally tend to have higher interest rates than government-insured mortgages. This type of mortgage is great for financing a primary, secondary, or investment property.

2. Government-insured Mortgages

While the government isn't a mortgage lender, it does have federal agencies that back mortgages. The three agencies are: the Federal Housing Administration (FHA), the U.S. Department of Agriculture (USDA), and the U.S. Department of Veteran Affairs (VA). 

Home loans that are backed by the FHA make it possible for homeownership for those who don't have a large down payment saved or perfect credit. FHA loans require two mortgage premiums. One is paid upfront and the other is paid annually for the life of the loan if you put less than 10% down.

USDA backed loans make it possible for moderate to low income families to buy homes in rural areas. To be eligible, individuals must purchase a home in a USDA eligible area and meet certain income limits.   

VA loans are backed by the government for the benefit of military families. These loans do not require a down payment, but do have a funder fee to offset the cost to taxpayers. 

3. Adjustable-Rate Mortgages

Adjustable-rate mortgages do not have a fixed rate. Instead, the interest rates will go up and down with market conditions. Many of these loans will start out fixed and, after a certain period, move into adjustable. 

This does come with risks, of course, because you could have high interest rates or, if the market falls, it will be harder to sell your home.

4. Fixed-Rate Mortgages

Fixed-rate mortgages keep the same interest rate for the life of the loan, so your monthly mortgage payment will stay the same. These types of loans usually come in a fixed time-frame. 15, 20, and 30-year fixed-rate mortgages are common. Unlike other loan options, you will ultimately pay more in interest over the course of your loan.

5. Jumbo Mortgages

A jumbo mortgage is a common type of non-conforming loan. These loans are often more common in higher-cost areas and require in depth documentation for approval. These mortgages allow you to borrow more money than a conforming loan for a higher-priced home. 

If you need more information or want advice on how to buy or refinance your mortgage, contact us today to speak with a mortgage expert who can help you find the right option for you.

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