Mortgages and loans help you achieve one of the key milestones in living the American dream, which is owning a house. However, buying your dream home is becoming harder because of high-interest rates and economic difficulties.
The youth from the millennial downwards are the worst affected because they came of age at an uncertain time. In this article, we share with you all mortgage types available in the U.S and the benefits of each.
A mortgage is a loan advanced by mortgage companies, commercial banks, and other financial institutions to borrowers for them to buy homes or other types of real estate. For you to get a mortgage you must meet specific requirements stipulated by the lender. Some of the mandatory ones include enough income level and a credit score that is high enough.
Most lenders will give you a mortgage if your income is high enough to enable you to repay. Failure to repay a mortgage i.e. money borrowed plus interest can make the lender repossess the property.
Introduction to All Mortgage Types
Taking a mortgage is one of the major financial decisions you’ll have to make as an adult. This article helps you make an informed decision. It’s not advocating for affiliate marketing success. Below is list of mortgage types that you can use to finance your property:
- Long-term fixed-rate loans.
- Adjustable-rate mortgage.
- Mortgage pools.
- Federal Housing Administration (FHA)
- Qualified mortgages and non-qualified mortgages.
- Jumbo loans.
- Balloon mortgages.
Long-Term Fixed-Rate Loans
Long-term mortgages with fixed-rates are the most popular in America. The reason borrowers prefer this mortgage is that the fixed-rate and monthly payments are predictable and cost-effective. Most lenders and homebuyers prefer fixed-rate mortgages, especially when the interest rates are low.
Most fixed-rate mortgages have a term of 30 years, but you can opt for shorter terms from 20, 15 to 10 years. A shorter repayment period means high monthly remittances with a lower overall interest.
Adjustable-rate Mortgage (ARM)
Adjustable-rate loans have varied monthly payments that can rise and fall. This makes this type of mortgage to have some risks that fixed-rate loans don’t have. Adjustable-rate loans bestow some benefits to borrowers including first-time borrowers. However, you need to research for deeper understanding and exercise due diligence before you proceed.
There’re two types of ARMs and they include traditional ARMs and hybrid ARMs. Traditional ARMs come with interest rates that are adjustable every year, every 3 years, or 5 years. ARMs with these provisions are commonly called “5/5”, “3/3” or “1/1” ARMs.
The names are based on the frequency of the changes in the interest rates and how long they remain. For instance, a “5/5” ARM attracts a fixed interest rate for the first five years. The interest rates are then reset after every five years until the loan reaches its maximum limit of 30 years.
Hybrid ARMs come with an initial fixed interest rate that lasts from 3, 5, 7, to 10 years. After the fixed interest period, the rates start to change every year. Hybrid ARMs attract lower interest rates compared to traditional ones.
Mortgage pools are known as mortgage-backed securities (MBS) are real estate investments diversified over several individual loans. The loans are originally obtained from banks and then put in a common pool. Individuals who invest in mortgage pools receive cashflow from the common pool. Some pools are structured into different levels based on seniority.
The Federal Housing Administration (FHA)
The FHA is not a mortgage, but a Federal Government entity that runs an insurance pool funded by the fee FHA mortgage borrowers pay. This type of insurance does away with the risk lenders face.
This main benefit of this type of loan is that riskier borrowers with lower credit scores and small initial deposits can get the loan.
The down payment for FHA loan is just 3.5%. The FHA guarantees both adjustable-rate and fixed-rate mortgages. Most first-time house buyers go for the 30-year fixed-rate.
Qualified Mortgages and Non-Qualified Mortgages
Qualified mortgages were created through the Dodd-Frank legislation. A qualified mortgage is a basic plan that doesn’t come with inherent risks such as inflated payments, interest-only payments, a or 40-year duration.
This type of loan is also advanced to people with a debt-to-income ratio of 43% or less. Non-qualified mortgages include perks like interest-only payments and the 40-year terms among others.
If you’re interested in buying luxurious or expensive homes, jumbo loans are the way to go. These types of loans will need you to have an excellent credit rating, enough debt-to-income ratio to enable you payback.
Moreover, you’ll need to make a substantial down payment because of the cost of the house. Most jumbo loans range from $510,400 to $765,600 and come in either fixed, adjustable, or, hybrid types.
Balloon loans attract lower than average payments, and in some cases, you’re only making interest payments. Nevertheless, most of the principle is payable at the end of the term. In most cases, balloon mortgages are given commercially and are sought by people planning to resell the property in the short-term.
The mortgage types discussed above are the most common ones. However, there are other specialized mortgages such the VA home loans granted to veterans.
Conclusion of Guide to All Mortgage Types
Whether you are looking to achieve a lifelong dream of owning home in the near future, it is important to know all mortgage types in the United States so that you will have plenty of options to pay it off.
You can learn more about mortgage types that’s available in the United States in its respective category.