If you are looking to buy a home, or even refinance, it is important to know what mortgage options are available to you. With so many lenders to choose from and so many programs offered, it can be confusing. In this article, we are going to go over the different types of mortgages and basic lending terms to help make you a more informed borrower.
This post is sponsored by CreditRepair.com. All opinions are mine alone and are honestly conveyed.
This type of mortgage is offered by a private lender, such as a credit union, bank or mortgage company; or through the government sponsored entities of Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). Conventional mortgage loans are not secured by a government entirety, such as the USDA (U.S. Department of Agriculture), FHA (Federal Housing Administration), or VA (U.S. Department of Veteran’s Affairs).
All conforming loans are conventional types of mortgages, but not all conventional mortgages are conforming loans.
Conforming mortgage loans are the most commonly known types of loans.
- must have a credit score of 620-640
- have a low DTI, or debt-to-income ratio
- 20 percent down payment
Don’t qualify for a conventional or conforming mortgage loan?
There are different reasons why you may not qualify for a conventional or conforming loan. You may not have enough of a down payment, your debt ratio may be too high, or your credit score may need a little work. If the latter is the case, you may want to take a look at the services at CreditRepair.com to see if they can help you take steps to clean up your credit, and possibly qualify for a lower rate or better loan program.
Not everyone fits into the strict guidelines of a conforming loan. So if you don’t quite qualify for a conforming mortgage loan, you may want to look at other non-conforming options. Non-conforming loans allow for higher debt-to-income ratios, lower credit scores, and less than 20 percent down payment (or equity in your home).
Fixed rate mortgage
A fixed rate mortgage offers a consistent rate throughout the entire term of the mortgage and will not change. So, if you are able to qualify for a good rate, you can lock that in with a fixed rate mortgage. Knowing that you have a fixed rate also allows you to budget more effectively, because you don’t have to worry about a fluctuating payment.
Adjustable rate mortgage
An adjustable rate mortgage, or ARM, has a rate that can and will fluctuate. An ARM can be used as the main mortgage on a house or as a line of credit. When used as a primary mortgage, an ARM may be fixed for a certain period of time and then adjust after that time has expired. When used as a second mortgage, it is common for an adjustable rate mortgage to come in the form of a line of credit, or LOC. Typically, this type of mortgage adjusts according to the prime interest rate. So, when the prime rate goes up, the ARM will adjust up; however, when the prime rate goes down, this type of mortgage rate goes down.
Any time you are looking to get an adjustable rate mortgage, make sure you understand the limitations of how much the rate can adjust and how often it can adjust. You don’t want to be surprised when the rate goes up, that can cause your payment to increase each month as well. Make sure you are looking ahead with your budgeting and are able to accommodate these changes in payment.
A VA loan is a mortgage option for people who meet the requirements of military service. These loans are guaranteed by the Department of Veterans Affairs, however, you are able to obtain this type of mortgage from an approved private lender, such as a mortgage company or bank. The VA guarantees a portion of the loan, enabling the lender to provide you with more favorable terms, although there is no specific rate guarantee.
VA loans can help you to purchase a home at a competitive rate often, without requiring a down payment or private mortgage insurance. These types of loans are also available for cash out refinance loans, which allow you to take cash out of your home equity to take care of concerns like paying off credit card debt, paying for college, or even making home improvements.
These types of loans are guaranteed by the Federal Housing Administration and help borrowers qualify for a home loan by helping borrowers that don’t fit the traditional conforming guidelines. FHA loans allow for:
- down payments as low as 3.5 percent of purchase price
- low closing costs
- less stringent credit qualifications, with credit scores down to 580
Line of credit
A line of credit, or LOC, is credit that is extended to you based on your amount of equity in your home. What’s nice about a line of credit is that it gives you access to cash on an as-needed basis. In a sense, an LOC functions as a credit card. You can access the equity in your home as cash or to pay other bills by writing a check or using a debit card attached to the home. Your payments on a line of credit can fluctuate monthly for a couple of reasons. First of all, an LOC’s rate is typically attached to the prime interest rate and will change when prime goes up or down. Second of all, your payment for your line of credit is only based on the amount of money that you have borrowed currently. For instance, you can have access to a $50,000 line of credit, but that doesn’t mean that you have to use all $50,000. Perhaps, you only need $10,000—so you will only have to use that amount and your payment will correspond to that balance. So, as you pay down the balance, you have access to the equity again.
As the name suggests, a balloon mortgage balloons, or expands, at the end of the term. For example, a balloon mortgage might have a low payment for a set period of time, then at the end of the term, the balance of the mortgage is due. What this means is that you either have to be able to pay off the entire amount of the mortgage at that time or refinance into a new mortgage loan.