Here are 6 types of home loans and how to choose the best mortgage for your situation.
1. Fixed-Rate Mortgages
The interest rate remains fixed for the life of the loan.
- Provide protection from rising rates. Your interest rate will stay the same, no matter how high the market rate will go up. The interest rate of interest will not change throughout the life of the loan.
- The borrower is protected from sudden and potentially significant increases in monthly mortgage payments if intreats rates rise.
- The downside of FRM is that when interest rates are high, qualifying for a loan is more difficult because the payments are less affordable.
- Good for buyers who are planning to stay in their homes for a long period of time, that has a fixed or slowly-increasing income, and that has a lower tolerance of financial risk.
2. Adjustable-Rate Mortgages
The interest rate adjusts periodically to reflect market conditions on pre-determined dates.
- Contrary to fixed-rate mortgages, the initial introductory period suggests usually a lower rate, after which the rate adjusts periodically, based on a market index.
- Borrowers are protected from steep increases in rates through annual and lifetime adjustment caps.
- The initial rate can be locked in for different periods. Most lenders offer introduction periods of 1,3,5 or 10 years. The rate readjusts annually after the introductory period.
- ARMs are typically more complicated than fixed-rate mortgages.
- More appropriate for borrowers who may want to sell or refinance early can afford to make larger monthly payments after the rate readjust or borrowers who are also looking to buy a home when interest rates are relatively high.
3. Jumbo Loan
Loans that exceed a specific size (conforming loan amount) is a mortgage used to finance properties that are too expensive for a conventional conforming loan.
- Jumbo loan on single-family homes exceed $625,500.
- Rates are generally higher on jumbo loans than on a smaller comparable loan.
- Jumbo loans are stricter because the loans are larger and riskier for the lender.
- You’re more likely to be approved for a jumbo loan if you have ample cash in the bank.
4. FHA Loan
The Federal Housing Administration (FHA) insures a wide variety of mortgages. These loans are designed to meet the needs of homebuyers with low or moderate incomes.
- Loan limits based on geographic locations
- Backed by the Federal Housing Administration and have down payment as low as 3.5%
- Ideal for first-time homebuyers
- More liberal qualifying guidelines
- Low down payment requirements
- Can be use of gift funds for down payment and/or closing cost
5. VA Loans
The Department of Veterans Affairs guarantees mortgages for qualified veterans and active-duty military personal and their spouses who are first or second-time home buyers.
- Low or zero down payment requirements on a new home
- No income is required
- A wide range of rate, term, and cost options
- Great for refinancing
- Flexible qualifying guidelines
- Use of gift funds for closing costs
6. Conventional Loans
Also called a “conforming” home loan. This is because it conforms to the conventional loan limits set and guaranteed by Fannie Mae and Freddie Mac.
- These are common simple loans
- Good option for most home buyers
- No interest rate surprises
- The lower fixed rate
- Refinancing options available