It may seem like buying a house is a straightforward process. It can feel that way, but there are many different types of mortgage loans. Once you’ve decided to purchase your first home, it can be helpful to know about the various options for financing it and consider which loan type is right for you. Your circumstances will determine what loan will be best for you and your family so here are ten common types of mortgage loans.
Conventional Loans
These loans are not insured or guaranteed by the federal government and are designed to be conservative. They come with a variety of down payment options and interest rates that can be fixed or adjustable. Conventional loans can be an excellent choice for first-time home buyers because they typically require lower cash down payments than other types of loans. Another advantage is the ability to have subordinate financing for the purchase, which allows for a larger loan amount with less cash on hand upfront. The conforming loan limit for a single-family home in most of the U.S. is $726,200 in 2023.
Fixed-Rate Mortgages
These are loans that have a fixed interest rate over the life of the loan. They require borrowers to have a monthly interest payment which can be paid off in installments. The main advantage of such a loan is that the amount you owe does not change each month and it eliminates the risk of variable interest rates. Another feature is the flexibility to refinance, which allows for lower monthly payments or even a larger down payment and lower interest rates if you want to take advantage of those. Two frequently-chosen fixed rates would be 15 and 30-year mortgages.
Adjustable-Rate Mortgages
ARMs are loans that have a variable interest rate, which can change according to an index. They offer lower monthly payments when the interest rates are low, but can increase substantially if the index goes up. Because of this, they may be a good choice for those who expect their income or expenses to go up or down during the loan. ARMs are also known as “interest-only loans” because they require no principal payment on this type of loan. The interest rate should be relatively low at the inception of the loan but can rise dramatically over the life of the loan.
High-Balance Loans
These are loans that allow for the payment of a much larger amount in interest than the principal. There are two types of high-balance loans: balloon payments and negative amortization loans. Balloon payments usually involve a loan with a large balloon payment due at the end of the loan term, after which there is a lower monthly payment. Negative amortization loans allow borrowers to pay off principal over time, but they get ahead faster if they pay down some principal balances too, which can also lead to higher monthly payments down the road. These loans can be beneficial for those who want to lower their monthly payments, but consumers should research them thoroughly first.
Jumbo Mortgages
These loans are offered to home buyers who need a larger loan amount than conventional mortgage loan limits allow. The limit, which is adjusted each year, can vary based on the location of the home and the area it is located in. Jumbo mortgages have higher interest rates but require less money upfront in cash or funds and can often be structured to be assumable by future owners who want to take over the payments. The rates on jumbo mortgages haven’t fluctuated much over the years.
VA Loans
These loans are offered by the U.S. Department of Veterans Affairs and they offer a full range of mortgage loans including payment options that can be fixed or variable, depending on the type of loan you apply for at the time you purchase your home. The VA allows additional down payment assistance for veterans and can also require no down payment for some veterans. In addition to those options, VA loans come with higher interest rates but offer some advantages over other types of mortgages as well. They’re also assumable, which means that future home buyers can take over payments when the original owner decides not to pay any more or chooses to sell the home.
Reverse Mortgages
These are loans that allow you to use interest that you have already paid on other mortgages (such as a home equity loan or home improvement loan) and pay it off as part of your principal. These loans, which can be packaged with other types of mortgages, could save you thousands of dollars in interest over the life of a 20-year mortgage. They also allow you to get a lower down payment, but the downside is that they generally require the lower amount to be paid off before any proceeds are used for the new mortgage. The mortgage repayments for a reverse mortgage are flexible and can be tailored to your needs. You can sell your home or refinance to take out a new, forward mortgage that covers what you owe on the reverse mortgage loan.
FHA Loans
These loans are offered by the Federal Housing Administration and they’re a good option for first-time home buyers. They have low down payment requirements, flexible mortgage insurance premiums, an income-based repayment plan, and they allow for “streamlined” funding of closing costs as part of your down payment. FHA loans have the associated affordable housing requirements and allow more flexibility in interest rate adjustments over the life of the loan. The FHA’s loan limits for a single-family home are $420,680 for 2023.
Mortgages are not the end all, be all of home ownership. There are many different options and types of mortgages out there that can provide you with a smooth transition into home ownership. Each mortgage tool comes with its advantages and disadvantages, so it is important to thoroughly research these options before making a final decision. Mortgages also offer investors the ability to earn interest income from their investments by buying a mortgage and handing it over to another borrower for payments.
