Buying a home is one the biggest and complex financial transaction you will likely do in a lifetime and it is very important to understand the different types of mortgage financing that are available to you. If you do not know all of your options, you can not make the most informed decision for your situation.
Here’s a look at the basic mortgage options and the other kinds of mortgage loans you may be eligible to receive to finance your home:
Basic Mortgage Types
There are two basic mortgage types – fixed rate mortgages and adjustable rate mortgages. Fixed rate mortgages are the most popular, with approximately 70% of mortgages falling into this category. These mortgages are set and stable at a fixed rate through the life of the loan. Consumer prefer this type because they know what to expect for the next 15 or 30 years.
Adjustable rate mortgages are not nearly as popular but many people do chose them depending on their finances and plans for housing. Generally, the loans require smaller payments for the first several years of the loan. The rate can change based on market rates, meaning they can increase or decrease as time goes on.
There are three loans that the federal government backs for homebuyers. These loans are particular popular for first-time home buyer for whom the programs are designed to accommodate. Government-backed loans often give the consumer a bit more leeway than traditional lenders in that it can be easier to qualify for the loans and homebuyers typically are required to put down less money than with a traditional mortgage. The three types of loans from the government include:
A fixed rate mortgage created to help first-time homebuyers of low to moderate income levels. The loans are guaranteed by the Federal Housing Administration and are for use with single or multiple family homes provided the borrower intends to live on the premises.
These loans are backed by the US Department of Agriculture and are designed for low to moderate income levels. To qualify for this type of loan, you must be planning to purchase a home in a designated rural area. USDA loans are very beneficial to first-time homebuyers because they require not down payment or mortgage insurance.
These mortgages are available for current members, retired members, or the surviving spouse of an active service member of the United States military. Veterans can obtain a loan with small or even no down payment money provided the applicant can afford the monthly payments.
These are loans that permit the borrower to pay only the interest on the loan for a certain period of time. The benefit is a low payment for the first part of the loan but after the time has expired, payments will increase to include the principle. The drawback is that payments will be higher because principle must be paid back in a shorter period of time. The longer a borrower only pays interest, the higher the payments will become later.
This type of mortgage is set up based on a repayment schedule much like a 30 year fixed rate loan. The loan term is usually shorter, typically 5 to 7 years. Once a borrower reaches the end of the loan term, the outstanding balance that remains must be paid in a lump sum. The final balloon payment can be made from the borrower’s pocket or by refinancing the outstanding amount.