Mortgage Loan Comparison for Homebuyers
Choosing the right mortgage is a challenging task. There are many things to consider, including your credit score, income and debt-to-income ratio. You also need to understand how different types of mortgages work and which type will be best for you. In this article, we’ll go over some common types of mortgage loans used by homebuyers today.
Conventional loans are the most common type of mortgage loan. They’re also the ones most people associate with “traditional” lending, since they’re not insured by the government or guaranteed by it. Every borrower is responsible for finding a lender and making their own agreement with that lender to fund a home purchase—and then paying off the loan over time.
Conventional loans typically require a down payment of at least 20% of the purchase price or appraised value, whichever is smaller. However, there are some exceptions where you can put down less than 20%. On top of that amount and any other fees you agree to pay your lender (such as closing costs), you’ll make monthly payments on your loan until it’s paid off in full.
Government Insured Loan
Government insured loans are made to homebuyers who meet certain requirements and agree to a set of terms. FHA, VA and USDA loans are all government insured.
The main difference between the three is their eligibility requirements. A borrower must meet certain guidelines in order to qualify for an FHA loan, for example, but not for a USDA loan.
When you’re looking to buy a home, it’s important to know that there are different types of mortgage loans. One type is called a jumbo loan.
The conforming limit is the amount that lenders can lend on a home loan. It’s set up by Fannie Mae and Freddie Mac, two government-sponsored corporations that buy mortgages from banks in order to make more money available for them. In most areas, this limit is $417,000—but if you live in an expensive city like New York or San Francisco where property values are higher than average (and therefore so are your mortgage payments), then you may need more than that amount. In these cases, many people turn to a jumbo loan as an option because they can use up to 95% of the value of their property instead of only 80%.
Adjustable-rate mortgages (ARMs) are loans for which the interest rate is fixed for an initial period of time and then adjusts periodically thereafter, based on changes in an index such as the one-year Treasury bill rate. The initial fixed period can range from one to five years.
One reason to take out an ARM is if you expect your income or other financial situation to improve over time. If this happens, you may be able to refinance into a lower rate loan before your adjustment occurs. There are also ARMs with no prepayment penalty that allow you to pay off the loan early without paying additional fees, which can help keep costs down if rates go up during the term of your mortgage.
A fixed-rate mortgage is a loan with a fixed interest rate and payment over the life of the loan. Fixed-rate mortgages are available for all types of properties, including investment properties.
Fixed-rate mortgages are more predictable than variable-rate mortgages because your monthly payments will not change throughout their duration. They also require less work when it comes to budgeting for housing costs because there are no surprises in store—you know exactly what you’re going to pay each month until you pay off your loan or sell your property.
If you’re confused about which type of mortgage loan is right for your situation, don’t worry. What we’ve discussed will help differentiate types of loans and how they work.
When talking to a lender, it’s important to ask questions and make sure that you’re choosing the
- Is there an application fee?
- What are the rates and terms?
- What’s the rate cap on this program?
This is important to understand when shopping around for a mortgage loan because some lenders may not be able to offer all types of financing options or have certain requirements that need to be met in order for approval.