Understanding the Various Types of Mortgages: Which One Is Right For You?

If you are planning to buy a home, chances are you will be shopping for a mortgage loan as well. Naturally, you want an affordable option that can enable you to own the property without over-stretching your finances.

That is absolutely possible to achieve, as long as you choose a mortgage that is suitable for you. The current real estate market offers so many options to pick one from.

Your ultimate selection should be based on so many factors, including how much savings you have, the amount of time you plan to stay in the home, whether it is your first home or not, and the interest rates offered on the loan among many other considerations.

That is to say, the more knowledge you have about each option, the better your choice will be. Here we have covered the common types of mortgage loans to help you determine if any of them fits your needs.

Feel free to contact Mortgage Right for more information and personal guidance on the various types of mortgages.

Conventional Mortgages

What is a conventional mortgage?

The most straightforward definition of a conventional mortgage is that it is a home loan that is not insured by the US Federal Government. Also, for a loan to be called conventional, it must conform to the limits set by Fannie Mae and Freddie Mac – the two government sponsored enterprises (GSEs) that provide regulations for mortgage loans that are not backed by the government.

Who is it right for?

It makes sense to choose a conventional mortgage if you have some substantial savings to put as down payment. The exact amount to put down varies, but at least 10% of the home’s purchase price will go a long way.

Why is that the case? Simple actually. If you have some down payment, the lender will consider you a low-risk borrower and they will be more willing to lend to you. So the more down payment you have, the better.

In fact, if you have a lot of down payment (up to 20%) you stand to enjoy exceptionally low rates and relaxed terms of lending. Those favorable rates and terms explain why as many as 60% of home buyers prefer using conventional mortgages over all the other types.

FHA Mortgages

What is an FHA mortgage?

It is a mortgage loan insured by the US Government through the Federal Housing Administration (FHA). The government doesn’t actually offer the loan, it only guarantees it. That, in turn, allows mortgage lenders to extend the loan to high-risk borrowers who would otherwise not qualify for conventional mortgage products. That would be a person with a less-than-perfect credit score, low down payment, and low to middle income.

Who is it right for?

The low down payment requirements of the FHA loan makes it perfect for anyone who hasn’t been able to build up their savings. You can qualify even with just 3.5% down. If you are pondering about purchasing a home but the typical 10 or 20% down of conventional loans is limiting you, then you may want to turn to the FHA loan. It is a great choice for first-time homebuyers who haven’t had enough time to save up for a home purchase.

USDA Mortgages

What is a USDA mortgage?

Don’t fancy life as a city dweller? A USDA mortgage loan could help you purchase a home in rural or suburban parts of the US. This mortgage is meant for properties that are located in the countryside and is guaranteed by the government through the USDA.

Who is it right for?

If you are a struggling family that lives in a rural or suburban area, you may want to consider this mortgage option over all the others. Its terms are extremely favorable to low and middle-income earners, as long as the property in question is not in an urban setting. For instance, it is possible to get 100% financing, which means you can purchase a home with absolutely no down payment.

Additionally, the loan comes with discounted interest rates, which makes it one of the most affordable mortgage options. So, in short, it puts home ownership within reach for people who may be locked out of other mortgages dues to their strict qualification criteria.

VA Mortgages

What is a VA mortgage?

Like the FHA and USDA mortgages, the VA loan is insured by the government (through the Veterans Affairs) and issued by approved private lenders. It is an excellent choice because it has no down payment or mortgage insurance requirements. That, along with the persistently low-interest rates of a VA mortgage, makes it perhaps the most affordable option. There’s a catch though; you must have served in the US Military.

Who is it right for?

First of all, to be eligible for a VA home loan you should either be:

  1. A veteran,
  2. An active duty service member for at least 90 days during wartime or 180 days during peacetime, or
  3. A National Guard or a Reservist who has served for at least 6 years.

You may also qualify if your spouse died in the line of duty, or due to service-related disabilities. If you meet the criteria, there’s no doubt the zero down payment, zero insurance, and low-interest rates make the VA mortgage a great option for you.

Fixed-rate Mortgages

What is a fixed-rate mortgage?

A fixed-rate mortgage (abbreviated as FRM) is a home loan whose interest rate doesn’t change throughout the duration of the loan. Meaning it remains constant from the moment you take the loan until you finish repaying it. The implication of the continuous rate is that your monthly payments also remain constant.

Who is it right for?

The primary advantage of an FRM is that your monthly payments will not change. Changes in mortgage rates will not affect your rates or fees in any way. That makes this type of mortgage very predictable.

So if you are the type of borrower who craves predictability, you will love the FRM. It is also ideal only if you are planning to stay in the home for a reasonably long time – at least 10 years. Today, FRMs come in 5-year, 10-year, 15-year, 20-year, 30-year, 40-year and 50-year options.

Adjustable-rate mortgages

What is a adjustable-rate mortgage?

If a FRM isn’t for you, another option is an adjustable-rate mortgage (ARM). In this case, the interest rates charged on your home loan will vary depending on the market rates. What usually happens is that the lender will give you low-interest rates (lower than FRM rates) but after a period of time, say 5 or 10 years, the rate will adjust upwards.

More often than not it will keep changing year after year depending on the market rates. If interest rates increase, the rate charged on your loan will also increase. The opposite is also true – if market rates drop your rates will fall too. Every change in your interest rate will also cause a difference in your monthly payments.

Who is it right for?

It makes sense to take an ARM if your credit score is low. It is usually tough to get a good rate on an FRM if your credit score is less-than-impressive. So, if your FICO score limits you from an FRM, you could still own a home by applying for an ARM.

Conventional Mortgage

Numbers don’t lie. If you’re looking shopping around for a mortgage, keep in mind that over 60% of US homebuyers opt for conventional loans to purchase their homes. Making these, by far, the most popular mortgage option for first time home buyers to previous home owners.

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FHA Mortgage

Are you planning on purchasing a home soon? You may qualify for a number of different loans. Before attempting to get a regular mortgage, you might be better off applying for FHA home loans.

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VA Mortgage

The federal government created this military mortgage guaranty program with the aim of helping service members acquire homes more easily. It is managed by the Veterans Affairs

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USDA Mortgage

Known as the USDA Rural Development Guaranteed Housing Loan Program, this home loan is designed for rural property owners.

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