The Three Most Common Types of Mortgages
Choosing which sort of mortgage to take on is very important as it determines how much you pay every month and how long it will take to pay off your loan. Below are the three most common types of mortgages offered in the USA.
1. Fixed-Rate Mortgage
The fixed rate mortgage is the most common type of mortgage in the US (representing about 75% of all home loans). With this option, the interest rate remains the same for the entire life of the loan making it easier to budget ever month. These loans are usually come with 15 or 30 year terms (30 being more common as it comes with a lower monthly payment).
For the consistency of a fixed rate, borrowers will typically pay a premium. However, if you plan to stay in your home for the next 7-10 years, a fixed rate mortgage could be a good option.
2. Adjustable rate mortgage
The adjustable rate mortgage is a loan with an initial fixed rate that then adjusts to the market periodically. Buyers with an ARM can take advantage of lower interest rates. However, they are also subject to fluctuations in the market. This type of loan may best for those who don’t plan to hold a mortgage for a long time. Alternatively, you can take on a fixed-rate mortgage and refinance in the future should interest rates go down.
3. Government Insured Mortgage
While the government itself if not a mortgage lender, it does back mortgages that fit specific criteria:
Federal Housing Authority (FHA) Loans: This loan is great for people who don’t have substantial cash saved up for a down payment and don’t have a solid credit history. To secure this loan, you must have a minimum 580 credit score for a 3.5% down payment (500 is accepted if you put 10% down). Note however that this loan can be costly if you put down less than 10%. FHA loans require two mortgage premiums; one paid upfront and the other annually for the life of the loan. This type of loan must also meet the FHA standards.
Veterans Affairs (VA) Loans: For both active duty and veterans, a VA loan can provide low interest rate mortgages with zero down payment. Check out the VA website to see how you can apply.
US Department of Agriculture (USDA) Loans: The USDA loan may be of benefit to you if you’re of moderate-low income and looking to purchase in a rural area. In order to qualify, you must purchase a home in a USDA-eligible area. Click here to see if you qualify.
Be cautious with the balloon mortgage
While not as common, buyers should be wary of a balloon mortgage or a balloon mortgage clause in their agreement. With a balloon mortgage, the borrower makes small fixed-rate payments for a period of time and then makes one large pay-off at the end of the loan. This method can work well for borrowers who plan to sell the home before the balloon pay-off due date. However, this mortgage is risky and generally not advised to the average person for the following reasons: The homeowner has little or no equity in the house for a long period of time (having made smaller payments), to be profitable the borrower has to sell or refinance for at least the amount of the balloon payment, the borrower is taking on a lot of risk having to come up with a large sum of money by a specific point in time.