Are you thinking of buying a house? Unless you have a whole lot of cash lying around, you probably need to get a mortgage and there are many types of mortgages.
The decision to transition from renter to owner has many benefits. Perhaps you are tired of paying rent without any capital appreciation? Maybe you’ve watched real estate prices rise and feel like you are missing out on a return on an investment opportunity? Maybe you believe in the idea of building a strong, stable community? Perhaps you’d like to take advantage of the low rates found in mortgages today? We’ve previously written on this journey.
Understanding the different types of mortgages can be tricky, but we broke it down for you, so you don’t get a headache.
Types of Mortgages
There are two broad categories of mortgages and many sub-categories. The two most significant categories are Conventional mortgages and Government-backed mortgages.
Conventional mortgages are just mortgages that the government does not back. (Not that there is anything unconventional about government-backed mortgages!) Government-backed loans often have a lower interest rate than conventional loans because the government guarantees part of the loan. Most Government-backed mortgages are intended for specific groups of people. If you are a veteran, are short on cash, or live in a rural area, it might be wise to get a Government-backed mortgage.
Are you a Veteran?
If so, then get yourself a VA loan backed by the Veterans Benefits Administration. There’s no down payment, no mortgage insurance required, and a low-interest rate.
Do you live in a rural area?
You can get yourself a USDA loan backed by the United States Department of Agriculture. USDA loans need either no down payment or a very low down payment, so they are perfect if you are short on cash. However, there is an income limit, meaning Jeff Bezos might not qualify for a USDA mortgage on his new country home.
Are you short on cash right now?
Get an FHA loan. The Federal Housing Administration backs them, and an FHA loan needs only a small down payment, as low as 3.5%. You can even get one with a low credit score, even as low as 500.
What’s the catch? FHA loans need expensive mortgage insurance and can be more costly than other options. However, they might be your best bet if you don’t have those alternatives.
It’s always a good idea to understand what you can afford. There are many mortgage calculators online. (click here for one of them).
Do you want to live in your home for a really long time?
Then get a conventional 30-year fixed-rate mortgage. By committing to the loan for 30 years, you won’t have to pay as much per month as you would on a shorter mortgage. But you might wind up paying more in interest over the long run.
Do you want to pay off your mortgage fast?
Consider getting a Conventional 15-year fixed-rate mortgage. You will have a lower interest rate than you would have on a 30-year mortgage, so you will end up paying less money overall. But you will have to pay more per month. This choice is often suitable for people looking to pay off their mortgage even faster.
Are you planning not to have the mortgage for very long?
Consider an adjustable-rate mortgage. These loans start with a fixed interest rate, but after an initial period (usually between 1 and 10 years), the interest rate changes every year depending on the housing market. This option works if you know you want to pay the whole loan off in a concise amount of time or strongly believe that the interest rate will go down after the first few years of paying. However, it could be a risky bet if you want to spend 30 years paying off your mortgage (in which case a 30-year mortgage might be safer).
Do you want to buy an expensive home?
Look for a jumbo mortgage.
There are limits to how much you can borrow for a Jumbo mortgage, and you will have to pay a significant (at least 10%) down payment. It would help if you also had a strong credit score, typically at least 700. But if you qualify, this may be your best option for buying that mansion you always wanted.
Do you have a lot of money or a high income?
You could get an interest-only mortgage. With this plan, you don’t pay any principal on the loan itself for several years, only the interest. Think of this type of mortgage as renting: the money you pay doesn’t go towards the house. If you follow this mortgage plan and don’t spend any money beyond the mortgage, then you will not build any equity on your home. So the best person to use this option is someone who has a high income and can pay off the loan separately, as they wish.
Do you want to build your own home?
Then get a construction loan. These are often very short-term (even one year), have a high-interest rate, and are used to build your home. When your home’s construction is complete, you can refinance your construction loan into a regular mortgage.
See, there ARE many types of mortgages.
There are many types of mortgages because many kinds of people want to buy a home. If you want more help with selecting a mortgage program, try talking to a financial specialist, like the Villa Nova Finance Group team.
Start the Conversation today!
If you are thinking about your transition from renter to owner, we’d love to speak with you. No risk, no high-pressure salespeople, just an opportunity to speak with experts that might help you secure the right mortgage. Go beyond a low rate but explore mortgage opportunities you can actually live with. Just tell us a little about you and your situation and we can schedule a meeting.