Different types of mortgages
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In today’s hot real estate market, it may seem like getting your offer accepted is the hardest part of buying a home.
But in some cases, this is actually the easier part. Once you’re under contract, there’s a litany of other decisions you need to make. Choosing the right type of mortgage is one of the most important – it’s a decision that will have financial consequences for the next 15 or 30 years.
What is the difference between conforming loans and jumbo loans? Fixed or adjustable rate? There are so many options to choose from, and in order to make the best financial decision for you and your family, you need to understand the differences between each. Use this guide to learn more about each type of mortgage and how they might be right for you.
What Type of Mortgage is Right for You?
First of all, there are many factors that go into choosing the right kind of mortgage – and surprisingly, some of them have nothing to do with money.
“In order to determine the type of mortgage loan that is right for you, first focus on the non-financial aspects of the purchase,” said Gregory Giardino, financial advisor at JM Franklin & Company LLC, a financial planning firm. retirement.
Here are some questions you should ask yourself:
- How long do you plan to live there? It is important to know how long you plan to stay in a certain city to determine the type of loan to obtain and the amount. “Having an estimate of how long you plan to stay in your home is critical in determining how to maximize loan terms to your advantage,” Giardino said.
- What are your prospects for job / career security? Is your industry growing or at least stable? “The last thing you want to do is pick the wrong type of mortgage because you’ve assumed your industry is immune to change,” Giardino said.
- What is your future earning potential? Do you expect your salary to increase, stay the same, or even decrease? “The growth of your profession and the earning potential of your paycheck will influence the right type of loan for your family in the long run,” said Giardino.
Once you’ve answered these questions honestly and openly, you can now consider the loan terms and interest rates that are best for you.
Different types of loans
Conventional mortgage and jumbo loans
A conventional loan is the most common type of mortgage and refers to any mortgage loan that is unsecured by a government agency. There is a reason why most buyers end up with conventional loans: Conventional loans have strict lending requirements from banks, so they are less limited when it comes to income and type of property, and they tend to incur lower fees.
“Lenders know them and they’re pretty competitive,” said Matt Bacon, investment advisor at Carmichael Hill, a financial advisory firm. “It’s like bread and butter for everything.”
Conventional loans will work for most purchases. Usually, if you put less than 20% down, you’ll have to pay for private mortgage insurance, which can cost a few hundred dollars a month.
Be aware of the two types of conventional loans: compliant or jumbo. There is an upper limit on the purchase price before a mortgage becomes a “jumbo loan,” which has higher interest rates and more stringent requirements. You can use this map to see what the compliant loan limits are in your area.
Fixed rate loan vs adjustable rate loan
Mortgages are available with two different types of interest rates: fixed and adjustable.
- On a fixed rate loan, the interest rate remains the same throughout the life of the loan. This means that you lock in the current market interest rate for the next 15 to 30 years.
- On a variable rate loan, the interest rate varies with the financial market as a whole. It is likely to go up and down over the course of the loan, which could cause your mortgage payments to fluctuate widely.
Current rates are historically low. An adjustable rate mortgage can get you a lower interest rate upfront, but you need to be prepared for it to increase over time.
“If you look at this adjustable rate mortgage, and you go into what’s probably the lowest now, the chances are your rates are higher,” Bacon said.
But if you plan to stay in this house for many years to come, you will probably want to lock in a low fixed rate now.
Government insured loan
There are a number of government insured loans that can make home buying more affordable. You may have heard of VA, USDA, or FHA loans, which make it easier for some borrowers to qualify and afford a mortgage.
Depending on your financial situation, a conventional loan isn’t necessarily better than a government-guaranteed loan, Bacon said. Both could work for your income level and your housing goals. Some unconventional loans have specific benefits, such as favorable VA loan terms for veterans or USDA incentives to buy in rural areas.
Government guaranteed loans are issued by many of the same lenders that issue conventional loans. Some financial advisers warn that government-issued loans may be less attractive to sellers in today’s housing market, where cash offers and conventional loans are seen as the most desirable, Bacon said.
Other types of mortgages
There are a few other types of mortgages that are less popular, but still available to buyers:
- Interest-only mortgages: This type of loan allows you to pay only the interest for a period of time, after which you have to refinance the loan or start paying higher monthly payments.
- Mixed mortgage: Also known as a “piggyback” loan, this allows borrowers to combine two loans and qualify for a larger loan amount.
- Reverse Mortgages: Available to homeowners aged 62 and over, this type of loan allows you to borrow against the value of your home without having to make monthly payments.
The right kind of mortgage is a decision that will stay with you (and your wallet) for a very long time. Start by understanding your needs (what you can afford and how long you plan to stay in the house), then choose the loan that’s best for you. Be sure to shop around with different lenders for the lowest possible mortgage rates. Experts recommend that you ask for and compare at least three different quotes before choosing a lender.