At its simplest level, a mortgage is a loan you use to buy a home or other piece of real estate. The property itself serves as collateral for the loan. Mortgages are available in a variety of types, including fixed-rate and adjustable-rate. So, how do you know which mortgage is right for you? The following list provides just a few examples of some of the most popular types of mortgage loans available to borrowers.
Conventional loans are the most common type of mortgage loan. A conventional mortgage originates with a private lender, such as a bank or credit union. Conventional loans are broken down into conforming and non-conforming loans, depending on whether or not they conform to guidelines set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).
Fannie Mae and Freddie Mac are companies originally chartered by Congress to help provide stability and affordability in the housing market. For a conventional loan, borrowers generally need to meet a list of requirements to qualify. These requirements may include:
- Having a good credit score, typically over 620
- The ability to make a down payment of at least 20%
- If a buyer’s down payment is less than 20%, they will be required to pay private mortgage insurance (PMI).
- PMI protects mortgage investors in case you default on your loan.
- The cost of PMI will vary, depending on your loan type, your credit score and the amount of your down payment.
- Not having too much debt, typically under a 43% debt-to-income ratio
- No history of bankruptcies or foreclosures
Conventional loans are typically repaid over a 30-year term, but it’s possible to qualify for a 15 or 20-year conventional mortgage loan.
The Federal Housing Finance Authority (FHFA) sets guidelines for government-backed mortgages, including a limit on the total amount of the loan. A jumbo loan is a mortgage used to finance properties that exceed the qualifications for a conventional conforming loan. Due to the larger size of the loan, the bar to qualify for a jumbo loan is even higher for borrowers: they need higher credit scores, lower debt-to-income ratios, and more cash in the bank.
Jumbo mortgages can also mean a bigger down payment, higher closing costs, and slightly higher interest rates. In other words, you have to pay more for the privilege of a more expensive purchase. But if your dream house has a higher price tag and you qualify, a jumbo loan may be the way to go.
The federal government wants to make sure that more Americans can become homeowners, so they insure lenders who provide mortgages for what may be considered traditionally riskier borrowers. The Federal Housing Authority (FHA) lends to borrowers with less money in the bank, the United States Department of Agriculture (USDA) lends to rural borrowers, and the Department of Veterans Affairs (VA) lends to military veterans. These government-insured mortgage programs may require smaller down payments or lower credit scores than conventional mortgages. However, the government does place limits on a borrower’s income and the price of the home.
A fixed-rate mortgage features an interest rate that doesn’t change over the life of the loan. If the rate was at 5.750% when the loan began, then the rate will still be 5.750% 30 years later. That also means your monthly mortgage payment won’t change either. Fixed-rate mortgages are generally best for buyers who want to live in their home for the long-term.
Adjustable-Rate Mortgages (ARMs)
Adjustable-rate mortgages (ARMs) usually offer a lower initial interest rate than fixed-rate mortgages, but only for the first few years of the loan. For example, a 5/1 adjustable-rate mortgage offers an initial low rate for the first five years of the loan. After that, the rate will adjust once per year based on the current market rate.
Adjustable-rate mortgages may offer caps on how high or low the rate can go, in order to protect the borrower and lender. Because an adjustable-rate mortgage will change over the life of the loan, this type of mortgage may be best suited for a homeowner plans to sell the home within the first few years of the purchase.
BayCoast Mortgage Company is a full-service lender providing industry-best solutions in residential purchase, refinance, renovation and construction loans.
Our lending experts are ready to help you find the mortgage that best suits your needs and lifestyle. For more information or to schedule an appointment, please contact us at 508-646-0800 or call toll free at 877-466-2678.