There was a time when there were three mortgage loan types available to home buyers. You could get a Fixed-Rate Conventional Mortgage, an FHA Loan or a VA Loan. But times, they are a changin’. Now there is a vast array of mortgage loan types to be had! Let’s learn about some of them, and the differences between them.
We will start with the most popular:
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FIXED-RATE MORTGAGES
These loans come in 5-year, 10-year, 15-year, 20-year, 30-year, 40-year, and even 50-year timeframes. The interest rate remains the same for the duration of the loan, meaning monthly payments are predictable. -
FHA LOANS
FHA Mortgage Loan types are insured by the government through mortgage insurance that is funded into the loan. This is an ideal loan type for first-time buyers because it has minimal down payment requirements and does not rely on a 700+ plus credit scores for approval.
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VA LOANS
VA loans are government loans available to veterans who have served in the Armed Forces for the United States. They are also available to spouses of deceased veterans in some cases. The requirements depend upon the years of service and whether or not the veteran was honorably discharged or not. The primary benefit of a VA Loan is that the borrower does not have to come up with a down payment. The loan is guaranteed by the Department of Veterans Affairs but funded by a conventional lender.
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USDA LOANS
USDA Loans are offered through the U.S. Department of Agriculture for eligible home buyers who want to buy a rural property. They often come with no down payment required and can sometimes be more affordable than an FHA loan.
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INTEREST-ONLY MORTGAGE TYPES
This name is a bit misleading, as these loans are not truly interest-only in terms of the borrower only paying interest on the loan. The reality of the interest-only mortgage is that it offers an option to make an interest-only payment. This option is only available for a set period of time. However, there are some junior mortgages that are interest-only and necessitate a balloon payment in the amount of the original loan balance at maturity.
Now, let’s take a look at HYBRID LOANS:
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ADJUSTABLE-RATE MORTGAGE TYPES
There are various types of adjustable-rate mortgages (ARMS). They can fluctuate monthly, semi-annually, annually, or remain fixed for a set amount of time before they adjust. -
OPTION ARM MORTGAGE TYPES
These types of loans are complicated. Like your standard ARM, the interest rate on them will fluctuate periodically, but in these loans, the borrowers can choose from various payment options and index rates. WARNING: The minimum payment option can be dangerous as it can result in negative amortization. -
COMBO/PIGGYBACK MORTGAGE LOAN TYPES
This is a type of financing that consists of TWO loans: a first mortgage and a second mortgage. They can be adjustable-rate, fixed-rate or a combination of both. This option is used by borrowers when the down payment is less than 20% to avoid paying private mortgage insurance. -
MORTGAGE BUYDOWNS
A mortgage buy down is a choice for borrowers who want to pay a lower interest rate in the beginning of their loan. Basically, fees are paid to lower the rate, thus the name buydown. Buyers, sellers, or lenders can buy down the interest rate for the borrower.
Finally, Specialty Mortgage Loan Types:
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Bridge loans are used when a seller’s home has not yet sold and the seller wants to borrow equity to buy another home. The seller’s existing home is used as collateral for the bridge loan. -
FHA has a program that provides money to a borrower to make home Improvements by rolling the funds into one loan. This is similar to the 203(K) Loan Program, but involves less paper work and is easier to get than a 203(K). -
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SHARED APPRECIATION MORTGAGES
These are rare in the United States, but shared appreciation mortgages allow home buyers to share part of their property’s value gains with an investor or lender. The guaranteed return to the lender means that the borrower will get a lower interest rate and lower monthly payment on the loan. -
REVERSE MORTGAGE
This type of mortgage is for people over the age of 62 who have enough equity in their homes. Instead of making monthly payments to the lender, the lender makes monthly payments to the borrower for the duration of their residence in the home. Reverse mortgages can be done with either fixed or adjustable interest rates. Please get advice from a trusted advisor before considering a reverse mortgage!
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