It may seem like buying a house is a straightforward process. It can feel that way, but there are many different types of mortgage loans. Once you’ve decided to purchase your first home, it can be helpful to know about the various options for financing it and consider which loan type is right for you. Your circumstances will determine what loan will be best for you and your family so here are ten common types of mortgage loans.
Conventional Loans
These loans are not insured or guaranteed by the federal government and are designed to be conservative. They come with a variety of down payment options and interest rates that can be fixed or adjustable. Conventional loans can be an excellent choice for first-time home buyers because they typically require lower cash down payments than other types of loans. Another advantage is the ability to have subordinate financing for the purchase, which allows for a larger loan amount with less cash on hand upfront. The conforming loan limit for a single-family home in most of the U.S. is $726,200 in 2023.
Fixed-Rate Mortgages
These are loans that have a fixed interest rate over the life of the loan. They require borrowers to have a monthly interest payment which can be paid off in installments. The main advantage of such a loan is that the amount you owe does not change each month and it eliminates the risk of variable interest rates. Another feature is the flexibility to refinance, which allows for lower monthly payments or even a larger down payment and lower interest rates if you want to take advantage of those. Two frequently-chosen fixed rates would be 15 and 30-year mortgages.
Adjustable-Rate Mortgages
ARMs are loans that have a variable interest rate, which can change according to an index. They offer lower monthly payments when the interest rates are low, but can increase substantially if the index goes up. Because of this, they may be a good choice for those who expect their income or expenses to go up or down during the loan. ARMs are also known as “interest-only loans” because they require no principal payment on this type of loan. The interest rate should be relatively low at the inception of the loan but can rise dramatically over the life of the loan.
High-Balance Loans
These are loans that allow for the payment of a much larger amount in interest than the principal. There are two types of high-balance loans: balloon payments and negative amortization loans. Balloon payments usually involve a loan with a large balloon payment due at the end of the loan term, after which there is a lower monthly payment. Negative amortization loans allow borrowers to pay off principal over time, but they get ahead faster if they pay down some principal balances too, which can also lead to higher monthly payments down the road. These loans can be beneficial for those who want to lower their monthly payments, but consumers should research them thoroughly first.
Jumbo Mortgages
These loans are offered to home buyers who need a larger loan amount than conventional mortgage loan limits allow. The limit, which is adjusted each year, can vary based on the location of the home and the area it is located in. Jumbo mortgages have higher interest rates but require less money upfront in cash or funds and can often be structured to be assumable by future owners who want to take over the payments. The rates on jumbo mortgages haven’t fluctuated much over the years.
VA Loans
These loans are offered by the U.S. Department of Veterans Affairs and they offer a full range of mortgage loans including payment options that can be fixed or variable, depending on the type of loan you apply for at the time you purchase your home. The VA allows additional down payment assistance for veterans and can also require no down payment for some veterans. In addition to those options, VA loans come with higher interest rates but offer some advantages over other types of mortgages as well. They’re also assumable, which means that future home buyers can take over payments when the original owner decides not to pay any more or chooses to sell the home.
Reverse Mortgages
These are loans that allow you to use interest that you have already paid on other mortgages (such as a home equity loan or home improvement loan) and pay it off as part of your principal. These loans, which can be packaged with other types of mortgages, could save you thousands of dollars in interest over the life of a 20-year mortgage. They also allow you to get a lower down payment, but the downside is that they generally require the lower amount to be paid off before any proceeds are used for the new mortgage. The mortgage repayments for a reverse mortgage are flexible and can be tailored to your needs. You can sell your home or refinance to take out a new, forward mortgage that covers what you owe on the reverse mortgage loan.
FHA Loans
These loans are offered by the Federal Housing Administration and they’re a good option for first-time home buyers. They have low down payment requirements, flexible mortgage insurance premiums, an income-based repayment plan, and they allow for “streamlined” funding of closing costs as part of your down payment. FHA loans have the associated affordable housing requirements and allow more flexibility in interest rate adjustments over the life of the loan. The FHA’s loan limits for a single-family home are $420,680 for 2023.
Mortgages are not the end all, be all of home ownership. There are many different options and types of mortgages out there that can provide you with a smooth transition into home ownership. Each mortgage tool comes with its advantages and disadvantages, so it is important to thoroughly research these options before making a final decision. Mortgages also offer investors the ability to earn interest income from their investments by buying a mortgage and handing it over to another borrower for payments.
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