What Are Mortgage Loans?
A mortgage is a loan that buyers use to buy a home and commit to paying back over a predetermined period, or term, in equal, fixed monthly payments.
The mortgage application procedure is a crucial component of being a resident for many individuals.
The 5 Different Types Of Mortgage Loans
- Traditional or Conventional loans:
Conventional loans come in two different distinctive forms. They are known as conforming loans and non-conforming loans.
Conforming loans are loans that meet the guidelines set by the Federal Housing Finance Agency (FHFA) and can be purchased by government-sponsored enterprises like Fannie Mae and Freddie Mac.
Non-conforming loans are such that do not meet one or more of the guidelines set by the Federal Housing Finance Agency (FHFA) like the Jumbo Loan. The government-sponsored enterprises like Fannie Mae and Freddie Mac cannot purchase these loans.
- Jumbo loans:
Jumbo loans are home loans that exceed Federal Housing Finance Agency (FHFA) loan limits. These types of loans are usually over $766,550, or $1,149,825 in locations with greater costs.
- Loan backed by the government:
The U.S. government backs three different types of mortgage loans or home loans to make homeownership more accessible. They are the Federal Housing Administration (FHA) loans, the Veterans Affairs (VA) loans, and the U.S. Department of Agriculture (USDA) loans.
FHA Loans – FHA loans have a lower borrowing ceiling so these types of government back loans can be a problem sometimes, especially if you are looking for higher amounts of loans. You can have FHA mortgage loans with lower credit limits but they also come with insurance premiums and can be more expensive.
VA Loans – VA loans are only eligible for a member of the U.S. military and their surviving spouses. There isn’t a minimum down payment, insurance for the mortgage, or credit rating requirement; however, there is a financing fee that must be paid at closing that can range from 1.25 to 3.3 percent.
USDA Loans – Moderate-to low-income borrowers can purchase properties in rural areas that qualify for USDA financing. These loans involve guarantee costs but no minimum credit score or down payment requirements.
- Mortgage loans with a fixed rate:
With a fixed-rate mortgage, the interest rate remains constant during the loan’s term, meaning that the monthly payment amount, which includes both the principal amount and the interest rate, will never change.
Although some lenders provide variable term lengths, fixed loans normally have periods of 15 or 30 years.
- Mortgage loans with an adjustable rate:
Adjustable-rate mortgages (ARMs) have variable interest rates, unlike fixed-rate loans. Usually, an adjustable-rate mortgage offers an initial, fixed, lower rate for a predetermined period.
After this time, the rate will fluctuate or change for the rest of the loan term at pre-arranged intervals, either increased or decreased.
For instance, the rate on a 5/6 ARM is fixed for the first five years, and thereafter it will vary every six months until the loan is paid off, depending on the state of the economy.
Your monthly mortgage payment will increase in sync with an increase in your rate.
Closing Thoughts
You may be eligible for more than one kind of mortgage loan, depending on your financial situation and credit history.
For this reason, it’s critical to comprehend the distinctions between government-backed loans, jumbo loans, conventional or traditional loans as well as fixed-rate mortgages, and adjustable-rate mortgages. So, you can decide which mortgage loans are best for you.
