What Are the Different Types of Mortgage Loans?
You’ve found your dream home but now your next step is financing it. You might be wondering what are the different types of mortgage loans? Looking at your monthly budget, down payment amount, and credit score will give you insight into which loan will work best for you.
Keep reading for details about some of the most common types of mortgages, how they work, and how you can make an informed decision.
Conventional fixed-rate mortgages are among the most common types of home loans. These mortgages allow you to secure a fixed rate for 15, 20, or 30 years. Typically, they have fewer closing costs, flexible monthly payment terms, and don’t require mortgage insurance with a down payment of 20% or more.
These loans are a good match if you have strong credit, stable employment history, minimal debt, and enough funds to put down at least 5% - 20%. They can be used to finance most properties including primary residences, vacation homes, or investment properties.
That said, these types of mortgage loans aren’t insured or guaranteed by the federal or state governments.
Adjustable-Rate (ARMs) vs. Fixed-Rate
Adjustable-rate mortgage loans have variable interest rates. These loans come with a lower, introductory rate at the beginning of the life of the loan. Once that expires, the rates adjust according to the current market rates.
You should be comfortable with a certain level of risk when choosing this type of loan. If you don’t plan to stay in your home beyond a few years, an ARM can save you a good amount of money on interest payments.
Fixed-rate mortgages keep the same interest rate over the life of your loan. This means your monthly mortgage payment always stays the same. Consider this a major benefit if you’re sticking to a strict budget and planning to stay in your home longer than 10 years.
Home Equity Loan vs. Home Equity Line of Credit (HELOC)
Both home equity loans and home equity lines of credit (HELOCs) are loans that allow you to borrow against your home equity, but there are some key differences.
First though, what is home equity? Home equity is the difference between what you still owe on your mortgage and the current market value of your home. Your equity will determine how much money you’ll be able to borrow.
Now let’s talk about the differences between the two types of loans. With a home equity loan, you receive all the money upfront in a lump sum. This loan comes with a fixed monthly payment and a fixed interest rate for the term of the loan, making your payback plan very consistent.
A HELOC, however, is a revolving line of credit with variable interest rates. This type of loan allows you to access the money as you need it, up to a predetermined credit limit. Unlike home equity loans, the monthly minimum payment can vary, similar to the way credit card payments do.
If you know how much you want to borrow, need the money upfront, and want to know exactly how much you’ll owe every month, a home equity loan would probably be a good choice. But, if you prefer to have a line of credit readily available, for whatever amount you need, whenever you might need it—a HELOC could be the better alternative.
Either way, remember that your home is the collateral for the loan. Meaning, if you default on payments for either type of loan, the lender has the right to take your home as payback for the loan. So, be sure you choose the right type of loan for your circumstance and be certain you’ll be able to make the monthly payments before signing on the dotted line.
The federal government isn’t a mortgage lender, but it can play a role in helping more Americans become homeowners. Government-backed loans are protected by mortgage insurance, which generally makes it easier for the applicant to qualify.
At Members Heritage Credit Union, we offer two government-backed mortgages: Federal Housing Administration loans (FHA loans) and U.S. Department of Veterans Affairs loans (VA loans).
FHA loans are backed by the Federal Housing Administration. They’re a great option if you prefer a smaller down payment and have a lower credit score. FHA loans can be ideal for someone purchasing their first home.
Advantages of FHA loans include lower down payments, flexible eligibility requirements, and lower monthly payments. However, the home must be your primary residence and in most cases, cannot be a condominium.
VA loans provide flexible, low-interest mortgages for members of the U.S. military (active duty or veteran) and their families. They don’t require a downpayment and closing costs may be paid by the seller. A funding fee is charged on VA loans as a percentage of the loan amount to help offset the program’s cost to taxpayers.
This fee, as well as other closing costs, can be rolled into most VA loans or paid upfront at closing. For those who are qualified, VA loans tend to offer the best terms and most flexibility compared to other loan types.
Find Your Best Fit With Us
Our team at Members Heritage Credit Union can help you choose the mortgage loan type that’s right for you!
Learn more about Mortgage Loans.
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