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When it comes to home financing, there are many different mortgage loan types that are designed to meet various borrower needs and preferences. From fixed-rate loans to adjustable-rate loans, there are a number of options for every type of borrower.
So if you are in the market to purchase a new house, or are just exploring your options for refinancing your mortgage, we have listed the most common types of mortgage loans in the market.
Read on to discover the various mortgage loan types so you can decide which one fits your needs.
What Are the Different Types of Mortgage Loans? 8 Mortgage Loans Explain
There are many different types of mortgage loans offered by banks, financial institutions, and credit unions. The 8 most popular ones include:
1. Conventional Loans
Any mortgage loan that is not backed by the federal government is called a conventional loan. Instead, it’s supported by private lenders such as banks, credit unions, or other financial institutions.
The credit score requirement for a conventional loan is higher than that of other loans. You will be required to have a credit score of at least 620 to be eligible for a conventional loan. Therefore, a conventional loan is ideal for people with a high and steady income.
What’s more, if you are paying less than a 20% down payment on your conventional loan, you will be asked to pay private mortgage insurance (PMI). However, you can also get your conventional loan refinanced to get lower interest rates.
2. High-Balance Loans
A high-balance loan is a type of conventional loan that goes beyond the usual loan limits set by financial entities. These limits are set annually and are determined after considering the average housing prices in different areas. So if you have your eyes set on a house that exceeds the conforming loan limits for that region, you can apply for a high-balance loan.
However, do note that high-balance loans have a higher interest rate as compared to conventional loans. What’s more, the eligibility criteria for a high-balance loan are also very strict. You will also be asked to make a bigger down payment and have a solid credit history to secure this type of loan.
If you are eyeing a house in an area where housing is costlier, you can turn to private lenders and mortgage companies to apply for a high-balance loan.
3. Fixed-Rate Mortgage
A fixed-rate mortgage is a type of mortgage loan that comes with a fixed interest rate for the entire loan term. With a fixed-rate mortgage, your monthly interest and principal payments will remain the same throughout the loan term.
So you don’t need to worry about your monthly payments changing whenever the interest rates go high in your state. But if the loan rates drop significantly at some point, you can refinance your fixed-rate mortgage to lock in a lower interest rate.
With a fixed-rate mortgage, you also have the option to select the loan terms that fit your needs and goals. What’s more, you can also pay your loan back early without having to face any penalties.
So if you are looking for stable interest payments throughout the loan term, you should opt for a fixed-rate mortgage. You will need to have a good to excellent credit score in order to qualify for this type of mortgage.
4. Adjustable-Rate Mortgage
As the name suggests, an adjustable-rate mortgage is a type of mortgage loan that comes with varying interest rates. The interest rate for this type of loan changes according to the market conditions.
When you apply for an adjustable-rate mortgage loan, your loan term will start with a fixed interest rate for a few years. During this time, your monthly payments will remain the same.
Once this fixed-rate period ends, the interest rate on your loan will change depending on the financial index it is tied to, such as the CMT index or LIBOR. However, these loans have interest rate caps (such as 5% points) to protect the borrowers from unusually high jumps in interest rates.
You can apply for an adjustable-rate mortgage and then refinance before the fixed-interest rate period is over to save up. You will need to have a good to excellent credit score to be eligible for an adjustable-rate mortgage.
5. Jumbo Mortgage
A jumbo mortgage is basically a type of mortgage loan tailored for pricier properties that surpass the limits set by Fannie Mae and Freddie Mac, the government-sponsored entities. It can range from several hundred thousand to millions of dollars, depending on the area’s housing market.
Since these loans deal with more significant amounts, lenders often have stricter requirements. This usually means a solid credit score, stable income, and a manageable debt-to-income ratio. You might also have to make larger down payments (10%-20%) and provide stricter documentation to prove your financial stability.
What’s more, the interest rates on jumbo mortgage loans are a tad higher than those for standard loans. This is mainly due to the increased risk involved with lending larger sums. However, lenders may offer various terms and options to cater to borrowers looking for high-value financing.
So if you are eyeing a house that exceeds the standard mortgage loan limits, you can apply for a jumbo mortgage loan. It is ideal for properties in upscale markets.
6. FHA Loans
FHA loans are mortgage loans that are backed by the Federal Housing Administration (FHA). These loans are offered to borrowers who have a poor credit score and limited funds to make a down payment.
If you can make a minimum down payment of 3.5% and have a credit score of 580, you can apply for an FHA loan. But if your credit score is lower than 580, you will have to make a down payment of 10%.
FHA loans are available for both first-time and repeat real estate buyers. What’s more, they are easier to qualify for as they have no income limits. And since they are insured by the government, they are easier to obtain.
FHA loans are assumable loans. So if you decide to sell your house at any point, the buyer will be able to take over your FHA loan if approved by the lender.
So these loans are ideal for people with an unstable income. You can qualify for an FHA loan even if you have limited savings or a poor credit score.
7. Construction Loan Mortgage
A construction loan mortgage, often simply referred to as a construction loan, is a specialized type of loan designed to finance the construction or renovation of a new home or property. This covers the materials, labor, permits, and other expenses related to the construction process.
Unlike traditional mortgages that provide funds upfront for the purchase of an existing home, a construction loan allocates funds in stages as the construction progresses. This ensures that the borrower has access to funds as needed throughout the construction process.
Construction loans are usually short-term loans with a duration of around 6 to 18 months, although this can vary depending on the lender and the specific terms of the loan. Once the construction is complete, the borrower typically refinances the construction loan into a traditional mortgage or pays off the loan in full.
During the construction phase, borrowers typically only make interest payments on the amount of the loan that has been disbursed. This is known as “interest-only payments” and helps keep the borrower’s monthly payments manageable during construction.
So if you are planning on building your dream house, you can apply for a construction loan mortgage.
8. Package Loan Mortgage
A package loan mortgage, also known as a combination loan or all-in-one mortgage, is a unique type of home financing that brings together different financial products under one umbrella.
With a package loan mortgage, you’re not just getting a regular mortgage for buying a home. You also have the option to bundle in other financial products like personal loans, home equity lines of credit (HELOCs), or even construction loans. It’s like creating your own custom borrowing package to fit your needs.
Instead of juggling multiple loans with different due dates and payment amounts, a package loan mortgage lets you roll everything into one convenient monthly payment. This can make managing your finances a whole lot easier and less stressful.
By combining all your loans into one package, you can also score a better interest rate overall. Plus, you’ll have the added bonus of potentially saving on interest costs in the long run compared to keeping separate loans with higher rates.
So if you are looking for a convenient and flexible way to manage your borrowing needs simultaneously, opt for a package loan mortgage. You can also personalize it according to your needs.
Conclusion
In conclusion, knowing the various types of mortgage loans is essential for anyone entering the housing market or aiming for homeownership. Each type has its own advantages and considerations, addressing different financial situations and preferences.
Whether it’s the stability of fixed-rate mortgages, the flexibility of adjustable-rate mortgages, or the accessibility of government-backed loans like FHAs, there’s a mortgage option for every homeowner’s needs.
By carefully considering the pros and cons of each type and seeking advice from financial experts, potential homeowners can make informed decisions aligned with their long-term financial goals.
If you only need a short-term loan to make some quick adjustments or fixes in your current house, you can always opt for a personal loan.
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