When it comes to financing a home, there are various types of mortgages available. Each has its own purpose and is tailored for a particular borrower type, making it difficult to decide which mortgage works best for you. But by understanding these different mortgage types, you can determine which one best meets your requirements and budget.
Fixed-rate mortgages are loans in which the interest rate is fixed at the outset of the loan, making budgeting much simpler since you know exactly how much you will be paying each month for your monthly mortgage payments.
An adjustable-rate mortgage (ARM) is a type of mortgage in which the interest rates adjust on a set schedule. Due to their potential risks, you should carefully assess your financial situation before deciding to use an ARM.
These mortgages are usually offered to those with lower credit scores and considered riskier than fixed rate mortgages. Furthermore, they have more frequent interest rate changes, prepayment penalties, and loan balances that could increase over time.
Conforming mortgages are insured by the Federal Housing Administration and follow underwriting guidelines set by Fannie Mae and Freddie Mac. These loans can be an attractive option for first-time homebuyers or those with weak credit due to their lower down payment requirements and more forgiving credit scores.
Nonconforming mortgages, on the other hand, do not adhere to those guidelines and exceed FHFA loan limits. These loans may also be referred to as “jumbo” or “non-conforming.”
By 2022, the FHFA’s maximum single-family loan limit will be $647,200 in most areas and $970,800 for more expensive ones. These loans offer several advantages like affordable mortgage insurance premiums and low down payment requirements.
Government-backed mortgages are those backed by federal agencies such as the Federal Housing Administration, United States Department of Agriculture or Veterans Affairs. These types of loans have more relaxed credit criteria and require a lower down payment with no upfront funding fees.
The Federal Housing Administration offers mortgages with as low as 3.5% down. Borrowers with a credit score of 580 or higher can take out an FHA loan with just 1% down payment requirement, while those between 500-579 have to put down between 5%.
FHA-backed loans offer lower down payment requirements and don’t require private mortgage insurance for the initial few years, making them attractive options in rural areas where conventional mortgages may not be available.
Another type of mortgage is a hybrid mortgage. These have a fixed rate for five years, but then adjust regularly on an ongoing basis. They’re best suited to homeowners who plan to remain in their home longer and who are comfortable with fluctuating interest rates and monthly payments.
No matter if you’re a first-time homeowner or an experienced real estate investor, understanding your loan options is critical to finding one that meets both your needs and budget. Landmark can assist in finding the mortgage that works best for you – whatever that may be!