Purchasing a home is sure to be an exciting moment in everyone’s life. However, it also requires you to study the financing options carefully. The entire process can be quite overwhelming as you may have to choose from different types of home loans. You need to do some homework in order to nail the down payment amount and also your budget.
This guide will help you choose from different mortgages if you are having a hard time choosing from the mortgage loan options available.
- Conventional Mortgage
This home loan is not insured by any federal government. There are two kinds of conventional loans: Conforming and Non-Conforming Loans. In a Confirming loan, the loan amount falls within the range set by government-sponsored enterprises such as Fannie Mae* and Freddie Mac**. The loans that don’t fall under these guidelines are referred to as non-conforming loans.
The major advantage of choosing this type of mortgage loan is that it can be used for an investment property, primary home, or for a second home. The overall borrowing costs here are lesser in comparison to others; however, you need to have a debt-to-income ratio greater than 45 percent. It is suitable for borrowers with strong credit, employment history, and a stable income.
- Jumbo Mortgage
This conventional mortgage has Non-Conforming limits. This implies that the home price exceeds the federal loan limit. The maximum conforming loan amount for 2020 for a single-family home is $510,400***. The ceiling is high in high-cost areas. Jumbo loans are quite common in higher-cost areas and require an in-depth documentation process. Though you can borrow more money, you need to make a down payment of a minimum of 10 to 20 percent of the home loan amount.
- Government-Insured Mortgages
The US government plays a crucial role in helping Americans become homeowners. There are currently three government agencies+ that back mortgages in America –
- USDA Loans (The U.S. Department of Agriculture)
- FHA Loans (The Federal Housing Administration)
- VA Loans (The Department of Veterans Affairs)
These housing loans help individuals who do not qualify for conventional loans. Here, the credit requirements are quite relaxed and you don’t have to make a large down payment. However, you will have to bear higher borrowing costs with these mortgage loans. You may also be required to provide substantial documentation when applying for these types of mortgages.
- Fixed-Rate Mortgages
Fixed-rate mortgages remain at the same interest rate throughout the life of your loan. This implies that your monthly payment remains the same. You can pay more interest with a long-term loan. In this kind of mortgage, it will take some time to build equity on your property. Also, interest rates are quite high.
- Adjustable-Rate Mortgages
These have fluctuating interest rates that can either go down or up with market conditions. Some of these products carry a fixed interest rate for a few years before it changes to a variable interest rate for the remainder of the loan repayment term. You will enjoy a lower fixed rate during the first few years of securing the homeownership. If you don’t have any plans to stay in your home after a couple of years, then this mortgage will save considerable money on interest payments.
- Other kinds of Home Loans
Apart from the above-mentioned mortgages, there are plenty of other options that you can consider. You can choose from Construction Loans, Interest-Only Mortgage Loans, Balloon Mortgages, and more depending upon your requirements. If you want to construct a home, then opting for a Construction loan would be the right choice.
With an Interest-Only mortgage, the borrower just pays interest on the loan for a set period, and after that, you start paying the principal amount. You won’t build equity quickly with this kind of loan as you are paying only the interest in the initial days. These loans are best for people who can sell or consider refinancing options at a later stage.
Balloon mortgages require you to make a large payment at the end of the loan tenure. Initially, you will be making payment for a 30-year term within a short time frame. In the end, you will be making a large payment on the outstanding balance.
Conclusion
You can consider the information provided here as a starting point in your search for the most optimum mortgage suited to you. You may have to do an in-depth study on each of these kinds of home loans to learn about their pros and cons before finalizing anything.
Before choosing any mortgage option, you should analyze your financial situation thoroughly. Reviewing your needs and circumstances and doing your research will help you choose the most suitable option as per your needs.
References:
* https://en.wikipedia.org/wiki/Fannie_Mae
** https://en.wikipedia.org/wiki/Freddie_Mac
+ http://www.loanlimits.org/government-insured-mortgage-loans-explained/
