Are you in the market to finance a property and would like to get more informed on the different types of mortgage loans so you can make the best financial decision?
There are many steps to take when preparing to finance a property, and one of them is understanding the different types of loans so you can arrive at a decision that best suits you.
So, below is a brief overview of each type of mortgage loans.
The different types of Mortgage Loans
Fixed Rate Fixed rate mortgages offers a set interest rate throughout the life of your loan.
Usually available at 15 and 30 year terms, with this type of mortgage loan you can expect your monthly payments to be the same.
Generally, the longer the term is, the lower the monthly payment will be, but shorter terms gives you the opportunity to pay less interest over the life of your loan.
Adjustable-rate mortgage (ARM)
The interest rate for this type of mortgage fluctuates according to the type of loan you have as well as the US market index rate.
Balloon mortgage Usually have a short term of around 10 years and it has very low payments for majority of the term, that being mostly interest.
However, full balance is due at the end of the term. Very risky but a good option for anyone who expects to either have a higher income or receive a large sum of money at the end of the term in order to satisfy the loan.
Interest Only Mortgage
Similar to balloon mortgage loans, however, an interest inly mortgage allows for low interest only payments for a certain period of time but then the borrower must make it up by making higher monthly payments for the remainder term of the loan.
This is a great option for home buyers whom do not have a lot of cash to dispose of monthly but expect an increase of income in the next few years.
Reverse Mortgage
Available for senior citizens only! What this type of mortgage does is it allows senior home owners to tap into their home's equity by providing a loan that requires no monthly payment.
However, a lien by the lender is placed on the property upon the death of the homeowner or if owner moves out, the debt also must be paid back in full.
Combination Mortgage
Usually used to avoid Private Mortgage Insurance which is an insurance charged to home buyers to protect the lender from homebuyers who cannot afford to pay 20% down payment.
This is how it works, let's say you only have 15% down payment so instead of getting one loan for the full 85% you would get one loan to cover 80% and a different loan to cover the remainder 5% of the amount you need to finance your property.
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Government Backed Loans
These are loans that are sponsored by the government which means that if the borrower defaults then the government will cover the lender's losses.
Here are the different types of government backed loans:
FHA - backed up by the Federal Housing Administration and great option for first time home buyers and those with bad to fair credit.
USDA - Sponsored by the United States Department of Agriculture and it encourages home ownership in rural areas.
VA Loans - Available for active duty, reserve, national guard and veterans offering low interest rates and zero down payment options.
Indian Home Loan Guaranteed - HUD loans provided to Native Americans, Alaskans and Hawaiians.
Second Mortgages
If you are already a home owner and you have built up equity you can actually borrow against it.
This is just another loan which your home equity is used to secure the note. Good option for those who are looking to fund a home renovation.
Jumbo Loan
Jumbo loans exceed the amount secured by Fannie Mae and Freddie Mac ($484,350 in 2019) simply because it represents a higher risk rate due to the large amount.
Jumbo loans also require higher credit scores than the usual requirements.
Keep in mind that this is only a brief overview of each type of mortgage loan available on the market and you should consult a mortgage broker and expert to guide and help you in making the right decision for you based on information and documentation you have provided.
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