Buying a home today can be a daunting task. There are so many choices to consider: condo, townhome, single family home, HOA, school districts, commute, the list goes on and on. Add to that the type of mortgage you should get and you may feel like quitting before you even get started. While I can’t help you decide on the type of home you should consider in a blog (I’m better at that in person), with the help of payoff.com I can help you learn the differences between the different types of mortgages to help you make an informed decision.
The Basic Types of Loans
1. CONVENTIONAL / FIXED RATE MORTGAGE
Conventional fixed rate loans are a safe bet because of their consistency — the monthly payments won’t change over the life of your loan. This is your standard, plain-vanilla mortgage.
They’re available in 10, 15, 20, 30, and 40-year terms but 15 and 30 are the most common.
2. INTEREST-ONLY MORTGAGE
Interest-only mortgages give you the option, during the first five or 10 years, to pay only the interest portion of your monthly payment instead of the full payment. You aren’t required do this. This slows down your repayment time but can be useful in a pinch. Afterward, the rest of the mortgage is paid off in full like a conventional mortgage.
3. ADJUSTABLE RATE MORTGAGE (ARM)
There are many different ARMs. The basic idea is that their interest rate changes over time throughout the life of the loan. The rate changes reflect changes in the economy and the cost of borrowing money. A common ARM is called the 5/1 loan — the interest rate stays the same for the first five years and then is free to change for the remaining 25 years.
Special Assistance for Certain Groups
4. FHA LOANS
These are mortgages guaranteed by the Federal Housing Administration. They come with built-in mortgage insurance to protect against the possibility of not being able to repay the loan. The required down payments are smaller with these loans.
5. VA LOANS
These loans make it easier for veterans of the U.S. armed forces, and sometimes their spouses, to buy homes. They don’t require a down payment and are guaranteed by the Department of Veteran Affairs.
More Exotic Types of Loans
6. COMBO / PIGGYBACK
The combo occurs when you put a down payment of less than 20% and take two loans of any type in combination to avoid paying Private Mortgage Insurance.
On a balloon mortgage, you pay interest only for a certain period of time — five years for example — and then the total principal amount is due after this initial period.
Jumbo refers to a mortgage that’s too big for the Federal Government to purchase or guarantee. Currently, the limit is about $700,000. This means that the borrower wouldn’t get the lowest interest rates available on smaller loans.
Now that you have a basic idea of what kind of mortgages are available, you are in a better place to work with your mortgage broker in finding the best type of loan for you. Once you are pre-approved you can begin shopping for your new home with confidence and excitement.