What are the different types of mortgage
Aug 18, 2022

Before you start looking for the right home to buy, you’ll need to find the right type of mortgage for your financial situation. At the Soheil States we want you to be well informed about your home loan options to acquire the property you liked so much and meet your needs and those of your family.

Learn about the types of mortgage you can access according to your situation:

Conventional loan
Conventional loans are not backed by the federal government and come in two packages: conforming and non-conforming. A conforming loan “conforms” to a set of standards established by the Federal Housing Finance Agency (FHFA). The criteria include a variety of factors about your credit and debt, but one of the main pieces is the size of the loan. For 2022, the conforming loan limits are $647,200 in most areas and $970,800 in more expensive areas.

While non-conforming loans do not meet the FHFA standards, they may be for larger homes or offered to borrowers with poorer credit. Some non-conforming loans are designed for those who have experienced significant financial catastrophes, such as bankruptcy.

If you have a strong credit score and can afford a hefty down payment, a conventional mortgage is probably your best option. The 30-year fixed-rate conventional mortgage is the most popular option for homebuyers.

Giant loan
These are loans that are outside the limits of the FHFA. Jumbo loans are more common in higher-cost areas like Los Angeles, San Francisco, New York City, and Hawaii. More money means more risk for the lender, so these generally require more requirements to qualify.

Among its advantages are that you can borrow more money to buy a more expensive house with these loans and the interest rates tend to be competitive with other conventional loans. However, some of its advantages require a down payment of between 10 percent and 20 percent, and you must prove that you have significant assets in cash or savings accounts.

Government insured loan
Although the US government is not a mortgage lender through three agencies that have its support, it promotes the purchase of homes; the Federal Housing Administration (FHA loans), the US Department of Agriculture (USDA loans), and the US Department of Veterans Affairs (VA loans).

Federal Housing Administration (FHA) Loans: These types of mortgage loans help homeowners who don’t have a large down payment saved or who don’t have impeccable credit. These types of mortgages require two mortgage insurance premiums: one paid upfront and the other paid annually over the life of the loan if you put down less than 10 percent, which can increase the total cost of your mortgage.

Loans from the Department of Agriculture (USDA): They are aimed at low- and moderate-income borrowers to purchase homes in rural areas. To qualify, you must buy a home in a USDA eligible area and meet certain income limits. Some USDA loans do not require a down payment for eligible low-income borrowers. However, there are additional fees and an annual fee.

Department of Veterans Affairs (VA) Loans: Provide flexible, low-interest mortgages for members of the US military (service and veterans) and their families. They have no down payment or mortgage insurance, and closing costs are usually capped and paid by the seller. A financing fee is charged as a percentage of the loan amount to help offset the program’s cost for taxpayers.

Fixed-rate mortgage
They keep the same interest rate for the life of your loan, which means your monthly mortgage payment always stays the same. Fixed loans generally come in terms of 15 or 30 years.

Among its advantages are fixed payments, however in the long term, generally, you need to pay more interest for the duration.

If you plan to stay in your home for at least five to seven years and want to avoid potential changes in your monthly payments, a fixed-rate mortgage is right for you.

Adjustable Rate Mortgage (ARM)
Unlike stable fixed-rate loans, these types of mortgages have fluctuating interest rates that can go up or down based on market conditions. Some of these loans have an initial fixed interest rate and can change to a variable interest rate for the rest of the term.

Its advantages are that you get a lower fixed rate in the first few years and can save a substantial amount of money on interest payments. However, monthly mortgage payments could become unaffordable, resulting in loan default.

Home value can drop over a few years, making it difficult to refinance or sell before the loan is reinstated.

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