A mortgage is a loan for the purchase of real property, secured by a lien on the property. The lender agrees to lend the borrower money, and the borrower agrees to repay the loan over time with interest. There are several different types of mortgages available, each having its own set of terms and conditions.
Fixed-rate mortgages are the most common type of mortgage. With a fixed-rate mortgage, the interest rate remains the same for the entire loan term, which can be 15 or 30 years. This means that the borrower’s monthly principal and interest payments will remain the same throughout the life of the loan; however, changes in the taxable value of the home (PVA value) and the costs of homeowners insurance can change the monthly payment.
Adjustable-rate mortgages (ARMs) have an interest rate that changes over time. The interest rate is initially fixed for a period of time, such as 3, 5, or 7 years. After that, the interest rate will adjust based on current indexes. ARMs can be a good option for borrowers who want lower initial monthly payments, but they should be aware that the interest rate could go up in the future.
Government-backed mortgages are insured by the federal government, meaning the lender is protected if a borrower defaults on the loan. Government-backed mortgages are available to all borrowers, and are especially helpful to borrowers with lower credit scores and down payments. The most common government-backed mortgages are FHA loans, VA loans, and USDA loans.
Conventional mortgages are not insured by the federal government, meaning lender takes on more risk when they fund a conventional mortgage loan, so typically there are stricter requirements than government-backed mortgages.
Jumbo mortgages are mortgages that exceed the maximum amount that a conventional mortgage lender can lend without having to purchase mortgage insurance. The conforming loan limit varies depending on the location of the property.
A renovation loan is a mortgage that includes additional funds for renovations. Lenders use homes’ ARV (After Repair Value) to determine the amount borrowers qualify for, as opposed to basing the loan on a home’s current value.
So which type of mortgage is right for you? That depends on your individual circumstances, such as your credit score, amount of your down payment, desired loan term, and the condition of the property you want to purchase. Talk to a mortgage lender to get an idea of how much you can afford to borrow and which type of loan best meets your needs, and remember to shop around and compare different mortgage rates before you choose which lender to work with.
I hope this article has given you a better understanding of the different types of mortgages, and if you have any questions, please feel free to leave a comment or reach out to TwinSpiresRealty.com!
