8 Types of Mortgage Loans for Buyers and Refinancers

8 Types of Mortgage Loans for Buyers and Refinancers

There are many different types of mortgage loans available, each of which is designed to meet the needs of a diverse range of borrowers.

You will learn about the advantages of each type of mortgage listed below, as well as which types of borrowers are the best candidates for each. The final section of this page contains a glossary of terms that describe the various types of mortgage loans.

1. 30-year fixed-rate mortgage

A 30-year fixed-rate mortgage is a type of home loan in which the interest rate is fixed for the entire 30-year term of the loan.

• The most popular type of home loan
• Your interest rate will not fluctuate.
• Monthly payments are lower than those for shorter-term loans.

Best suited for: Homebuyers who want to benefit from the lower monthly payment that comes with deferring repayment for a long period. Because of the fixed-rate, the payment is predictable. A 30-year fixed-rate loan provides the flexibility to pay off the loan sooner by increasing monthly payments.

2. 15-year fixed-rate mortgage

The interest rate on a 15-year fixed-rate mortgage remains the same throughout the loan’s 15-year term.

See the advantages and disadvantages of the 15-year fixed-rate mortgage, which is frequently used for refinancing.

• The interest rate is fixed for the entire duration of the loan.
• Interest rates are lower than those charged on longer-term loans.
• The monthly payment is higher than with 30-year loans, but the total interest paid is less.

Best suited for: Refinancers and first-time home buyers who want to build equity and pay off their loans as quickly as possible. Because the interest rate does not fluctuate, payments are predictably made. Because the borrower pays interest for a shorter period, the total amount of interest paid is less.

3. Adjustable-rate mortgage

An adjustable-rate mortgage (ARM) is a type of home loan in which the interest rate is initially fixed for a specified period, after which it is adjusted periodically. Using the example of a 5/1 ARM, the initial interest rate is fixed for the first five years, after which it adjusts once per year. Examine the advantages and disadvantages of adjustable-rate mortgages.

• The initial “teaser rate” on this loan is lower than the rate on most other loans, resulting in initially lower monthly payments.
• Initial rates are frequently locked in for one, five, seven, or ten years at a time.

Best suited for: Homebuyers who do not intend to keep the mortgage for a long period or who believe interest rates will be lower in the future should consider refinancing.

4. FHA mortgage

An FHA mortgage is a home loan insured by the Federal Housing Administration. FHA loans are backed by the government and designed to help borrowers of more modest means buy a home.

• Allows for down payments as low as 3.5 percent of the purchase price.
• Credit scores as low as 500 can be used to qualify for this program.
• It is necessary to make payments toward mortgage insurance premiums.

Best suited for: Lower credit score borrowers who make a down payment of less than 20% of the loan amount.

5. VA mortgage

VA loans are mortgages that are backed by the Department of Veterans Affairs and are available to active-duty military personnel and veterans who have served their country. See how VA loans work and who is eligible for them.

• There is no requirement for a down payment.
• A one-time VA funding fee is required. See the chart below for the VA funding fees for this year.
• There is no mortgage insurance required.

Best suited for: Borrowers who are military-qualified and who appreciate a low-interest rate and no down payment requirement.

6. USDA mortgage

USDA home loans are mortgages that are backed or issued by the United States Department of Agriculture.

• The majority of properties do not require a down payment.
• Loans and grants for home improvement projects are also available.
• There are income and property value caps in effect.

Best suited for: Income-qualified buyers in rural and some suburban areas who want a low or no down payment can take advantage of this program.

7. Jumbo mortgage

Jumbo home loans are mortgages above a certain dollar amount. Jumbo loan limits vary by county and are adjusted periodically. See this year’s loan limits.

• Can have fixed or adjustable rates.
• Often require a credit score of 700 or higher.
• Usually require a down payment of 10% or more.

Best suited for: Buyers of expensive homes and homeowners who want to refinance their jumbo mortgages.

8. Interest-only mortgage

An interest-only mortgage necessitates only the payment of the interest charged by the lender. During the interest-only payment period, the loan balance, also known as the principal, is not reduced.

• Borrowers who are disciplined enough to make periodic principal payments may find this option to be appropriate.
• This is especially useful for first-time homebuyers who do not intend to live in their new home for the foreseeable future.
• Borrowers will be required to provide lenders with evidence of substantial assets or a demonstrated ability to pay.

Best suited for: A high monthly cash flow, an increasing income, significant cash savings, or a variable monthly income are all desirable characteristics for loan applicants. Additionally, those who receive significant annual bonuses can put these funds toward paying down the principal balance.

Other aspects of mortgage financing

You should now be aware of the different types of mortgages you may encounter when purchasing a home. Listed below are four subcategories of mortgage types that you may come across along the way:

The term used by lenders to describe loans that are not guaranteed by the government is “conventional mortgages. “

‘Conforming mortgages’ is a term used in the industry to describe a mortgage that complies with local loan limits established by the government. Compare and contrast the differences in terms of conforming and non-conforming mortgages.

Lenders who guarantee loans made by the Department of Veterans Affairs (VA loans), the Federal Housing Administration (FHA), and the Department of Agriculture are examples of government-backed mortgages (USDA loans).

Reverse mortgages are a way for homeowners over the age of 62 to access the equity in their home in the form of a lump sum or a stream of income.