7 Types Of Mortgage Loans You Should Know About – There are many different types of mortgage loans. It is important to be aware of all of them to make sure you chose the mortgage that is right for you. The most well-known are fixed-rate and adjustable-rate mortgage loans. There are also conventional, FHA, VA, and USDA loans. Check out some information about each to determine which mortgage loan suits you the best.
1. Fixed-Rate Mortgage Loans
This is the most popular type of mortgage loan among home buyers, because it offers the most stability and predictability over time.The interest rate and monthly payments will stay the same over the entire life of the loan. This holds true for 10 year loans or even 30 year loans. This way you always know what your interest rates and monthly payments will be. There can be no adjustments or variables.
Downsides: Some downsides to this type of mortgage is that you will pay a higher interest rate in exchange for the predictability of the repayment. Typically, this interest rate is higher than that of an adjustable loan. The fixed-rate type of home loan is available in different terms. The “term,” in this context, is simply the length of the repayment period. They are also available in both FHA (government-insured) and conventional (non-government-insured) forms. So the fixed rate is basically a class or category that can be applied to many different mortgage products and programs.
2. Adjustable-Rate Mortgage Loans
This type of home loan is popular among borrowers who only plan to hold the loan for a few years, before either refinancing or selling the home. An adjustable-rate mortgage (ARM) loan has an interest rate that changes or adjusts over time. Most ARMs are actually “hybrid” products that combine the qualities of both a fixed and adjustable-rate loan. This product starts off with a fixed interest rate for a certain number of years, after which the rate begins to adjust annually. That’s what makes it a hybrid, or combination, mortgage product. ARM loans typically have lower interest rates than fixed-rate loan, giving it an advantage.
Downsides: Some downsides are the lack of predictability over the long term. This makes it riskier for the borrower. You will know that it will be adjusting but not how it will adjust or how payments will change over time.
3. Conventional Home Loans
As a borrower, you will have to choose between the fixed and adjustable mortgage types described above. You’ll also have to choose between conventional or government-insured financing. A conventional loan is one that is not insured or backed by the federal government. Conventional home loans might be insured by a private mortgage insurance (PMI) company. But they are not insured by the government.
Downsides: Qualification standards are typically stricter for conventional loans, when compared to government-backed financing. That’s why a lot of borrowers flock to the government programs, such as the FHA loan. Generally speaking, the government-insured products are easier to obtain — especially for borrowers with smaller down payments and/or credit problems.
4. FHA Home Loans
FHA loans are one of the most popular types of mortgages among home buyers. particularly for first-time buyers. FHA loans are backed by the government. This program falls under the Department of Housing and Urban Development (HUD), and is administered by the Federal Housing Administration (FHA). FHA loan programs also have a benefit of allowing a 3.5% downpayment, making it great of buyers with a smaller budget. There are different types of FHA loans available today. For instance, you could take out an FHA-insured mortgage with a 30-year term and a fixed interest rate. You could also get a 5-year hybrid adjustable-rate mortgage (ARM) that is backed by the FHA.
5. VA Home Loans
The VA loan program is another example of government-backed mortgage financing. These loans are generated in the private sector by regular lenders, but they are guaranteed by the Veterans Administration (at least in part). They are generally limited to military service members and their families.
The primary advantage of this program is that it offers 100% financing. Qualified borrowers who use a VA loan to buy a house can finance 100% of the purchase, with no down payment. That makes the VA program unique among the other loan types.
6. USDA Loan Program
USDA loans also provide 100% for qualified borrowers. But they are limited to a very select group. This type of mortgage is only offered to low- and moderate-income borrowers in designated rural areas. This loan program is officially known as the USDA Rural Development Single-Family Housing Guaranteed Loan Program. They are also referred to as rural housing loans, or Section 502 mortgage loans. According to a HUD fact sheet, this program “is designed to serve rural residents who have a steady, low or modest income, and yet are unable to obtain adequate housing through conventional financing.” Eligible borrowers can use this type of home loan to “acquire modestly priced housing for their own use as a residence through the purchase of a new or existing dwelling or the purchase of a new manufactured home.”
7. The Qualified Mortgage (QM) Rule
In January 2013, the Consumer Financial Protection Bureau (CFPB) introduced a new rule designed to eliminate the types of risky mortgage loans that were common during the housing boom. The Qualified Mortgage (QM) rule, as it is known, prohibits a wide variety of loan products and features. This rule can be applied to many different types of mortgage products and programs. This rule is important to be aware of because it sets the bar for loan standards. The QM rule actually eliminates different types of home loans that were used during the housing boom. For instance, it prohibits interest- only payments and negative-amortization scenarios. Among other things, this rule is intended to prevent borrowers from taking on mortgage obligations they cannot realistically afford.
The more you know about the mortgage loans available to you, the easier the process will be! What do you think of these 7 different types of loans? What tips can you share? Comment to share with us!