What are the differences between the five types of mortgages?
A report released on Thursday revealed that U.S. job growth begins to slow after a period of rapid growth as the nation recovers from covid-19. This should allow mortgage rates to remain stable, or even drop slightly, over the next few weeks.
This could make it an attractive time to take out a mortgage and many potential homeowners are expected to do so as the summer months approach, when there is often a surge in home buying.
If you’re thinking of taking the plunge, we take a look at the five types of mortgages available in the United States…
These are federally unsecured loans, which means you’re at the mercy of the markets to find a package that’s right for you. They can be divided into conforming and non-conforming loans.
Compliant Loans are required to meet standards set by the Federal Housing Finance Agency (FHFA) for credit, debt, and loan size. Non-conforming loans do not necessarily meet FHFA standards and are generally reserved for large houses or offered to borrowers with poor credit ratings.
Another type that exceeds FHFA limits are jumbo loans, which are often found in high-cost real estate areas, such as New York, Los Angeles, and San Francisco. They can allow buyers to secure the cash needed to purchase a more expensive home, but usually require a larger down payment; sometimes up to 20%.
Government insured loans
Although the US government does not offer mortgages, she is involved in homeowner loans. The Federal Housing Administration (FHA loans), Department of Agriculture (USDA loans), and Department of Veterans Affairs (VA loans) all provide mortgage support.
They are often designed to provide financing to those who would not qualify for a conventional loan and are more flexible on credit requirements. However, they have lower limits than most other types of mortgages, which limits the options for the buyer.
Fixed rate mortgages
If you want stability in your home, a fixed rate mortgage may be the best option for you. Fixed rate mortgages keep the same interest rates for the life of your loanensuring that the monthly mortgage payment remains the same.
This allows borrowers to budget their other expenses more accurately, as they will know exactly how much they are going to spend on their mortgage payments. However, interest rates are usually slightly higher.
Adjustable Rate Mortgages (ARMs)
Unlike fixed rates, adjustable rate mortgages, which have fluctuating interest rates. Often they come with a fixed rate for the first few years, but will be subject to market forces after the fixed period has passed.
Generally, the terms of these mortgages are expressed in the form ‘ARM X-year/Y-month‘ – which means that the rate will remain the same for the first X years, before being adjusted for inflation every Y months after this initial period.