Different Types of Mortgage Loans
Just like house shopping, chances are, you are also mortgage loan shopping when first-time homebuying. There are numerous types of mortgage loans out there, so our goal is to break down the most popular different types of mortgages. This will hopefully help you decide which mortgage loan path is best suited for you and your home. Plus, you might be able to save money by choosing the most appropriate mortgage loan type detailed below!
Mortgage Loan Factors to Consider
According to Realtor.com, the main factors to consider while mortgage loan shopping is: where you choose to live, how long you plan on living there, certain down payment requirements, mortgage insurance, interest, etc.
Here are the most common types of mortgage loans first-time homebuyers typically look into/go with when purchasing a home!
Adjustable-Rate Mortgage (ARM)
Adjustable-rate mortgage (or, ARM) usually offers mortgage interest rates that are lower than a fixed-rate mortgage loan. Sounds great, right? The only catch is that ARM interest rates are less than fixed rates for a shorter period. Meaning, instead of a consistent interest rate throughout the life of a loan, an ARM rate will change after five or even 10 years. Then you are basically at the mercy of the mortgage interest rate market. If rates go up, so does your loan. If they go down, so does your loan.
While this option is great for first-time buyers with lower credit scores, a key thing to keep in mind is that fluctuation is inevitable with an Adjustable-Rate Mortgage loan.
If consistency is vital for you, a Fixed-rate loan is the way to go. This type of mortgage loan is the most common and sticks to a single interest rate for the span of the loan (usually 15 or 30 years). So, if you do not plan on selling your house for many years and want a loan where interest rates will not change, go with the Fixed-rate loan!
The great thing about a Fixed-rate loan – unlike other types of mortgage loans like an ARM – is that you will always know what your monthly mortgage payment will be. However, a fixed rate does require a down payment. Make sure you are ready to put a chunk of cash down!
Veterans Affairs (VA) Loan
Have you served or currently serve in the US military? If so, you are eligible for a VA loan! This type of loan does not require a down payment or mortgage insurance. It is a great option for our veterans. The biggest drawback though with a VA loan is that the home you are buying must meet specific requirements. No fixer-uppers are allowed if this home will be your main residence!
Federal Housing Administration (FHA) Loan
Speaking of government-backed loans, an FHA loan lets you put down as low as a 3.5% down payment compared to the standard 20%. An FHA loan is a Fixed-rate mortgage loan, so there will be no fluxes in interest over time.
If this is the route for you, keep in mind that an FHA loan does require you to pay mortgage insurance. You can pay this mortgage insurance either upfront or pay it over the life of the loan. How much does mortgage insurance cost with an FHA loan? It is typically 1% of the amount of your loan. Be prepared to pay that at closing or pay it over time as an additional cost on your mortgage.
Final Words on Different Types of Mortgages
Two other types we did not get into are USDA loans and Bridge loans. Feel free to do some research on those if you would like.
Now that you are aware of the different types of mortgages, hopefully, you know the exact route you want to go when choosing which mortgage loan to go with. Along with picking your mortgage loan type, here at Madison Settlement Services, we highly recommend that you add on title insurance to keep your big purchase and investment safe from the unknowable or unthinkable!