There are many types of mortgages. Determining which one is right for you can be a struggle. There are so many unfamiliar terms and numbers; it can easily overwhelm you and leave you feeling frustrated rather than empowered. However, all you need is a little basic information to help you understand your options. Before you sign any dotted lines, here are some simple explanations of different types of mortgages and how to decide which is right for you.
A fixed rate mortgage is one with an interest rate that doesn’t change over the life of the loan. The interest rate you agree to when you sign the mortgage is the same rate you’ll have when you make your last mortgage payment, unless you refinance the loan at some point. This offers homeowners some stability and peace of mind as they know exactly what their mortgage payment will be every month for the life of the loan.
Oftentimes the interest rate on a fixed rate mortgage can be higher than other options from the same lender. However, it will vary slightly from lender to lender. You can find a variety of repayment terms up to 30 years to pay back this type of loan.
An adjustable rate mortgage is one with an interest rate that changes over time, depending on your lender. When you accept the loan, you’ll usually have a lower interest rate than you would if you had a fixed rate mortgage. This lower rate will last for a period of time which can be as little as one month or as long as 10 years. At the end of this initial period, the loan “resets” and you get a new interest rate based on the current market rates. This new rate lasts until the next reset, which can happen as often as every year.
This mortgage option is good for homebuyers who want to buy when interest rates are high, as your rate will usually be much lower, or if you plan to sell the home before the interest rate resets. It can also be a good option if you don’t plan on owning the home for very long.
VA or Other Government Loans
VA, USDA, and FHA loans are all backed, or insured by, the government. This means that, in the event that you stop paying your mortgage, the government will pay back your loan.
These types of home loans often offer lower or no down payments, so they can be great options for those who don’t have enough money saved for a traditional down payment. Each of these loans comes with its own requirements to be eligible. For example, a VA loan is only available to active or former military service members or their spouses. USDA and FHA loans are available to most people who meet the credit and income requirements. These types of loans are often best for people who either can’t afford a large down payment or for people who have lower income households.
A jumbo loan is for a home that is beyond the maximum limits of a conventional home loan. If you’re buying a luxury home or condo, and the price tag is half a million or more, you would need to apply for a jumbo loan. These loans, because they’re higher than a conventional loan, require a stellar credit history and that you submit to more rigorous credit requirements than other loans. You’ll also need an extremely low debt-to-income ratio and need to have at least 10-15% of the purchase price as your down payment. Jumbo loans often have a higher interest rate than most other mortgage options as the lender needs better security on this large type of purchase.
Most of the time, you’ll narrow your home loan options down to just one or two possibilities, such as a fixed rate and adjustable rate mortgage. But it’s always a good idea to go over all your options with a lender before making a final decision to see what you qualify for and the various interest rates available to you. This ensures you get the best loan for you and your financial future that will keep your mortgage affordable for years to come.