Before you apply for your first home loan you might be forgiven for not realizing just how many options there are out there for the various mortgage loans types. Since mortgages first came to fruition they have undergone some serious changes are there are now so many different types of mortgages to suit all kinds of lenders.
Research shows that Americans nowadays aren’t just looking to banks for their mortgages, meaning there are now more types of home loans than ever before. This is good news for the lender in today’s world as you’re given far more options to choose a mortgage that best suits your needs and circumstances.
A potential lender should be able to explain the different mortgage loan types and what they mean, hopefully finding one that gives you the best deal. It’s best to understand how each of them works before you go ahead, though, so here’s a rundown on the more common types of mortgages.
This is usually the first question you’ll be asked in regards to home loans and one that can have quite a huge difference on your mortgage. Every home loan fits into either of these categories so you’ll need to make the choice on what you prefer, with either option usually being more beneficial depending on your situation. It is possible to get a hybrid loan that combines the two, so that might also be an option for you.
A fixed rate home loan will have the same rate for the entire length of the loan which means your repayments will always stay the same, too. Some people prefer a fixed rate as it helps them to secure a low interest rate and gives them certainty about always knowing what their repayments are, however you do run the risk that the rates will lower ever further but you won’t be able to benefit.
An adjustable rate home loan works with an interest rate that is set by the lender as a result of many external factors. Your repayments will vary as the rate changes so there’s some uncertainty about what it might do in the future, however you’re able to benefit from the low interest rates when they occur.
In addition to deciding whether you want a fixed or variable rate mortgage, you’ll also need to look at the other options for home loans. Conventional loans are the most common and these are regular mortgages that haven’t been insured by the federal government in any way.
However, a government insured loan can include things like Federal Housing Association, Veteran Affairs, or United States Department of Agriculture backed loans. Each of these departments offers special loans for some Americans, such as military service members and their families. They can include stipulations such as low down payments and special assistance for rural borrowers.
A rate tracker home loan is one that follows the movements of another rate, such as the Federal Reserve. These are like a form of variable rate mortgages which means your repayments and loan terms are likely to change over the term of your loan.
These mortgages don’t match the rates that they track but rather are at a percentage slightly higher than this. If you’re on an introductory mortgage rate tracker, you’ll usually have one of the lower interest rates available, however, it won’t always stay at this amount.
There’s another distinction you’ll need to make when choosing a mortgage and it depends on the size of the loan or money you’re borrowing. Jumbo loans exceed the conforming limits put in place by Freddie Mac and Fanny Mae and are represented a far higher risk than a conforming loan. For this reason, borrowers using a conforming loan will have a bigger down payment on offer and must have an excellent credit history.
A conforming loan is the most common with many Americans having this type of mortgage. These mortgages conform to the underwriting guidelines set by Freddie Mac and Fanny Mae. These loans are within their acceptable size limits of a loan and meet all other criteria as well.
Another form of variable interest rate mortgages, a discount mortgage is one that is set below the standard variable rate offered by the lender. When the lender’s standard variable rate changes so too do the discount mortgage, so although it might sound like the best deal for a low rate it can be a risky move.
A discount mortgage means the lender is able to change the rate whenever they see fit so although you might be enticed by the initial low rate, you should be cautious about the future of your loan and how much your repayments might change.
As modern mortgage holders, we are truly spoilt for choice with all of the different mortgage loans available. It’s always best to do your research extensively before settling on a mortgage, as you’ll likely find some home loans are more beneficial to your needs than others.
The many different types of mortgage loans have been created to meet the unique needs of borrowers and make them easier to find a mortgage that will suit their budget and future planning. Choosing the right one for you means saving thousands of dollars over the life of your loan and feeling comfortable with the mortgage you entered into.
Although your lender will be able to talk you through their options available, you should still have a thorough understanding of what’s on offer so you can be in the best position to find a good deal on interest rates and the term of your loan. As our mortgages are usually with us for life, it’s not a decision that should be taken lightly so you need to do your homework.