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5 Types of Mortgage Loans for Homebuyers (March 2024)

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People are making purchases every single day, and for the most part, those are small purchases that do not really matter in the grand scheme of things. These are little things like groceries, a hamburger for lunch, a movie ticket or paying for gas.

However, there are some times in life when you are making a purchase that will matter for years, decades, or even the rest of your life. Buying a new home is one of them, and it is easily one of the biggest purchases (and costs) that you will make in your life. Naturally, this means that you will need quite a bit of money that very few people have lying around, readily available in cash, or in their bank accounts

The only real option here is to get a home loan. However, since not all of them are the same, it can be beneficial for you to explore different mortgage options and find the most suitable one for your financial situation. Some of them could turn out to be beneficial enough to allow you to buy your new house and still get to keep some money in your pocket, while a bad one could barely cover the cost of your future home.

These things require careful consideration and planning, especially these days when the prices are quite unreliable and have a strong tendency to move up quite frequently and by quite a lot.

Different types of mortgages

As mentioned, there are different types of mortgages, and selecting the right one can make all the difference for years, if not decades of your future life. We have narrowed it down to 5 types that you should consider, including the following:

  1. Conventional loan
  2. Jumbo loan
  3. Government-insured loan
  4. Fixed-rate mortgage
  5. Adjustable-rate mortgage

The Conventional loan is typically the best for borrowers who have a good credit score, while Jumbo is great for those who wish to buy expensive homes with an excellent credit score. If your credit score is low, and you wish to put down minimal cash as your down payment, then a government-insured loan is your best bet. However, if you are looking at the long years of repaying the loan and want no surprises, then a fixed-rate mortgage is definitely for you. If, on the other hand, you plan for your new house to be only a temporary home, then an adjustable-rate mortgage should do the trick just fine for you.

Now, let’s take a look at each of these loans up close and see what exactly they have to offer.

1. Conventional Loan

The first on our list is the Conventional loan. This is a loan that is not backed by the federal government, and it can come on one of two forms — conforming and non-conforming.

Essentially, the conforming loan, as the name suggests, “conforms” to a certain set of standards that the FHFA (Federal Housing Finance Agency) has put into place. These include things like loan size, debt size, and credit. In 2022, for example, the conforming loan has a limit of $647,200 in the majority of average areas and $970,800 when it comes to more expensive areas.

On the other hand, we have non-conforming loans that do not depend on FHFA standards. Instead, they cater to borrowers that are looking to buy more expensive homes and individuals with credit profiles that step outside of the norm.

Now, the benefits of conventional loans include a few things, such as:

  • They can be used for a primary home, second home, or even for investment property
  • Borrowing costs are typically lower than other types of mortgages, although the interest rate is a bit higher
  • The lender can cancel private mortgage insurance after you reach 20% equity or refinance to remove it if you so choose
  • You can pay only 3% down on loans
  • The seller can contribute to closing costs

However, there are also a few cons to this type of loan, including:

  • A minimum FICO score of 620 is necessary
  • Down payments are usually high than what government loans can offer
  • DTI ratio cannot be above 43%, or in some cases, 50%
  • You will have to pay PMI if your down payment is under 20% of the sales price
  • A lot of paperwork is required

If you have a relatively strong credit score and you have some funds that would cover a sizable down payment, this is probably your best option. You’ll be paying the fixed-rate conventional mortgage for the next 30 years.

2. Jumbo loan

Jumbo mortgages are loans that do not fall within FHFA borrowing limits. Basically, these are loans that are commonly taken in high-cost areas. Think Los Angeles, NYC, San Francisco, or pretty much anywhere in the state of Hawaii, where prices are considerably higher than in other areas.

Benefits of getting jumbo loans include:

  • You get to borrow huge amounts of money and buy expensive homes
  • Interest rates are actually similar to conventional loans
  • A lot of borrowers can only turn to this option to become homeowners, if they happen to live or wish to live in one of the mentioned neighborhoods.

However, jumbo loans come with quite a few disadvantages, including:

  • You need a FICO score of 700 or higher
  • You must show up with a down payment of 10-20% of the property value
  • Your DTI cannot be above 45%
  • You need to show that you have significant assets, either in cash or savings accounts
  • Typically, this loan requires a lot of in-depth documentation in order for you to even qualify

Generally speaking, this is a loan for those who plan to finance a home with a selling price far above anything you would call “affordable.”

3. Government-insured loan

When it comes o government-insured loans, they can be a bit misleading, as the US government, obviously, is not a mortgage lender. However, it does play a certain role when it comes to making home ownership available for its citizens. There are three government agencies that back mortgages — The US Department of Veterans Affairs (VA), the Federal Housing Administration (FHA), and the US Department of Agriculture (USDA).

