Understanding the most common types of mortgage loans available today
There are many choices when it comes to the types of mortgage loans you can apply for when buying a home. Each one comes with it’s own set of options, qualifications, and rules. But it’s important to understand the most common types of loans at their most basic level. Especially once your Lender starts talking about rates, points and qualifying ratios! So here are your options. It’s as simple as A, B, C, and F (hey, nothing is perfect).
So, what is a mortgage? By definition, a mortgage is a legal document that promises property to the lender as security for payment of a debt.
A: Adjustable-Rate (ARM)
This is a mortgage in which the interest rate floats up or down according to a specified index. The interest rate is “adjusted” at certain time intervals (such as six months or one year), usually having a “cap rate” or maximum rate of change per adjustment interval (such as 1%, or 4%). Terms such as “one year ARM” generally identify the adjustment interval (interest rate adjusted after one year).
B: Balloon
This is a unique type of loan, as it is rather short. You make a monthly payment for 5 – 7 years, based on a term of 30 years. There’s often a low interest rate, and it can be easier to qualify for this versus a traditional 30-year-fixed. A balloon mortgage can be an excellent option for many home buyers. There is, however, a risk to consider. At the end of your 5-7 year loan term you will need to pay off the outstanding balance. This usually requires you to either refinance, sell your home, or convert the balloon mortgage to a traditional mortgage at the current interest rate.
C: Conventional
These loans are neither insured nor guaranteed by the government. As such, conventional loans represent a greater risk to lenders than government backed loans. Conventional loans can start with as low as 5% down, but if you can put at least a 20% down payment (80% LTV) you can avoid paying private mortgage insurance.
F: FHA
Federal Housing Administration loans are available to all types of borrowers, not just first-time buyers. You can read more about the differences between a conventional loan and an FHA loan in one of our previous blogs.
F: Fixed Rate
The most common type of home loan is the fixed-rate mortgage. The interest rate remains the same for the life of the loan, so the principal and interest remain the same, too. This is one of the best reasons to buy vs rent, as rents rise over time where as most mortgages stay constant for the life of the loan.
If you’re interested in learning more, or would like to apply for a loan, contact our preferred lender, Keith Harris.
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