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5 Types Of Mortgage Loans For Home Buyers: Which Is The Best For You?

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Mortgage loans are not universal loans and it is important to know which one works best. (iStock)

There is more to buying a home than just finding the right broker and choosing your dream property. You also have to go through the sometimes tricky process of getting one mortgage. Along with Check your creditworthiness And preparing your down payment it is also important to compare different mortgage loan options.

1. Conventional mortgage loan

A conventional mortgage loan simply means any loan that meets the standards set by Fannie Mae or Freddie Mac or a government agency.

This type of home loan may automatically come to mind when you think of a mortgage.

Advantages of Conventional Mortgage Loans:

  • Private Mortgage Insurance (PMI) terminable after reaching 20 percent equity in the property
  • Closing costs can be lower compared to other types of credit
  • Can be used to purchase a primary residence, secondary residence, or investment property

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Disadvantages of traditional mortgage loans:

  • PMI can make your monthly mortgage payment more expensive
  • You may need a higher credit score or lower debt to income ratio to qualify

A conventional mortgage loan could be good if:

You have good credit and at least 20 percent home ownership, or you don’t mind paying a personal mortgage insurance with a smaller deposit.

2. Options for government supported loans

Government-secured mortgage loans are supported by the federal government and issued by partner banks. Government support offers some type of insurance policy to a mortgage lender if for some reason you default on the loan.

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There are three main types of government-backed mortgage loan that you might consider:

  • FHA loans. The Federal Housing Administration loans are designed for first-time and middle-income buyers and allow a down payment of just 3.5 percent for a FICO score of 580 or a 10 percent down payment for a credit score of 500.
  • USDA loan. U.S. Department of Agriculture loans allow buyers in certain rural areas to buy a home without a down payment if they are eligible for income.
  • VA loan. Veterans and their families can use VA mortgage loans to buy a home with no down payment and no personal mortgage insurance.

Benefits of Government-Secured Mortgage Loans:

  • Perfect credit is not required for approval
  • Good for first time and repeat buyers looking to buy a home with a low down payment

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Disadvantages of government-secured mortgage loans:

  • FHA and USDA loans require private mortgage insurance, which cannot be canceled
  • Properties may be subject to more stringent inspection and valuation requirements

A government-secured mortgage could be good if:

You are a first-time or repeat home buyer who do not meet the credit requirements for a conventional mortgage loan, or you want to buy a home with a lower down payment.

3. Jumbo Mortgage Loans

Jumbo loans or non-compliant loans have credit limits that exceed those set for traditional mortgages.

This type of loan may be more common if you are buying a home in a high cost of living area where property values ​​are well above the national average. The limits for a jumbo loan may vary depending on the state and municipality.

Advantages of Jumbo Loans:

  • They can allow the purchase of a more expensive home
  • Even if the loan is bigger, you can still get low interest rates

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Disadvantages of jumbo loans:

  • Credit requirements tend to be higher, except for borrowers with mediocre or poor creditworthiness
  • Banks and lenders may require a higher down payment compared to a traditional or government-secured loan

A jumbo loan could be good if:

You want to buy a more expensive home and would rather piggyback a single mortgage than multiple mortgage loans.

4. Fixed-rate mortgages

Fixed rate mortgages are exactly what they sound like: fixed rate mortgage loans.

A 30 year fixed rate mortgage is the most common type, although you can choose a 15 or 20 year mortgage term instead.

Fixed-rate mortgage benefits:

  • Monthly payments are predictable, which makes budgeting easier
  • A loan calculator can help you figure out exactly how much interest your mortgage is costing

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Disadvantages of fixed-rate mortgages:

  • The interest rates can be higher compared to a variable rate mortgage loan
  • The only way to lower your interest rate would be to refinance into a new mortgage

A fixed-rate mortgage can be good if:

You want stable monthly mortgage payments that don’t change over time.

5. Variable rate mortgages

Variable rate mortgage loan have an interest rate that is linked to an index or reference interest rate.

During the first term of the loan, you will pay a low interest rate. After this period, the interest rate can be adjusted up or down depending on what happens to the reference interest rate.

For example, you could have a 5/1 ARM, with a fixed rate for the first five years. Banks also offer 7/1 and 10/1 variable rate mortgages.

Advantages of variable rate mortgages:

  • With a. you can save money first low interest rate
  • The savings could continue if the reference rate on your loan remains low

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Disadvantages of variable rate mortgages:

  • An ARM could become significantly more expensive if the price adjusts significantly upwards
  • You would need to refinance yourself to a new loan to get a fixed interest rate

A variable rate mortgage might be good if:

You are buying a home that you no longer want to stay in or you are confident that you can make it Refinancing to a new loan with a low interest rate before your mortgage adjusts.

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