Over 40% of American homeowners take out mortgages to purchase their houses. Yet, a recent survey found that only about half of the adults in this country know what a mortgage is.
Do you fall into this category? If so, it would be well worth learning more about what a mortgage is before applying for one to buy a house. Better yet, you should know all about the different types of mortgages so you can select the correct type of mortgage loan to take out.
So what are the various types of mortgage loans? Which kinds of mortgage loans might be right for you? And how can you get the best terms on a home buyer loan?
Find out all about the different kinds of mortgages below and then set your sights on selecting the one that’ll be your best option.
Conventional Mortgages
Of all the different types of mortgages that we’re going to talk about here, conventional mortgages are the most common of the bunch. They’re the type of mortgage loan most people will apply for when they’re interested in buying houses.
To qualify for a conventional mortgage, you’ll need to have a good credit score, a stable employment history, and possibly even a certain income, depending on how much you’d like to borrow. You will also need to be willing to put down at least a 3% downpayment and a 20% downpayment if you want to avoid private mortgage insurance.
Often, people go through banks and other large financial institutions to obtain conventional mortgages. But other private mortgage lenders are starting to pop up and offer mortgages to those who want them.
Fixed-Rate Mortgages
Before discussing the other types of mortgage loans, we want to take a quick detour to talk about the two main kinds of conventional mortgages. The first one is called a fixed-rate the mortgage.
With this type of mortgage, you’ll take on an interest rate that won’t change throughout the life of your loan. If the interest rate is, say, 5% when you secure a mortgage, it’ll remain 5% over the 15 or 30 years you spend paying off a mortgage.
Adjustable-Rate Mortgages
The second kind of conventional mortgage is called an adjustable-rate mortgage. As you can probably tell by its name, it’s a mortgage with an interest rate that will fluctuate over time.
The interest rate will remain the same for anywhere from 6 months to 10 years after you qualify for a mortgage. But after that, it’ll go up or down depending on where the interest rate stands when you hit that point.
Federal Housing Administration (FHA) Loans
The federal government does not back conventional mortgages. But many other types of the mortgages are.
Federal Housing Administration or FHA loans are a great example of this. They’re backed by the FHA and are designed to help those with lower incomes qualify for mortgages to buy homes.
Unlike conventional mortgages, FHA loans are slightly more relaxed regarding credit scores. They’re also available to those who can’t put down at least 20% on the house as a downpayment.
It’s worth noting that the FHA itself doesn’t dish out FHA loans to those interested in applying for them. Instead, it approves specific lenders to give out FHA loans and then backs them from there.
Veterans Affairs (VA) Loans
The FHA isn’t the only government agency specializing in backing mortgage loans. The U.S. Department of Veterans Affairs (VA) does it, too. They stand behind what is called Veterans Affairs loans, or VA loans.
VA loans are different from other types of mortgage loans in that they’re only available to military service members and veterans. However, the spouses of military members and veterans can also qualify for them. They provide them with lower interest rates than usual, the ability to purchase a home with no downpayment, and no closing costs.
There are funding fees that’ll come along with most VA loans to stop them from becoming too costly for American taxpayers. These funding fees will vary based on the prices of homes and other factors.
But some military members and veterans might even be able to avoid these funding fees. Those who were disabled due to injuries sustained in battle, Purple Heart recipients, and others may be eligible to steer clear of them.
U.S. Department of Agriculture (USDA) Loans
The U.S. Department of Agriculture (USDA) is another government agency that backs mortgage loans. These types of mortgages were first created to make it possible for those with lower incomes living in rural areas to afford houses.
In most cases, USDA loans won’t call for people to put down a large downpayment—if they’re asked to make a downpayment at all. They also won’t usually have to meet a certain income threshold to get USDA loans.
But one downside to these types of mortgage loans is that the houses purchased with them must meet USDA requirements. It can make buying a home a little more complicated for those trying to do it.
Which Type of Mortgage Loan Would Work Best for You?
Every type of mortgage loan on this list brings something different to the table. You might be making a big mistake if you automatically apply for one type of mortgage without considering your other options. Before you buy a home, you should discover more about how the types of mortgage loans found here might be able to benefit you. It’ll put you in a better position to select the right mortgage for your situation.