There are 5 types of mortgages that are tailored to fit specific financial situations and goals. It is important to know these types in order to identify the one which could best match your financial situation.
These mortgages are Fixed-rate, Adjustable-rate, Government-insured, Conventional, and Jumbo. Now let’s look into each type and see if any is ideal for you.
1. Fixed-Rate Mortgages
A fixed-rate mortgage maintains the same interest rate throughout the entire loan term. This consistency means that the monthly payment for principal and interest remains unchanged from the first payment to the last.
Fixed-rate mortgages are best for you, if you plan to stay in the home for many years and value the stability of consistent payments.
Benefits and Common Terms
The major advantage of a fixed-rate mortgage is the predictability it offers. Borrowers can plan their finances with certainty, knowing their mortgage payment will not change over time.
These mortgages come in various term lengths, with 15, 20, and 30 years being the most common. While longer terms result in lower monthly payments, they also entail paying more interest over the life of the loan.
2. Adjustable-Rate Mortgages (ARMs)
Adjustable-Rate Mortgages start with a fixed interest rate for an initial period. After this period, the rate adjusts at predetermined intervals based on market conditions.
ARMs are suited for you if you plan to sell or refinance before the fixed-rate period ends or those who can accommodate potential future payment increases.
Initial Rate Period and Caps
The initial fixed-rate period varies (e.g., 5 years in a 5/1 ARM). After this period, the rate typically adjusts annually.
To protect borrowers from extreme interest rate fluctuations, ARMs often include rate caps that limit the amount the interest rate can change.
3. Government-Insured Mortgages
There are three main government-insured mortgages, namely; FHA, VA, and USDA Loans.
FHA Loans ➔: Insured by the Federal Housing Administration, these loans are characterized by lower down payment requirements (as low as 3.5%) and more relaxed credit score criteria. This makes them ideal for first-time homebuyers or those with lower credit scores.
VA Loans: Guaranteed by the Department of Veterans Affairs, VA loans offer benefits like no down payment, no private mortgage insurance (PMI), and competitive interest rates. They are available to veterans, active-duty military, and certain military spouses.
USDA Loans: Backed by the United States Department of Agriculture, USDA loans aim to promote homeownership in rural areas. They require no down payment and offer below-market interest rates. Eligibility includes residing in a rural area and meeting certain income limits.
4. Conventional Mortgages
Conventional mortgages are not government-backed. They typically require higher credit scores and larger down payments (usually at least 5%). These mortgages offer a wide variety in loan terms and amounts, catering to a broader range of borrowers.
Conventional mortgages are best for borrowers with strong credit profiles who can afford a larger down payment.
For conventional mortgages, Private mortgage insurance (PMI) is usually necessary if the down payment is less than 20%.
Want to learn more about this type of mortgage? Explore More About Conventional Mortgages and know their costs and requirements ➔.
5. Jumbo Mortgages
Jumbo mortgages cater to financing properties that exceed the loan limits set for conventional loans, typically necessary for luxury homes or those in high-cost areas. Due to the larger loan amounts and the associated higher risk, these loans often come with higher interest rates compared to conventional mortgages.
Additionally, obtaining a jumbo loan requires meeting stringent criteria, including having an excellent credit score, making a substantial down payment (often 10-20% or more), and providing detailed financial documentation. This rigorous qualification process ensures that borrowers are capable of repaying these larger loan amounts.
Jumbo mortgages are suited for high-income borrowers purchasing expensive, luxury properties.
Considerations before choosing the right Mortgage Type.
Before choosing any mortgage type, it’s essential to understand mortgage affordability. Determining how much you can afford is a critical step in the home buying process. It’s important to consider not only the ability to qualify for a mortgage but also the ability to comfortably make the monthly payments without financial strain.
A mortgage affordability calculator is an invaluable tool in this process. It helps you estimate how much you can borrow based on your financial situation. Thus giving you a clearer picture of what type of property you can afford.
This tool takes into account your income, debts, down payment, and projected mortgage rate to calculate an estimated mortgage amount that would fit your budget. For a more detailed and personalized estimate, visit our Mortgage Affordability Calculator page ➔.
Bottom Line
Each of these types of mortgages caters to specific needs and financial situations. From the predictability of fixed and adjustable-rate mortgages to the specialized solutions of government-insured loans, and the high-value financing of jumbo mortgages, there’s an option for every homebuyer.
Understanding the differences of these mortgages types is crucial for choosing the most appropriate mortgage for your circumstances.
