Choosing the right mortgage is one of the most important decisions you'll make when buying a home. The type of mortgage you select can impact your monthly payments, the amount of interest you pay over the life of the loan, and your overall financial stability.
Though your lender should ultimately help guide you on which loan and terms are best for your situation, here's a comprehensive guide to the different types of mortgages available so you can make an informed decision:
1. Fixed-Rate Mortgages
A fixed-rate mortgage offers a stable interest rate for the entire term of the loan. This means your monthly principal and interest payments remain the same, providing predictability and ease of budgeting.
Typical Terms: 15, 20, or 30 years
Best For: Buyers who plan to stay in their home for at least five years and prefer the stability of fixed payments.
Note: Conventional, FHA, and VA, and USDA mortgages are always going to be fixed rate mortgages.
2. Adjustable-Rate Mortgages (ARMs)
An adjustable-rate mortgage has an interest rate that changes periodically based on market conditions. ARMs typically start with a lower initial interest rate compared to fixed-rate mortgages.
Typical Terms: 5/1, 7/1, or 10/1 ARMs (fixed rate for the first 5, 7, or 10 years, then adjusts annually)
Best For: Buyers who plan to sell or refinance before the adjustable period begins or those who expect their income to increase substantially.
3. Conventional Loans
A conventional loan is any mortgage loan that is not insured or guaranteed by the government. Conventional loans can be conforming or non-conforming.
Typical Terms: 15, 20, or 30 years
Best For: Home buyers who want to put anywhere from 3% - 20%+ down and who have a good credit score (usually 620 or higher).
4. FHA Loans
Federal Housing Administration (FHA) loans are government-backed mortgages designed to help first-time homebuyers and those with lower credit scores.
Typical Terms: 15 or 30 years
Best For: First-time buyers, buyers with lower credit scores, buyers with limited down payment funds, or buyers looking for a lower interest rate than a conventional loan.
5. VA Loans
Veterans Affairs (VA) loans are available to eligible veterans, active-duty service members, and certain members of the National Guard and Reserves. These loans offer competitive interest rates and often require no down payment.
Typical Terms: 15 or 30 years
Best For: Eligible veterans and service members seeking favorable loan terms.
6. USDA Loans
United States Department of Agriculture (USDA) loans are designed for rural homebuyers who meet certain income requirements. These loans offer low interest rates and zero down payment options.
Typical Terms: 30 years
Best For: Buyers in eligible rural areas with moderate to low income.
7. Jumbo Loans
Jumbo loans are used to finance high-value properties that exceed the conforming loan limits set by the Federal Housing Finance Agency (FHFA). These loans typically have stricter credit requirements and higher interest rates.
Typical Terms: 15 or 30 years
Best For: Buyers purchasing luxury homes or properties in high-cost areas.
8. Interest-Only Mortgages
With an interest-only mortgage, you pay only the interest for a set period (usually 5-10 years), after which the loan converts to a traditional mortgage with principal and interest payments.
Typical Terms: Varies
Best For: Buyers with irregular income streams or those who plan to sell or refinance before the interest-only period ends.
9. Balloon Mortgages
A balloon mortgage features low monthly payments for a set period, followed by a large lump-sum payment at the end of the term.
Typical Terms: Usually 5-7 years before the balloon payment is due
Best For: Buyers who plan to sell or refinance before the balloon payment is due.
Selecting the right type of mortgage depends on your financial situation, future plans, and personal preferences. By understanding the different types of mortgages available, you can choose the one that best fits your needs. Utilize Homa’s resources to compare mortgage options, understand their implications, and make informed decisions on your path to homeownership. With the right mortgage, you can achieve your dream of owning a home while maintaining financial stability.