If you think that all mortgages are the same, you might want to think again. If you are preparing to buy a home for the very first time, it is a must that you are familiar with the different types of mortgage loans that are available right now.
Once you know about these specific types, it will be easier for you to choose the one that best suits you, your needs, and of course, your budget.
Fixed Rated or Conventional Mortgage
The fixed-rate or conventional mortgage loans are considered the safest bet you’ve got mainly due to their consistency. This means that your monthly payments will never change throughout the life of the loan. As the name suggests, this is the standard and good old type of mortgage.
These mortgage loans are available in 40, 30, 20, 15, and 10-year terms, with 30 and 15 being the most popular and common options.
Adjustable-Rate Mortgage or ARM
Adjustable-rate mortgage loans have several forms. The basic concept here is that the interest rate of this mortgage changes overtime during the course of the loan. The changes in rate are a reflection of the changes in the cost of borrowing money and the economy as a whole. A common form of an adjustable-rate mortgage is known as the 5/1 loan. Here, the interest rate remains the same for the initial 5 years and can change for the rest of the 25 years.
Interest-Only Mortgage
An interest-only mortgage gives you a choice to pay just the interest portion of the monthly payment and not the full payment itself during the initial 5 or 10 years of the loan. However, this is not really a requirement as it can slow down the time of your repayment. But, it can come in handy. After this, the remaining amount of the mortgage will be fully paid similar to that of a conventional mortgage.
VA Loans
VA loans have simplified the process of home purchases for the veterans of the United States armed forces as well as their spouses sometimes. There is no need for a down payment with these loans and these are backed up by a guarantee coming from the Department of Veteran Affairs.
FHA Loans
The Federal Housing Administration guarantees the FHA loans. These mortgages come with integrated mortgage insurance that serves as a protection against the possibility of failure to pay back the loan. These loans require smaller down payments than usual.
Balloon
A balloon mortgage is where you only pay the interest for a specific timeframe, such as 5 years, and the rest of the principal amount will be due after the initial period.
Jumbo
Jumbo pertains to the mortgage that is already too big for the Federal Government to guarantee or purchase. It means that borrowers will not be able to get the least interest rates offered on smaller loans.
Piggyback or Combo
Piggyback or combo takes place once you put a down payment below 20% and apply for two other types of loans in combination so you don’t have to pay Private Mortgage Insurance.
Knowing the different types of mortgage loans can go a long way when it comes to helping you decide on the right loan for you.