The Best Types Of Home Mortgage Loan
Choosing a home mortgage can be hard simply because there’s so many options. To help make the process easier we listed the seven most common types of home mortgage loans to choose from – some you may qualify for, and others you may not. (Ex: VA Loans are reserved for U.S. Veterans and applies to less than 5% of potential homeowners)
Without further adieu, here are the best types of home mortgage loans and programs.
1. Fixed Rate Mortgage
A fixed-rate mortgage (as the name implies) is a mortgage in which the interest rate on the loan remains fixed, or stays the same, for the entire duration of the loan.
In a fixed rate mortgage, the customer will pay the same amount each month until the loan is paid-off. With each monthly payment, the customer is paying off more and more of the principal loan amount and a lesser portion of each payment is going towards interest payments, reducing the principal amount of the loan over time. Because the rate is fixed, the customer’s monthly payment amount is not at risk of increasing because the interest rate of the customer’s loan is not tied to the market.
Fixed-rate mortgages are offered with different terms, or length of time to pay off the note. Generally speaking, the shorter the term, the lower the interest rate will be and the faster the customer will pay off the customer’s home.
- Lock in low payments: With a fixed-rate loan, you never need to worry about your payment changing, which can help you manage cash flow more easily. And you can take advantage of rates that are still near record lows!
- Good for long-term homeownership: If you plan to be in your home for many years, we have great fixed-rate mortgages available.
- Better terms: You can refinance up to 95% of the value of your home, or buy a home with little down. There are no prepayment penalties.
Who Is A Fixed Mortgage For?
A fixed rate program is the best type of home mortgage loan for customers who plan on staying in their homes for many years. A fixed-rate mortgage is also well-suited for customers who want ease of budgeting and who do not want to worry about watching interest rate changes in the market. Fixed-rate mortgages, by virtue of their fixed monthly payments, are easier to predict the monthly cost to the customer’s personal budget.
Customers who don’t expect to be in their home for many years or who are looking for the lowest current interest rates may be more interested in an Adjustable Rate Mortgages (ARMs).
Tools and Resources
2. Adjustable Rate Loans (ARM)
Sometimes referred to as a “variable-rate mortgages” or “floating-rate mortgages”, an adjustable rate mortgage (ARM) is a mortgage in which the interest rate changes periodically based on a specific benchmark, usually a financial index. In an ARM, when the market rate changes, generally, the customer’s monthly payment will change. If the market rate increases, so will the customer’s interest rate on his/her loan. If the market rate decreases, the customer’s interest rate will decrease as well.
ARM products usually have “rate caps” to limit the amount the customer’s interest rate goes up or down during the adjustment period.
Lenders will often structure their adjustable rate mortgages differently.
For example, if you purchase a 7/1 ARM, the “7” stands for a 7-year introductory period where the interest rate is fixed, and the “1” shows that the interest rate is subject to change once per year after the intro period ends.
- Lower interest costs: At origination, ARM rates are always lower than fixed-rate loans. This means that your initial payment will be lower, and you pay less interest. Even over the long haul, analysis shows that ARM’s are less expensive than fixed-rate loans because the lender does not have to hedge the loan (at a cost). That means you pay less interest, keeping more of your money for faster payoff or other needs.
- Consumer-friendly terms: Most ARM’s today are “hybrids” with fixed rate periods that last for 3, 5, 7, or 10 years. They also come with interest rate caps that prevent the rate from moving up too fast on you in the short term, and lifetime caps that protect you over the full term of the loan.
- Ideal for upwardly mobile, or buyers that move a lot: If you’re thinking you may move up to a larger home in the near future, or that you may move to another location in the near future, you may not need 30 years of fixed rates!
Who Should Get it?
An adjustable rate mortgage appeals to all types of customers, and is the second most popular type of residential mortgage loan in the U.S.
They can be a bit more risky since the interest rate will fluctuate, but overall it offers a lower interest rate and introductory rate than a fixed rate mortgage. Below are some examples where an ARM is the best type of home mortgage loan.
- Homeowners concerned with getting the lowest interest rate right now.
- Those who expect interest rates to drop in the future. When interest rates drop in the market, the customer’s ARM lowers too, and won’t they have to refinance or incur the cost of refinancing their original loan.
- Homeowners who don’t expect to be in their home for many years.