VA offers loans that have flexible, low-interest mortgages, but they are only available for the members of the US military, including veterans and those on active duty, and their families. This type of loan does not have a minimum down payment, mortgage insurance, or any credit score requirement. Closing costs are capped, typically, and they may be paid by the seller. VA will charge a funding fee, however, a percentage of the loan amount that can be paid upfront, at closing, or it can even be rolled into the cost of the loan itself.

The second option, the FHA loans, come with fairly competitive interest rates, and they help with making homeownership possible for those who don’t have the money for a major down payment or a particularly strong credit score. A credit score is still required, but you can get this loan if you have a minimum of 580. The down payment will be only 3.5%, in this scenario. However, if you have at least 10% and you are willing to pay that much for your down payment, you can get this loan even if your credit score is all the way down to 500. Just keep in mind that FHA will require two mortgage insurance premiums, which can increase the cost of the mortgage overall.

Finally, there are USDA loans, which help moderate- to low-income borrowers become homeowners if they meet certain income limits. These will be homes in rural, USDA-eligible areas, and one great thing about them is that they don’t require down payments. However, there are extra fees, including an upfront fee of 1% of the loan amount, plus an annual fee.

Now, the benefits of these loans include the following:

  • More relaxed credit requirements
  • Allow you to buy a home when you don’t qualify for a conventional loan
  • Low down payments
  • Available to both first-time buyers and repeat buyers
  • No mortgage insurance or down payments for VA loans

On the other hand, there are a few cons to be aware of, including:

  • Mandatory mortgage insurance premiums when it comes to FHA loans that cannot be canceled
  • FHA loans have low loan limits compared to conventional loans
  • The borrower has to live in the property
  • Overall borrowing costs are often higher
  • Heavy documentation required

Essentially, if you are having trouble getting a conventional loan because of a low credit score or you can’t afford high down payments, then this is probably the best option for you.

4. Fixed-rate mortgage

In number four, we have fixed-rate mortgages that, as the name suggests, maintain the same interest rate for as long as you are paying back your loan. That way, you will always have the same payment to make each month, and depending on the loan, this can last anywhere from 15 to 30 years. But, this is the type of loan where there will be no surprises. You know exactly when and how much to pay, and if you can stick to that schedule with the required amounts — you will like this option.

The clear benefits of this loan include:

  • Monthly principal and interest payments do not change, ever
  • It is easier to plan your monthly budget with this loan

There are two downsides worth remembering here, however, which include:

  • The drop of interest rates would mean that you have to refinance in order to get the lower rate
  • Interest rates are typically higher than what adjustable-rate mortgages have to offer

5. Adjustable-rate mortgages (ARM)

Finally, we have adjustable-rate mortgages, which do not come with the fixed-rate mortgages’ stability, but they tend to fluctuate based on market conditions. The so-called ARM loans do come with fixed interest for a few years, but then, as the market changes, the interest rate also can go up or down, and stay like that for the remainder of the term or change further.

This is why many ARM providers offer to keep the rates fixed for the first 7-year or 6-month period, which means that you will only have to deal with the change after that period.

There are a few benefits here, such as:

  • Lower fixed rate in the first months/years of homeownership
  • You can save a lot of money on interest payments

However, there are two downsides worth mentioning:

  • Monthly mortgage payments could become unaffordable if the market moves in an unfavorable way, leading to a loan default
  • If home values fall, it will be harder to refinance or sell before the loan resets

Additional types of home loans

In addition to the five major mortgage types that we mentioned above, there are four more types that we consider worth mentioning, which might fit certain people. These include:

1) Construction loans — these are typically loans for those who wish to build a house on their own. They can decide whether o get a separate construction loan for the project and a separate mortgage to pay off the loan. There is even a construction-to-permanent loan that merges construction costs and financing into a single loan product.

2) Interest-only mortgages — This is a mortgage that allows borrowers to make interest-only payments for a certain period, typically 5-7 years. After that, however, they are required to start paying for both principal and interest.

3) Piggyback loans — This is a loan that is commonly known as an 80/10/10 loan, and it involves two loans, to be precise. The first one is for 80% of the home price, while the second one brings 10% more. The final 10 refers to the 10% down payment that you are required to make. These loans are designed to help you avoid paying for mortgage insurance.

4) Balloon mortgages — Lastly, there is a balloon mortgage, which is a type of loan that requires a large payment at the end of the loan term. Typically, yu are required to make payments based on a 30-year term, but only for a short time, such as 7 years, for example- When the term ends, you make a large payment on the outstanding balance, although this can easily become unmanageable if you have not prepared, or if your credit score drops in the meantime.

Ali is a freelance writer covering the cryptocurrency markets and the blockchain industry. He has 8 years of experience writing about cryptocurrencies, technology, and trading. His work can be found in various high-profile investment sites including CCN, Capital.com, Bitcoinist, and NewsBTC.