The most important thing to consider when buying a home (or any property for that matter) is what type of mortgage best suits your needs. The number of mortgages available is a lot larger than most people realize, and it is important to understand the differences between them, their advantages, and disadvantages. A couple of things to consider when looking into getting a mortgage are: the size of the loan, the interest rate and associated points, the cost of the loan, the Annual Percentage Rate (APR), the type of interest rate and whether it can change, the loan term (normally this ranges from 10 to 30 years), and whether the loan has other features that may not benefit you (this includes things like pre-payment penalties, a balloon clause, an interest-only feature, or negative amortization). Getting a mortgage isn’t always easy, but we’re here to help. Let’s discuss mortgages in detail so that you have all of the information necessary to make an informed decision about which type of mortgage is right for you!
What is a Mortgage?
A mortgage is an agreement between you and a lender that gives the lender the right to take your property if you fail to repay the money you’ve borrowed plus interest. Mortgages exist because homes are expensive, and most people don’t have the entire amount required to purchase a home out of pocket (especially when you include things like closing costs and home inspections). Mortgages exist as a way for home buyers to purchase a home. When someone takes out a mortgage, they are basically promising that they will pay back the loan within an agreed upon time frame known as the amortization period. The length of the amortization period is based on the mortgage that you chose.
Types of Mortgages
As we have mentioned, there are various different types of mortgages to choose from, we’ve listed ten here! Understanding the difference between each type will help you better determine which one is best for your specific needs.
A fixed-rate mortgage (also known as FRMs) has an interest rate that doesn’t change through the life of the loan. This means that the loan remains the same for the duration of your amortization period and your monthly payments will also stay relatively constant. This also means that if pay more than the minimum amount due, it will decrease over time as a result.
A variable mortgage (or VRMs) has an interest rate that fluctuations frequently and is tied to the market conditions as well as your financial institution. The rate may change once, or more, times depending on your lender, but it will remain constant for the life of the loan. This means that if you borrow $100K at an interest rate of five percent, you will always repay $5000 in interest per year.
Also known as HMs, these mortgages combine the best aspects of FRMs and VRMs. At first your interest rate will stay locked in for a set period, after which it becomes variable like any other type of mortgage. This provides homeowners with some stability while still allowing for potential savings down the line if the market rates go down, you also don’t have to worry about interest rates increasing and becoming
unmanageable.
In an IO, the amount borrowed remains constant throughout amortization, even though it’s paid off at a slower rate. It gives borrowers an option to pay only the interest on their loan each month so that they can reduce what they owe without actually reducing how long until own their home free and clear.
An FHA home loan is a government-backed mortgage for people who would otherwise not qualify with conventional lenders. This is possible by charging an up-front fee when you close your mortgage, however, they insure the lender against loss if you default on your payments and offer more flexibility with credit requirements than most banks adhere to.
This type of mortgage is also a government-backed mortgage for veterans and active military service personnel. Similar to FHA, it helps
people who may not otherwise qualify for other types of mortgages, by having up-front fees when you close your mortgage, and they insure the lender against loss if you default on your payments. Additionally, there is no down payment required with this loan.
Conventional loans don’t require any specific conditions for borrowers because mortgages are primarily based around the idea of placing a lien (a form of security interest granted over an item of property of secure that payment of a debt or performance of some other obligation) on the property.
This type of mortgage is for people who want to buy property in rural locations, or less-developed areas. The loan charges an up-front fee when you close your mortgage like VA and FHA mortgages. They offer great rates because the US Government guarantees them against loss if you default on repayments. One thing to take note of is that this loan is not just for farmers and that any property located in a designated rural area is eligible.
Jumbo mortgages are mortgages for borrowers who want to borrow more money that allowed by Fannie Mae and Freddie Mac (the government-sponsored entities which offer conventional loans). These mortgages have higher interest rates due to the added risks involved compared to what you would get on a Conventional loan.
Balloon mortgages only repay the interest and part of the principal on the loan for a few years, at which point you have to pay off the rest in one lump sum. This is more suitable if your income isn’t as stable as or you don’t expect any significant life changes.
After you’ve decided on a mortgage, get a mortgage preapproval letter to show that you’ve already begun working with a lender and er serious about buying and distinguish you from other buyers. Remember that it’s essential not to borrow money from a lender without understanding how it will affect your situation, at present or in the future. Do in-depth research on the mortgages that best suit you beforehand to prevent future problems down the line and ensure that you choose the best option for you in the long run.
