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For most people, buying a home is the biggest financial investment in their life. Since 99% of us cannot afford to buy a home outright, we will need to obtain a mortgage loan from a bank or other financial lending institution. There are many mortgage options out there, and an inexperienced home buyer can quickly feel overwhelmed looking at hundreds of thousands of dollars and commitments that span decades. This article shall serve as a simplified guide to the different types of mortgage loans in order to educate the home buyer.
Some of the different types of mortgages include fixed-rate mortgages, adjustable-rate mortgages, government-insured loans, and conventional mortgage loans.
Fixed rate mortgages carry exactly the same interest rate for the life of the loan. This means that your monthly payment to the bank will be exactly the same every month and year after year. These types of loans are often grouped as either 15-year or 30-year loans. A 15-year package will naturally have higher monthly payments than a 30-year package because it has to be paid off in less time.
Adjustable-adjustable mortgages, or ARM’s, are loans for which the interest rate is variable according to the market. Some ARMs remain fixed for a certain number of years and then convert to an adjustable rate, while some ARMs carry an adjustable rate for the first few years and then remain fixed. These are ARM’s Hybrid. An example of a hybrid would be a 5/1 ARM loan where there is a fixed rate for the first five years, after which that rate is adjusted each year in the market.
A conventional loan just means that it is not backed by the government. A government secured loan is a loan backed by the government, which guarantees the lender that the borrower will not be repaid. There are several different types of government secured loans; VA loans, FHA loans, USDA/RHS loans.
A VA loan is a loan offered by the US Department of Veterans Affairs. A Va loan is provided to former or current military service members and their families. A great advantage of this type of loan is that the borrower can get 100% of the loan up front, which means no down payment.
An FHA loan is a loan offered by the Federal Housing Administration and administered by the Department of Housing and Urban Development (HUD). This type of loan allows you to make a very low down payment, as low as 3.5% of the total loan, unfortunately, this means that you have to pay more in monthly payments.
A USDA/RHS loan is a loan from the United States Department of Agriculture, and this program is overseen by the Rural Housing Service (RHS). This loan is designed for low-income borrowers who are living in rural areas and who are having difficulty obtaining financial assistance from traditional lenders.
