What Are the Four Types of Mortgage Loans?

Although the home buying process is exciting, financing a home can, at times, be overwhelming. However, you can always apply for a mortgage loan if you are eligible. Metropolitan Mortgage offers borrowers with conventional mortgage loans. Click here for more information about conventional mortgage loan terms.

There are several types of mortgage loans, and knowing how to choose the ideal one for you can be a daunting task. Nevertheless, if you conduct thorough research, decide on a budget and down payment amount, and review your credit, you will be able to choose the ideal type of mortgage loan.

This article will look at the four different types of mortgage loans and their pros and cons.

The Four Types of Mortgage Loans

• Conventional Mortgages
• Adjustable-rate Mortgages
• Fixed-rate Mortgages
• Government-insured Mortgages

Also Read: Good Credit Score for Business Loan

1. Conventional Mortgages

This type of mortgage loan is one that the government does not insure. We have two types of conventional mortgage loans: non-conforming and conforming loans.

A non-conforming mortgage loan is a loan whose amount falls outside the maximum limits the Federal Housing Finance Agency (FHFA) sets. In contrast, a conforming loan falls within the maximum limits.

For most conventional loans, if your down payment is below 20% of the home’s purchase price, mortgage loan lenders require you to pay private mortgage insurance.

Pros

• Once you reach 20% equity, you can ask the lender to cancel PMI
• Although this type of loan has slightly higher interest rates, it has overall lower borrowing costs compared to other mortgage loans
• You can use it for an investment property, second home, or primary home
• If Freddie Mac or Fannie Mae backed your loan, you could put as little as 3% down

Cons

• Requires a minimum FICO score of 620
• Your debt-to-income ratio must be between 45%-50%

2. Adjustable-Rate Mortgages

This type of mortgage loan has fluctuating interest rates that can either go down or up depending on the market conditions. For a few years, most of these loans begin with a fixed interest rate which eventually changes for the remainder of the life of your loan to a variable interest.

To avoid winding up in financial trouble when your mortgage loan resets, look for one that caps how much your monthly mortgage rate or interest rate can increase.

Pros

• You save a significant amount on interest payments
• In the first few years, you enjoy a lower fixed rate

Cons

• If your home falls in value, you may find it difficult to sell or refinance your home before your loan resets.
• This loan can turn into a loan default as it can quickly become unaffordable.

3. Fixed-rate Mortgage

It is a type of mortgage loan with a constant interest rate throughout the life of the loan. These loans usually have a life of either 15, 20, or 30 years.

Pros

• Your interest payments and monthly principal remain constant throughout the loan’s life
• You can budget other expenses precisely month to month

Cons

• Building equity in your home takes longer
• With a longer-term loan, you will pay more interest.

4. Government-Insured Mortgage

It is a type of reverse mortgage loan that the government backs. The U.S. government has three agencies that support mortgages. They are:

U.S. Department of Veterans Affairs

It is an agency that backs VA loans. VA loans are low-interest and flexible loans meant for U.S. military members (both veterans and active duty) and their families. These loans require no PMI or down payment, have their closing costs capped, and the seller may pay them.

Borrowers are charged a funding fee as a percentage of the total loan amount to offset the program’s costs to taxpayers. Other closing costs and the funding fee can be paid upfront at closing or rolled into most VA loans.

U.S. Department of Agriculture

This agency backs USDA mortgage loans that help low-moderate low-income buyers purchase homes in rural areas. To qualify for the USDA loan, you must meet certain income limits and purchase a home in a USDA-eligible area. At times, low-income eligible borrowers can get these loans without a down payment.

Federal Housing Administration

This agency backs the FHA loans – mortgage loans ideal for individuals without pristine credit or a large down payment saved up. To pay a down payment of 3.5% and have maximum financing of 96.5% from FHA, individuals must have a minimum FICO score of 580. Nevertheless, if you put a down payment of at least 10%, they accept a score of 500.

The FHA loan requires two mortgage insurance premiums: one is paid yearly if you put a down payment of less than 10% for the life of your loan, and the other is paid upfront. The former significantly increases your mortgage’s overall cost.

Pros

• Open to first-time and repeat buyers
• It’s not a must you have a large down payment
• Relaxed credit requirements
• Suitable for individuals who do not qualify for conventional loans

Cons

• Overall borrowing costs can be higher
• The majority of government-insured loans have mandatory mortgage insurance premiums that you cannot cancel on some loans

As we have seen above, there are several types of mortgage loans. It is crucial to conduct your research before settling for a particular kind of loan to ensure you select one ideal for you.