There are several types of mortgage loans available. These include fixed-rate mortgages, conventional loans, government-insured mortgages, and standard adjustable rate mortgages. The most popular types of mortgage loans are described below. Each one offers unique advantages and disadvantages, so it is important to understand them before you make a loan application.
Fixed-Rate Mortgages
Fixed-rate mortgages are a type of mortgage loan. They are usually offered by banks and other financial institutions. The interest rate on fixed-rate mortgages stays the same for the life of the loan. These mortgage loans are a good option for people who want a long-term investment and peace of mind.
However, fixed-rate mortgages do come with a number of disadvantages. First, they are more complex than ARMs, adding to the amount of risk the borrower is taking. Second, fixed-rate mortgages have predictable payments, which makes them more manageable and easier to budget. These advantages make them an attractive choice for borrowers who plan to stay in the home for several years.
The main benefit of fixed-rate mortgages is that the principal and interest portion of the monthly payment remain consistent. This makes them more appealing to those who want to make a long-term investment. Also, fixed-rate mortgages are more easily understandable and easier to shop around for. Another advantage of fixed-rate mortgages is that they prevent borrowers from being caught off guard when rates increase.
Conventional Loans
Conventional mortgage loans are flexible loans that can serve the needs of borrowers in a wide variety of situations. They can range in length from fifteen to thirty years, and their interest rates can be customized to fit your needs. While shorter loan terms may incur higher monthly payments, they can save you thousands of dollars over the course of the loan. In addition, fifteen-year mortgages typically have lower interest rates than 30-year mortgages.
Conventional loans typically require a 20% down payment, but some lenders are now offering loans with lower down payments. When you put down at least 20%, you can avoid private mortgage insurance, or PMI. Once you have at least 22% equity in your home, you can also cancel your mortgage insurance.
Standard Adjustable Rate Mortgages
Standard adjustable rate mortgages are mortgages that are adjustable for the duration of the loan. They are based on an index rate and a margin. The index rate may go up or down, and the margin will remain the same. For example, if the index is 1.25 percent and the margin is three percentage points, the loan will have a 4.25 percent interest rate. If the index increases to 1.5 percent, the loan’s interest rate will go up to 4.5 percent.
These mortgages come with a variety of terms, from 15 years to 30 years. The longer the term, the lower your monthly payments will be, but you will pay more interest over time. However, you may find this flexible repayment schedule to be very convenient in certain circumstances.
Government-Insured Mortgages
The government provides mortgage insurance to low-income borrowers through various programs. The Department of Veterans Affairs, the Federal Housing Administration, and USDA’s Rural Housing Service make this kind of financing available to those who otherwise wouldn’t be able to afford the loans. These mortgages are virtually all securitized by Ginnie Mae, which guarantees the timely payment of principal and interest. Since the housing crisis, government-insured mortgages have increased their market share, ranging from three percent to 35 percent. Since 2010, however, the share has remained constant at roughly 20 percent.
The FHA is the largest source of government-insured mortgages. These mortgages are guaranteed by the government and backed by the mortgage company itself. This type of mortgage was created to help disadvantaged borrowers access mortgage credit, and they typically have lower down payment requirements than conventional mortgages. However, these loans may not be the best option for every borrower.
Balloon Loans
Balloon mortgage loans are flexible and useful financing options for certain situations. They make sense for people who plan to move or flip houses, or for those who expect to make a large financial gain. They also benefit people who might not otherwise be able to qualify for a traditional mortgage, as the interest rate is typically very low and the structure is very flexible.
Typically, borrowers should refinance their balloon mortgage loans as early as possible. This will ensure that they have time to work through underwriting and arrange for appraisals.