Home Buyers Guides

Types of Mortgage Loans and How to Choose the Best One + FAQs

Are you in the market looking to buy a new home? If so, you’ll need to take out a mortgage loan to finance the purchase. And luckily, mortgage loans come in wide different varieties.

Each type of mortgage loan is designed and created specifically to fit the needs of every individual. And if you are new to the real estate industry, it can be tricky to choose the right one.

This article will discuss the different types of mortgage loans and how to pick the best one for your needs.

Types of Mortgage Loans

Fixed-rate Mortgage Loan

The fixed-rate mortgage load means that your monthly payments will stay the same, no matter what happens to market interest rates, making it popular among home buyers.

Pros and Cons of Fixed-Rate Mortgage Loans 

The main advantage of a fixed-rate mortgage loan is that it provides borrowers with stability and peace of mind. You’ll never have to worry about your interest rate going up and increasing your monthly payments.

However, the downside of a fixed-rate mortgage loan is that you may end up paying more over the life of the loan if interest rates go down.

Adjustable Rate Mortgage (ARM)

Another type of mortgage loan is the adjustable-rate loan. It offers borrowers an introductory interest rate lower than the market rate, and after the initial period expires, the interest rate will adjust based on current market rates.

Pros and Cons of Adjustable Rate-Mortgage Loans 

The most significant advantage of an ARM is that it allows borrowers to save money in the short term. So if you plan on selling your home before the introductory period expires, you could pay less interest.

However, the downside of an ARM is that your monthly payments could increase if market rates go up. This means you’ll also have to pay attention to the terms of your loan so you know when your interest rate will adjust.

Conventional Loan

On the other hand, a conventional loan is a mortgage loan that’s not insured or backed by the government. These types of loans are available through private lenders, such as banks and credit unions.

Types of Conventional Loan

  1. Conforming Loans: A conforming loan is a mortgage loan that falls within the guidelines set by government-sponsored enterprises Fannie Mae and Freddie Mac.
  2. Non-Conforming Loans: Meanwhile, this is a mortgage loan that doesn’t fall within the guidelines set by government-sponsored enterprises Fannie Mae and Freddie Mac.

Pros and Cons of Conventional Mortgage Loans 

The main advantage of availing conventional mortgage loan is that you can get a fixed interest rate for the life of your loan. You’ll also have the option to choose a shorter-term loan, which will help you save money on interest over the life of the loan.

However, the disadvantage of a conventional mortgage loan is that you’ll need a good credit score to qualify. You’ll also need to make a down payment of at least 20% of the home’s purchase price.

Government Insured Loan

There is also what we call the government-insured loan. This is a mortgage loan that the government backs. The most common type of a government insured loan is a VA loan, supported by the Department of Veterans Affairs.

Pros and Cons of Government Insured Loan 

The most significant advantage of a government-insured loan is that you may be able to qualify for a loan with a lower interest rate. You’ll also usually have to make a smaller down payment than you would with a conventional loan.

The downside of a government-insured loan is that you’ll have to pay Mortgage Insurance Premiums (MIP) if you don’t make a down payment of at least 20% of the purchase price, just like how you do it with conventional mortgage loans.

Jumbo Loan

Meanwhile, a jumbo loan is a mortgage loan that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac. Jumbo loans are available through private lenders, such as banks and credit unions.

Types of Mortgage Loans

Pros and Cons of Jumbo Mortgage Loans 

An advantage of the jumbo loan is that you can finance a larger home. You’ll also usually get a lower interest rate than a conventional loan. However, one disadvantage of a jumbo loan is that you’ll need to have a good credit score and make a larger down payment than you would with a conventional loan.

30-year fixed-rate mortgage

As the name suggests, this is a mortgage whose interest rate remains for 30 years. This mortgage loan is best for people looking for stability who don’t mind paying higher monthly payments.

Pros and Cons of a 30-year fixed-rate mortgage

The main advantage of a 30-year fixed-rate mortgage is that it offers stability. You’ll know exactly how much your monthly payments will be for the next 30 years. The downside of a 30-year fixed-rate mortgage is that you’ll pay more interest over the life of the loan.

15-year fixed-rate mortgage

Lastly, a 15-year fixed-rate mortgage is similar to a 30-year fixed-rate mortgage, except that the interest rate is fixed for 15 years. This type of mortgage loan is best for people looking to save money on interest over the life of the loan.

Pros and Cons of a 15-year fixed-rate mortgage 

The advantage of a 15-year fixed-rate mortgage is that you’ll pay less interest over the life of the loan. The disadvantage however, is that your monthly payments will be higher than they would be compared to a 30-year fixed-rate mortgage.

Which Type of Mortgage Is Right For You?

Evaluate, Assess and Decide

The best way to know what type of mortgage is right for you is by evaluating your financial situation. Assess your needs and wants, and decide which provides more benefit than the other.

Moreover, shopping around for the best mortgage rates and terms is essential. Don’t just go with the first lender you talk to. Mortgage loans are a significant financial decision, so ensure you get the best deal possible.

Before you finalize and seal that deal, do your research and ask questions. Your efforts can save you money down the road, and mortgages are crucial to keeping your home during your lifetime.

FAQs

Q: What is a mortgage loan?

A: Mortgage loans are loans used to finance the purchase of a home. Mortgage loans are available through private lenders, banks and credit unions, and government-sponsored programs like FHA and VA loans.

Q: What are the different types of mortgage loans?

A: There are different types of mortgage loans available in the market, such as fixed-rate mortgages, adjustable-rate mortgages, jumbo loans, and FHA loans.

Q: What are the advantages of a 30-year fixed-rate mortgage?

A: The main advantage of a 30-year fixed-rate mortgage is that it offers stability. You’ll know exactly how much your monthly payments will be for the next 30 years.

Q: What are the cons of a jumbo loan?

A: One downside of a jumbo loan is that you’ll need to have a good credit score and make a larger down payment than you would with a conventional loan.

Conclusion

Purchasing a house is a significant financial decision. This is why you must understand the different types of mortgage loans available to choose the best one for your needs. The best thing to do is do your research and ask questions to professionals. Moreover, we hope this article has helped you out!

New Technologies in the Real Estate: Innovations in the Digital Age

Previous article

You may also like

Leave a reply

Your email address will not be published.