Buying a home is the biggest financial investment of their lives for most people. Since 99% of us cannot afford to buy a house outright, we will have to take out a mortgage loan from a bank or other financial lending institution. There are many mortgage options and an inexperienced home buyer can quickly feel overwhelmed when looking at hundreds of thousands of dollars and decades of commitments. This article should serve as a simplified guide to the different types of mortgage loans to educate the home buyer.
Some of the different types of mortgages include fixed-rate mortgages, adjustable-rate mortgages, government-insured loans, conventional mortgages.
Fixed rate mortgages have the exact same interest rate for the entire term of the loan. This means that your monthly payment to the bank is exactly the same every month, year after year. These types of loans are often packaged as loans with a term of 15 or 30 years. A 15-year package will of course have higher monthly payments than a 30-year package because it has to be paid off in less time.
Adjustable-rate mortgages, or ARMs, are loans whose interest rates are fluctuating according to the market. Some ARMs stayed fixed for a certain number of years and then switch to an adjustable rate, while some ARMs have an adjustable rate for the first few years and remain fixed after that. These are hybrid ARMs. An example of a hybrid is a 5/1 ARM loan with a fixed interest rate for the first five years, after which that interest rate adjusts to the market every year.
A conventional loan just means that it is not backed by the government. A government-insured loan is a loan that is secured by the government so that the lender does not default. There are a few different types of government-insured loans; VA Loans, FHA Loans, USDA/RHS Loans.
A VA loan is a loan offered by the United States Department of Veterans Affairs. A Va loan is offered to former or current servicemen and their families. A big advantage of this type of loan is that a borrower can receive 100% of the loan in advance, so no down payment.
An FHA loan is a loan issued by the Federal Housing Administration and administered by the Department of Housing and Urban Development (HUD). This type of loan allows you to pay a very low down payment, only 3.5% of the total loan, unfortunately it means you have to pay more in monthly payments.
A USDA/RHS loan is a loan from the United States Department of Agriculture, which is overseen by the Rural Housing Service (RHS). This loan is for low-income borrowers living in rural areas who are struggling to get financial help from traditional lenders.
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