Mortgage Loan Types

Mar 1, 2023 | Mortgage Guides

Exploring Your Options: A Guide to Different Mortgage Loan Types

Several types of home loans are available. The two conventional mortgages are fixed-rate and adjustable-rate. A fixed-rate loan has interest set for the duration of the loan, while an adjustable-rate loan has a variable interest rate. 

Other loan types include government-backed loans, jumbo, and reverse mortgages. Exploring these niche loans can be daunting, so below is a guide about all major home loans.

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Fixed Rate Mortgage

This is the most common loan. With a fixed rate, the interest remains fixed for the entire duration. This mortgage offers the security of a payment that won’t change with the market. 

Adjustable Rate Mortgage (ARM)

ARM loans have a changing interest rate. The interest begins at a lower rate and adjusts with the market. ARM loans offer lower initial rates, making them more budget-friendly. However, ARMs carry the risk of potential interest increases.

The benefits of an adjustable-rate mortgage loan

Due to lower interest rates, ARM loans have lower initial monthly payments. This allows borrowers to open a mortgage or pay off debt faster. ARM loans also offer greater flexibility in terms of payment types and amounts. ARMs often benefit folks who plan to refinance or move their mortgage within the foreseeable future.

FHA Loans

This is a government-backed mortgage for first-time homebuyers. FHA loans are secured by the federal government, making them low-risk. They provide low down payment requirements, lower interest rates, and flexible qualification requirements.

What are the differences between a conventional mortgage and a government-insured mortgage?

Conventional home loans are backed by a bank or mortgage company, whereas the federal government backs FHA and other government-insured loans. Conventional mortgages have stricter requirements regarding down payment and rates and have keener standards for credit scores, work histories, etc. Government-insured mortgages offer greater flexibility, lower down payments, and flexible credit requirements.

The benefits of an FHA loan

FHA loans offer lower down payments, more adaptable credit requirements, and competitive interest rates. They also require less stringent qualifications, making them easier to obtain. In addition, FHA loans are assumable, meaning a buyer can take over the loan from the seller. This can be a great option in competitive markets. FHA loans come with mortgage insurance, providing added financial protection.

Is an FHA mortgage loan suitable?

If you are a first-time home buyer and cannot make a sizable down payment or need credit requirements, an FHA loan may be perfect. FHA loans are also backed by the government, meaning it is a low-risk investment.

VA Loans

This is another government-ensured loan; however, VA loans are only available to veterans. They require no down payment and no PMI (private mortgage insurance), making them a great choice for service members. 

The advantages of a VA loan

VA loans offer 100% financing, no PMI, low/no credit requirements, competitive interest rates, and no prepayment penalty. VA loans also offer benefits like rolling closing costs into the loan.

Jumbo Loans

Jumbo Loans are greater than standard mortgage limits. They require better credit and higher down payments. This mortgage is for individuals looking to purchase a high-dollar home.

The benefits of a jumbo loan

Jumbo loans offer lower interest rates, higher loan-to-value ratios, and lower payments than conventional mortgages offer for a property of the same value. With a jumbo loan, borrowers can finance luxury homes, vacation properties, and renovation projects without meeting the stricter conventional qualifications. Jumbo loans also offer more flexibility.‍

The difference between a conventional and a jumbo mortgage

A conventional home loan falls within the guidelines established by Fannie Mae and Freddie Mac. It requires a down payment of 20 percent or more of the loan amount. A jumbo mortgage, on the other hand, is a loan that exceeds the Fannie Mae and Freddie Mac loan limits, requiring a larger down payment and higher interest rates.‍

Home Equity Loan

This loan uses the equity in your home as collateral. Equity loans are for folks who already own a home and want to take out a new loan. They offer a fixed interest rate and terms, making them a stable source of cash. Home equity loans are often used for home renovation, debt consolidation, or to finance expenses.

The advantages of a home equity loan

The primary benefit is that it allows access to your greatest asset: home equity. Other advantages include low rates, tax deductions, fixed rates, and fixed terms.

Refinancing

Refinancing involves paying off the existing mortgage with one that has better rates and terms. Many homeowners refinance to reduce interest rates, consolidate debt, or lower payments. Refinancing is often used to leverage the equity in a home; It is similar to a home equity loan.

Reverse Mortgage

Reverse mortgages allow elderly homeowners to access the equity in their homes. The mortgage can be repaid when the buyer passes away or sells the home. It provides seniors with revenue to supplement their retirement. 

What are the tax implications of a reverse mortgage?

Reverse mortgages are not taxable, but the money received may be taxable. Paid interest is not tax-deductible. Talk to a financial advisor to understand the implications.

Balloon Mortgage

Balloon Mortgages have regular payments due over a specified term, and the unpaid sum is due at the end of the term. This is a good option for homeowners seeking low monthly payments, but plan ahead and ensure the ability to make the final payment.

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Frequently Asked Questions

 

How do you determine which loan is appropriate?

Consider factors like the loan term, interest rate, and payments. Speak to a financial advisor or mortgage broker. Online research is also a great tool for exploring options.

What is the process for obtaining a mortgage loan?

First, meet with a lender and provide your credit score, income, and debt. Determine what you can afford and submit an application. The creditor will then review it. If approved, the loan will be finalized. After this, you will close on the loan, sign all necessary paperwork, and then take ownership of the property.‍

Are mortgage loans available for first-time homebuyers?

Several loan types are possible. These include FHA loans, VA loans, and USDA loans. The latter is for low-income households in rural areas and provides low-interest options with no down payment. Each of these offers advantages to first-time homebuyers, as well as government-insured loans.

What is a bridge loan, and can it help with my mortgage?

Bridge loans cover the difference between an existing mortgage and a new one. They provide funds for closing costs, down payments, and other expenses. Bridge loans can also cover refinancing fees. 

Deciding between a 30-year and a 15-year mortgage loan

Consider your financial situation and plans. A 30-year loan spreads out the payments over a longer period, resulting in lower monthly payments. A 15-year loan requires higher payments but results in paying off the loan sooner and saving money on interest. 

How long does processing a mortgage loan take?

The time depends on several factors, including the borrower’s credit score, employment history, and financial documents. The lender must request an appraisal and verify the borrower’s assets and debts, which can take up to 45 days.

Fees associated with obtaining a mortgage loan

Fees vary depending on the lender and loan. Closing costs range from 2% to 5% of the amount. These costs include lenders and third-party fees, such as appraisal, title searches and insurance, credit reporting, and origination fees. Borrowers may also be required to pay points, prepaid interest, and PMI. 

Final Thoughts

Many mortgage types could suit your needs. Depending on income, occupation, and situation, a mortgage loan can be customized. Contact Wesley Mortgage today for further assistance or if you are ready to apply for a loan.

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