Purchasing a home is not just about having the right broker and finding your dream property. An integral part of the process is getting a mortgage, with all the intricacies and challenges involved. Read on as we explore 5 types of mortgage loans and how to compare different loan options.
Conventional Mortgage Loans
Conventional mortgage loans are standard loans adhering to standards set by a government agency, Fannie Mae, or Freddie Mac. set by a government agency, Fannie Mae or Freddie Mac.
Advantages of conventional mortgage loans:
– Private Mortgage Insurance (PMI) can be canceled upon reaching 20% equity in the property
– Lower costs
Disadvantages of conventional mortgage loans:
– PMI can mean higher monthly mortgage payments
– More stringent qualifying parameters.
Government-Backed Loan Options
These loans are federally supported with the government-backing offering a type of insurance policy in the case that you default on your loans. These are further divided into FHA loans, USDA loans, and VA loans.
Advantages of government-backed mortgage loans:
– They don’t require a perfect credit score.
– Low down payments.
Disadvantages of government-backed mortgage loans:
– FHA and FHA and USDA loans require private mortgage insurance that can’t be canceled
– Stringent inspections and requirements.
Jumbo Mortgage Loans
Nonconforming loans, also known as Jumbo loans involve borrowing limits that are more than that available with conventional mortgages. They are common if purchasing a home in an expensive living area.
Advantages of Jumbo mortgages:
– They allow you to purchase a significantly more expensive home.
– Low-interest rates.
Disadvantages of Jumbo mortgages:
– Higher credit score requirements
– Large down payments.
Fixed-Rate Mortgages
These are mortgages that have a fixed interest rate.
Advantages of fixed-rate mortgages:
– Predictable monthly payments.
– The exact costs of the loan can be predetermined.
Disadvantages of fixed-rate mortgages:
– Can involve higher rates
– Only refinancing can lower your rate.
Adjustable-Rate Mortgages
After an initial period involving a low rate, these charge an interest rate that is linked to an index or benchmark rate.
Advantages of adjustable-rate mortgages:
– Low-interest rate
– Continued savings depending on the benchmark rate.
Disadvantages of fixed-rate mortgages:
– Can be very expensive if the benchmark rate increases
– Only refinancing can lock a new fixed rate.