Mortgage loans have made home buying a breeze but choosing a mortgage loan by comparing the different options sometimes appear overwhelming for home buyers. Preparing to buy a home begins by analyzing the features of various mortgage loans that help to understand which kind of repayment schedule and terms and conditions match with the home buyer’s budget. To visualize the different elements of mortgage loans and how it matches with an individual’s financing plans one must use a good mortgage calculator available online. Once you have understood the financing options by matching it with your budget and the down payment amount it becomes easy to select the mortgage loan that works best for you. Your options are limited to the following types of mortgage loans.
Conventional mortgage loans
Mortgage loans that do not have the insurance cover provided by the Federal government are the traditional mortgage loans and are available as conforming loans and non-conforming loans. The difference between the two types of loans is based on the maximum financial limits set by the government agencies Freddie Mac or Fannie May which back most US mortgages. Loans that fall within the set maximum limit are conforming loans, and those that do not conform to the guidelines are non-conforming loans. Jumbo loans are examples of non-conforming loans. If your down payment for the loan is less than 20% of the purchase price of the property, then most lenders would ask you to pay for private mortgage insurance.
To qualify for conventional loans, you must have FICO credit score of minimum 620 and your debt to income ration must be between 45 and 50 percent. Traditional mortgage loans might have a slightly higher interest rate, but the overall costs are lower than other types of loans. Moreover, it could entail only 3% down payment for loans backed by the government agencies.
Fixed rate mortgage loans
Most people are comfortable in paying the same amount towards monthly loan repayment because it is easy to allocate funds within the monthly budget for a fixed term. Since the interest rate remains fixed throughout the loan tenure, it is natural that the monthly payment stays the same for 15, 20 or 30 years which are typically the standard time frame of loans. No matter how long the duration might be, the interest rate, as well as the principal amount, remains the same regardless of the market fluctuations.
All components of the loan comprising of the principal, interest and the loan term remain fixed. Availing fixed rate mortgage loans help to create a precise monthly budget with the assurance of making timely payments which is very important for any loan. However, the longer is the term; more interest you pay for the loan because interest rates are also higher than adjustable interest and it takes a longer time to build home equity.
Adjustable rate mortgage loans
In this type of mortgage loan, the interest rate has a direct link to the market conditions which makes it obvious that the rate fluctuates according to the movement in the market. ARM or adjustable rate mortgages are thus unstable as it changes or adjusts to the market condition from time to time. Typically, the interest rate of adjustable rate mortgages remain fixed for some time during the initial period and thereafter will change year to year which is why some financial experts name it as a hybrid product. Many ARM products have a capping on the maximum increase that can happen to the interest rate and this is an excellent choice so that you do not land up paying an unspecified amount towards interest that can make the loan too costly. It will also help to avoid financial hardships when the loan resets.
Adjustable rate mortgages help to save a good amount of money on interest payments, and for the first few years, the interest is lower than the fixed interest rate. Sometimes, repayment might become unaffordable due to a rise in interest rate and refinancing or selling the home might become a problem if the home value falls in a few years.
Government insured mortgages
The US government plays a significant role in encouraging more and more people to avail mortgage loans for buying homes. The government has appointed some agencies like the Federal Housing Administration that backs FHA loans, the US Department of Veterans Affair backs VA loans and the US Department of agriculture backs USDA loans.
- FHA loans – This loan is beneficial for borrowers who do not have a satisfactory credit score and unable to afford large down payment because a FICO score of 580 is enough to qualify for obtaining 3.5% financing from FHA. A lower credit score is acceptable but with 10% down payment.
- VA loans – Members of the US military veterans and active duty personnel as well as their families are eligible for this type of loan that provides a flexible and low-interest mortgage. No down payment or PMI are necessary for this loan that has a capping on the closing costs too which the seller might bear in some cases.
- USDA loans – Moderate to low income home buyers in rural areas benefit from this type of loan. The condition for availing this loan is that the property must lie within the USDA eligible area and the income of the borrower must be within the set limits. Some eligible borrowers of USDA loans might totally avoid making any down payment.
The loan that is open to first time buyers, as well as repeat buyers, helps those who do not qualify for obtaining conventional home mortgages. However, the overall borrowing cost is higher.
These loans are non-confirming conventional home mortgage loans, in which the price of the property exceeds the Federal loan limits. A lot of documentation that is scrutinized in-depth is a requirement to avail the loans that are prevalent among home buyers in high cost areas.
The interest rates are more competitive than conventional loans, and FICO score of 700 and above is the eligibility criteria along with down payment of 10 to 20 percent which means that this product suits affluent buyers.