If you can easily afford the house with a 20% down payment, an adjustable rate with a shorter fixed period is the best type of home mortgage loan.
Tools and Resources
Read how to get the best mortgage rate.
3. Jumbo Loan for Larger Homes
The Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Office of Federal Housing Enterprise Oversight (OFHEO), offer loans that can be insured or purchased by government-sponsored establishments. Often loans that meet the conforming loan requirements are deemed “non-conforming” or “Jumbo” because the loan amount exceeds the conforming loan limit set by Fannie, Freddie, and OFHEO.
The current conforming loan limit for a single-family home in the U.S. is $510,400. In select, high-priced areas (such as NYC or San Francisco) the conforming loan limit may be up to 150% of the national limit. In 2020 this means it can be up to $765,000.
In federally designated high-priced markets, lenders such as Fannie, Freddie, and OFHEO allow for conforming high-balance loans with loan limits, $510,400 – $765,600. A conforming high-balance loan have higher interest rates, stricter underwriting, and larger down payment requirements.
Who Is A Jumbo Loan For?
Jumbo loans are available to primary residences and second or vacation homes.
For first time home buyers, the minimum down payment is 15%. If you can put 20% (or more) down for the house you are even more likely to qualify if you have a credit score above 680.
- Lock in low fixed rates: That means you never need to worry about your payment changing, which can help you manage cash flow more easily. And you can take advantage of rates that are still near record lows!
- Ideal for home upgrades: A jumbo loan may be just what you need to get into the luxury home of your dreams!.
- While the rate is going to be slightly higher than with a conventional conforming loan, the rate can be fixed for 15 or 30 years.
4. FHA Home Loan
The U.S. Federal Housing Administration (FHA) is a division of HUD.gov and provides loans and mortgage insurance to approved lenders. As part of the affordable housing program it’s a good option, but can be difficult to qualify for it.
An FHA home loan is intended for low or middle income borrowers. They require a much lower credit score and lower minimum down payments (as low as 3.5 percent) vs. regular home mortgage loans.
- Lower Down payment as low as 3.5%.
- Lower mortgage insurance: The monthly mortgage insurance on an FHA loan is less than what you might pay on a conventional loan.
- Better overall rates: There is no interest rate penalty for lower credit scores, as long as you qualify for the loan. And the rates are very competitive with conventional loans.
- Other great terms: Compared to a conventional loan, an FHA loan may allow you to qualify with higher debt ratios, little or no credit history (as long as there is no negative credit history on your report), and if you are buying a home, the seller can contribute more towards closing costs (6% vs 3% with a conventional loan).
- Must be used as your primary residence
- Homebuyer must show proof of steady income
- Minimum of 3.5% down payment on the home
- Credit score of 580 (or higher) = 3.5% down payment
- Credit score of 500-579 = 10.0% down payment
- Mortgage Insurance Premium will be required
- Debt-to-Income Ratio lower than 43%
5. HomePath Loan Advantages
A HomePath loan is offered specifically by Fannie Mae and can help you buy a foreclosed home. Using this type of home mortgage loan, the down payment can be as low as 3-percent, and offers financial assistance. You can also qualify to have the home closing costs reimbursed to you
Home closing costs are typically 3-6% of what you pay for the house.
- Smaller down payment: HomePath only requires a 3% down payment (compared to 3.5% for an FHA loan), allowing you to save cash for other needs, like furniture, repairs, or move-in costs.
- No “Private Mortgage Insurance” (PMI): If you take out an FHA loan or a conventional loan with less than 20% down, you will normally have to pay mortgage insurance. But with a HomePath loan, there is none, meaning your monthly payment (as a total monthly rate) will be less.
- No appraisal required: There is no need to prove the home’s value.
With a HomePath loan, home Improvement costs are included in the mortgage.
6. VA Loan (or Veterans Loan)
Veterans Loans are for U.S. service members and offer better terms vs. regular home mortgages.
The Federal Housing Administration (FHA) and the U.S. Department of Veterans Affairs (VA) offer government-insured mortgage loans. These loans have features that make them easier for first-time home buyers to obtain. These features include:
- VA loans offer the lowest down payment amount
- No maximum income/earning limitations
- Fixed- and adjustable-rate loans available for purchase loan
- Insurance from the federal government replaces private mortgage insurance (PMI)
- Maximum loan amounts vary by county