People often refer to a mortgage as a single entity. However, there are multiple types of mortgages that potential homebuyers can choose.
While some mortgage options might not be right for you, you could be able to afford a home with an alternative choice. While these are more than a dozen types of mortgages out there, we are going to review the eight most common that you can use to buy a house .
If you want consistency in your mortgage, this is your best bet. You will pay the same amount every month and every year. You can get a fixed-rate mortgage (sometimes called a conventional mortgage) in increments from ten to 40 years.
An interest-only mortgage allows you to pay only the interest for the first ten years of your mortgage. After this period, your normal fixed mortgage kicks in. One of the main pros of using this option is that it allows you to save up or put off your mortgage payments until a few years into the future. (For example, if you still have five more years on your student loans.) However, this type of mortgage does extend the amount of time you have to pay off your mortgage in full.
With an adjustable-rate mortgage (ARM), the interest rate changes over time. It will stay the same for the first five years but can be adjusted for the remaining time period. These adjustments account for changes in the economy, national interest rates and the overall housing market.
For example, if you buy a house and there’s an economic recession five years later, your ARM might lower your interest rate. On the flip side, an uptick in the economy can cause your interest rate to rise.
A balloon mortgage is a riskier type of loan. For the first ten years, the homeowner might only pay a small payment or just cover the interest on the house. However, at the end of the ten years, the full payment is due. If you aren’t able to cover the payment for the rest of the house, you risk going into debt or losing your home to the bank.
Homebuyers choose a combination mortgage if they can’t afford to put down the initial 20% on the home. In this case, the homebuyer will take out two loans instead of taking out Private Mortgage Insurance (PMI). PMI is often used in a conventional loan. It protects the lender (typically your financial institution) in the event that you can no longer make your payments. Some homebuyers will choose a combination mortgage instead so they can skip these PMI payments.
A Federal Housing Administration (FHA) loan is meant for a first-time homebuyer with bad credit. This loan comes with built-in mortgage insurance to protect the lender but also have lower required down payments. An FHA loan might be ideal if you are just starting to grow your career and want to invest in a house instead of continuing to rent.
A Veteran Affairs Loan often referred to as a VA loan, is meant to make it easier for members of the armed forces to buy a home. These loans are guaranteed by the Department of Veteran Affairs, and they don’t require a down payment. The goal of having a loan like this is to create a way for active military or veterans to set up a home during or after service. These homes also help spouses find a place to live while their significant others serve.
A reverse mortgage is meant for senior homeowners, not homebuyers. With this option, homeowners are given a lump sum based on the home’s value. Then, they have to pay back this amount in set monthly payments while they still live in the house. If the homeowner doesn’t make payments, the bank will have a lien on the house for the amount owed after the homeowner dies.
This mortgage is meant for people who have already paid off their homes and want to use their home value to continue living in that space.
If you feel overwhelmed by all of the types of mortgages, then you have two people to turn to. Your financial provider can make their recommendations for a mortgage, and your Realtor® can let you know what your best options might be.
If you are a first-time homebuyer, then you need a Realtor® who can guide you through the technical and financial aspects of this process.
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