An easy guide to the many different mortgages available.
Let’s be honest. Most people think that buying a home requires a lot of cash. Many would-be home buyers do not have the required capital to buy a new home. So, after you’ve found the home that you’d like to buy your next challenge is choosing the best type of mortgage for you and your situation. Most home buyers expect to be paying their mortgage over a long period of time. Therefore, it becomes especially important to choose the correct type of mortgage for your needs and budget.
What you need to know:
Two parts make up every mortgage or home loan.
- The first is principal which is the loan amount.
- The second is the interest charged on that principal.
These are the different types of home loans:
- Conventional (these include Conforming and Non Conforming loan amounts)
- Federal Housing Administration insured (FHA)
- US Department of Veterans Affairs insured (VA)
- US Department of agriculture insured (USDA)
- Non Qualified Mortgages (Non QM)
To understand a home loan or mortgage first let’s look at the two main components, principal and interest. Principal means the amount of money lent to you (aka the loan amount). The interest is the money you pay regularly at a particular rate for the use of the money that was lent to you (aka the interest rate). Over your mortgage term you will pay monthly installments based on an amortization schedule which is set by your lender. One other factor in pricing a home loan or mortgage is the APR or annual percentage rate. The APR assesses the total cost of your loan and expresses it in the form of a percentage. Your APR will include the interest rate as well as other loan fees.
The Common Different Types of Mortgages / Home loans
Loans are not all created equal. Some will require a higher down payment while others or will require less. Many loans will require top tier credit and others are geared towards home buyers with credit challenges. Let’s dive into see which mortgage might be best for you:
- Conventional Mortgage
A conventional loan is a type of loan that is not insured by the government. This means that the loan is instead backed by private investors like Fannie Mae or Freddie Mac. Borrowers will need to have good credit and a stable job/income, and usually the ability to put anywhere between 3% and 20% down. To avoid PMI also known as private mortgage insurance, home buyers will generally need to make a 20% down payment.
- FHA Loans (Government-Insured Federal Housing Administration Loans)
People with less than a 5% down payment, those who earn lower than average income or who have credit challenges will usually use an FHA loan to buy their first home. HUD (the department of Housing and Urban Development) is the agency that insures the lender in the event of default.
Did you know that an FHA loan can be used to buy not only single-family homes, but also multifamily homes (up to 4 units) and condominiums? Certain types of FHA loans can also be used for new construction builds, as well as renovating a home.
- VA Loans (Government-Insured Veterans Affairs)
If you are a veteran or a spouse of a veteran, you may qualify for a VA Loan with as little as zero down payment. Other benefits include lower interest rates than that of a Conventional loan. There is no PMI – but in some cases the VA does impose a Funding Fee which is added to the loan amount. The funding fee may vary depending on military service. VA are an excellent option for active military or veterans who want highly reasonable terms for their mortgage with little or no down payment.
- USDA Loans (Government-Insured U.S. Department of Agriculture Loans)
USDA loans are loans that are insured by the Department of Agriculture in the United States. These loans help lower income homebuyers in more rural or agricultural areas buy homes with very little or no money down. These loans are best for lower household incomes in agricultural areas that have difficulty qualifying for a conventional loan.
- Non-Qualified (Non QM) Mortgage
A non-qualified home loan is a home loan that does not follow the provisions of the Dodd-Frank Act. For instance, if you do not qualify for a home loan using traditional income documentation, some non-qualified home loan options might allow for alternative income options.
Other useful terms to know when looking for the right type of mortgage:
Fixed Mortgage Rate
Fixed mortgage rate is a loan with an interest rate that remains the same over the life of the loan. This means that you will be paying the same amount for principal in interest over a period of time. A Fixed rate mortgage loan is the most popular type of financing because it is predictable. If you can pay off a loan quickly a shorter term loan (such as 15 or 20 years) might be best because you will pay less in interest. However, 30-year loans are still the most common.
ARM (Adjustable-rate mortgage)
An Adjustable-rate mortgage is a home loan in which the interest rate can change over time. This means that your monthly payments could go up or down. Initially, the initial interest rate may be lower than that of a comparable fixed rate mortgage but can begin adjusting up or even down.
Whichever type of home loan you choose, we hope you will consider using Amerifund Home Loans, Southern California’s best mortgage company. Please read our reviews on Yelp!