What Are the Different Types of Mortgage Loans That Exist Today?

If you’re in the market to buy a house, it’s definitely an exciting time in your life. This event is particularly impactful for first-time homebuyers.

However, if it’s been a while since you’ve purchased a home or this is your first time entering the real estate market, you probably have a lot of questions. For example, do you know what types of mortgage loans exist? More importantly, do you know what the best home loans are for your current and future finances?

We are here to help you understand your options. Keep reading for a quick guide on the different types of home loans.

Fixed-Rate Mortgages Vs Adjustable-Rate Mortgages

First, let’s take a look at fixed-rate mortgages and adjustable-rate mortgages. These options are available through some of the various types of mortgage loans you can acquire. Therefore, it’s important to know the pros and cons of each option.

Fixed-Rate Mortgages

Fixed-rate mortgages are straightforward. When you apply for a home loan, your credit history and score dictate the interest rate at which you can acquire the loan. Of course, different lenders will have different interest approval options as well.

In a fixed-rate loan, once you sign the contract, your interest rate is locked in. This will make your payments more predictable, which makes budgeting much easier.

Adjustable-Rate Mortgages

Fixed-rate mortgages may sound like the immediate choice for a smart homeowner. However, that’s not always the case or a viable option.

If you can’t get approved for a fixed-rate loan with a low-interest rate, an adjustable-rate loan could be a saving grace. Adjustable-rate loans (ARMs) typically lock you in at a low rate for the first few years before any fluctuation will occur.

After this period of consistency ends, your rates can go up or down, depending on the real estate market. However, you can use the first few years of your ARM to improve your credit. Then, before your rates start to fluctuate, you can refinance your home under a fixed-rate loan and a newly approved low-interest rate.

Conventional Home Loans

Convention loans are the most common types of mortgage loans. However, they are reserved for people with good credit scores (620 or above).

You can acquire a conventional home loan with a down payment as low as 3%. However, any down payment below 20% will require private mortgage insurance. PMI can cost anywhere between 0.58% and 1.86% of your total loan per year.

FHA Loans

Federal Housing Administration (FHA) loans are the most common types of mortgage loans for people with lower credit ratings. With only 3.5% down, you can get approved with a credit score of 580. However, if a borrower can come up with a 10% down payment, they can acquire a home loan with a credit score of only 500.

FHA loans and other government-backed loans make homeownership possible for people with limited budgets and poor credit. Despite being able to qualify with lower credit scores, borrowers can often enjoy the same low-interest rates as those who apply for conventional home loans.

VA Loans

Other types of mortgage loans backed by the government include Department of Veteran Affairs (VA) loans. VA loans are reserved for active and veteran military members. Surviving spouses of military members may also qualify for VA loans.

VA loans come with a multitude of benefits. For example, VA loans are some of the few types of mortgage loans that are assumable. In other words, if you decide to sell your home before the mortgage is paid off, the buyer can assume it (provided that they meet the right qualifications).

Additionally, borrowers don’t have to have outstanding credit or meet strict financial stipulations to get approved for a VA loan. Just as importantly, VA loans don’t require a downpayment.

Borrowers can take out the loan without putting any money down. If you’re qualified, these are some of the best home loans on the market.

Jumbo Loans

The last types of mortgage loans we’re going to talk about are jumbo loans. As you might have guessed by their name, jumbo loans are reserved for high-value homes. The maximum capacity (with some exceptions) for conventional home loans, is just over $647,000

If you want a home that exceeds that limit, you’ll need to apply for a jumbo loan. Naturally, these loans have stricter requirements, such as a 700-720 minimum credit score. In many cases, you’ll also need to show the lender that you have enough money in the bank to cover an entire year of mortgage payments.

Furthermore, these types of mortgage loans often require a minimum of 20% down. Although, a 10% down payment for jumbo loans isn’t unheard of.

Choosing the Best Mortgage Loans

Finally, let’s talk about how to choose the best home loans for your needs. Start by identifying your current credit score. You can get a full credit report for free from any of the three credit bureaus – Equifax, TransUnion, and Experian.

Then, figure out how much money you can comfortably afford to put down on a house. If you don’t have much cash in reserve, you may have to save up for a few months to get approved for a loan.

The next step is reaching out to your bank and other lenders to get preapproved for a loan. Make sure you’re inquiring about pre-approval and not actually applying for a loan. If you apply for a loan and fail to get approved, it can negatively affect your credit score.

Based on your preapproval, you can get a better idea of your options. However, we also recommend looking into mortgage quality control, especially as a first-time homebuyer. Follow that link to learn more about verifying the quality and affordability of your potential mortgage.

The final step is shopping around for the best lender. You can use the leverage of other loan options and offers to help you secure the best possible interest rates and terms.

What Types of Mortgage Loans Are Right for You?

As you can see, there are many types of mortgage loans to choose from. Which ones do you qualify for? What loans will be best for your long-term finances?

We hope this guide helps you answer these questions. And if you’re looking for more financial advice or home-buying tips, we’re here for you. Browse through the rest of our website to find more informative articles.