Types of Mortgages: What You Need to Know

Getting a mortgage to purchase a home can often be a very complex ordeal. With so many types of mortgages out there for you to choose from, the process can often be overwhelming for first-time home buyers as well as those who have purchased a home in the past. You must find a home loan that offers the best value to suit your needs, one that fits your budget plan, and one that will work for you in the years to come.

Mortgages are not one-size-fits-all. There are different types available that appeal to the many different needs of today’s home buyers. Since the process of choosing a mortgage can be so confusing for many homebuyers, we have put together this helpful guide that gives more insight into what a mortgage is, how it works, and the different types of mortgages available to you.

What is a Mortgage?

A mortgage is a home loan that can be used to either buy or maintain a house, land, or any other type of real estate. The person borrowing the money agrees with the lender to pay back the loan over a series of payments, typically monthly, that are divided into interest and principal. The house or land serves as the collateral needed to secure the money borrowed.

To get a mortgage, the borrower has to apply through a lender who will make sure that they meet specific requirements before they agree on the terms. These requirements can include the borrower’s credit score and the amount they are willing to pay for a down payment on their new home. There is a complex underwriting process for mortgages to go through before they reach the final phase, and the borrower finds out if they are approved or not.

How Do Mortgages Work?

Home buyers and companies use mortgages so that they can purchase real estate without having to pay the entire amount of the property at one time. The borrower then repays their loan with added interest over a specific time frame, typically 20 to 30 years. Once the loan is paid off the borrowers own the property. Many traditional mortgages are fully amortized, which means the payment amount always stays the same over time. Still, there will be differences in the principal vs. interest throughout the life of the loan.

The 10 Different Types of Mortgages Available

Now that you know a little more about what a mortgage is and how it works, it’s time to discuss the different types of mortgages that are available to you. Determining which mortgage type works best for you will depend on several factors, therefore we have put together this list of ten different mortgage types for you with some key details about each one.

1. FHA Loans

This type of home loan is backed by The Federal Housing Administration and is designed for borrowers who have credit issues and a limited amount for their down payment. Most people qualify for an FHA loan with a minimum 580 credit score and a down payment of 3.5% or more. These mortgages typically require the homeowner to purchase a home insurance policy to protect the property during the loan.

2. High-Balance Loans

This is a conventional loan that has a balance that exceeds the standard loan limit but is still considered a conforming loan since it remains within the loan limit that the Federal Housing Finance Agency (FHFA) requires in high-cost areas. It adheres to the guidelines set in place by programs such as Freddie Mac and Fannie Mae. And it makes it possible for buyers to borrow an amount above the standard limit within high-cost locations.

3. Jumbo Mortgages

This is a conventional loan that is larger and often reserved for use with buying luxury homes. These loans exceed the conforming loan limits and typically require a large down payment that is at least 20% of the purchase amount. Jumbo loans are different from high-balance loans because they don’t conform to the guidelines set by Freddie Mac or Fannie Mae. They have stricter credit score requirements however if you are eligible, it’s possible to borrow as much as $1 million or more for a home.

4. Conventional Loans

A conventional home loan is a mortgage that isn’t backed by the federal government. They have higher credit score requirements than most other loan types, with a minimum required score of 620. It can be harder for many home buyers to qualify for a conventional loan in comparison to a loan backed by the government. It will require the borrower to provide in-depth information about their income, employment, credit, assets, and debts.

5. Fixed-Rate Mortgages

These home loans have an interest rate that remains the same throughout the entire term of the loan. The rate that is mentioned in the closing disclosure is the same rate the borrower will have until they pay off the loan or they decide to refinance. It is common for fixed-rate loans to have a term between 15 to 30 years, and they usually have a repayment term that is in five-year increments.

6. USDA Loans

This mortgage type is insured by the U.S. Department of Agriculture (USDA) and provides an opportunity for buyers with low-to-moderate incomes to purchase a home within designated rural areas. Down payments and mortgage insurance are not required for USDA loans however there are some income limitations.

7. Adjustable-Rate Mortgages

This type of home loan will have a variable interest rate instead of a fixed. This means the amount of interest will change throughout the loan repayment term. One popular option for Adjustable-Rate mortgages is a hybrid mortgage, which will have both a fixed-rate period along a period where the rate will adjust.

8. Reverse Mortgages

Current homeowners who are over the age of 62 could qualify for this type of loan. Different from a traditional home loan where the borrower makes payments to the lender, with a reverse mortgage, the lender pays the borrower, from the home’s equity, in either a lump sum or monthly. It doesn’t require payments until the home is sold, or when the borrower moves out or passes away. These loans do require borrowers to have a minimum of 50% equity in their property.

9. VA Loans

This is a loan reserved for military service members, veterans their families. It is backed by the U.S. Department of Veterans Affairs (VA). These loans offer veterans and current serving members of the military to purchase a home with no limits on income or the loan itself. They typically do not require a down payment and have a competitive interest rate. They can be used for either buying a home, building a new home, or renovating a current home.

10. Second Mortgages, Home Equity Loans, and HELOCs

Second mortgages are a type of home loan that allows the borrower to take out a loan against the equity they have built up over time. It is similar to the terms of a first mortgage which is the loan used to purchase a home. But a second mortgage is secured by your property, and it is always repaid after a first mortgage if there is a foreclosure on the property. It makes it possible for homeowners to use the equity of their home for things like debt consolidation or to make expensive home repairs.

Which Mortgage is the Right One for You?

Now that we have explained what the different types of mortgages are, it’s time to determine which one is the best option for you.

If you are a first-time homebuyer and want a principal and interest rate that is predictable so that you can budget your finances more easily, you should try to get a fixed-rate mortgage. Additionally, if you have some issues with your credit or do not have much money for a down payment, your best option would be to try for an FHA loan.

If you have a primary residence and are looking to purchase a second home, you will want to consider a conventional loan instead of an FHA, USDA, or VA loan which is reserved for first-time home buyers. Keep in mind that in most cases you will need to contribute a down payment of at least 10% when purchasing a second home.

If you are considering investing in real estate so that you can rent out the property and earn extra income, you may want to consider either a home equity loan or a HELOC that will help cover the investment property down payment. In most cases, you will be required to pay a 15% down payment for a conventional loan.

If you are an active member of the military, a veteran, or a family member of a service member who meets specific requirements, your best option would be to get a VA loan. You could save thousands of dollars by taking advantage of this type of mortgage.

If you are considering buying a new home, you need the right realtor for the job. Contact us today by calling (614) 316-3324 for assistance with finding your dream home..