Embarking on the journey of homeownership or considering refinancing your current home brings you to a critical decision point: choosing the right mortgage. With the myriad of mortgage options available, navigating through your choices to find the best fit can seem daunting.
Whether you're stepping into the realm of homeownership for the first time or you're a seasoned homeowner looking to make a savvy financial move, understanding the nuances of each mortgage type is essential.
This comprehensive guide delves into six prevalent types of mortgages, shedding light on their unique features, advantages, and scenarios they're best suited for. Our goal is to arm you with the knowledge needed to make an informed decision that aligns seamlessly with your financial aspirations and lifestyle.
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FHA Mortgage
An FHA mortgage is one of the federally insured mortgages that allow people with less than perfect credit to qualify for a loan. It stands for Federal Housing Administration, and this type of home loan action is designed to spur the U.S. housing market by making it possible for more people to buy homes.
The requirements are generally lower than those required from conventional mortgages, but there can be some substantial benefits as well as pitfalls including additional costs and restrictions on how the home will be used in order to retain its full value.
The FHA mortgage program is available through any bank or lender approved by HFA (the federal agency charged with overseeing this particular type of financing).
The pros and cons of an FHA mortgage
Pros - Hiding your financial situation behind a federal mortgage is great for those who are not in the best of shape financially. They will have to be more careful and be able to maintain a higher degree of responsibility.
Cons - The likelihood of getting approved is much lower than a Fannie Mae/Freddie Mac loan, which does not even require tax returns or annual income verification typically. So it's possible to get buyers with very strong credit histories turned down for an FHA loan because their debt-to-income ratio exceeds the 43% threshold (down from 49%).
In addition, there are some fees associated with the application process that can make these loans even less attractive than they would seem.
Conventional Mortgage
A conventional mortgage is a type of home loan that involves fixed-rate. You agree to loan a set amount of money over a predetermined term, usually 10 or 15 years, and you will receive reimbursement at the end of the agreement. The terms and requirements for repayment are also standard for this type of mortgage so it's not subject to manipulation like an Adjustable Rate Mortgage.
A conventional mortgage allows you to have more control over your monthly payments and lets you be in charge of how much you need to invest upfront before making any repayments on the capital - as opposed to an ARM where payments fluctuate based on prime rates which are likely higher than interest rates for other loans.
The pros and cons of a Conventional Mortgage
Pros - A Conventional Mortgage is that the principal and interest do not change.
Cons - A Conventional Mortgage has no Federal Housing Administration (FHA) insurance, which means it will be difficult to make loan modifications in the future.
The pros for a Conventional mortgage are that it has one low monthly payment with predictable monthly costs, meaning the homeowner does not have to worry about property taxes increasing the mortgage payment or any other outcome that would increase payments.
Moreover, you know what your payments are going to be for up-to-30 years so you do not need to worry about home prices going down and affecting your ability to pay money each month.
VA Loan
VA mortgages are a mortgage that is offered by FHA insured lenders for a loan that meets certain eligibility requirements. A VA mortgage can be used to buy your first home, move up to a bigger one, or as collateral on an investment property.
A VA loan is a home financing option for eligible military veterans. What makes it different from most other mortgages? It has no property appraisal requirement, and the VA sets an upfront payment that limits your monthly payments for the life of this mortgage.
VA loans have no property appraisal requirement because if you're a veteran, the government guarantees the loan.
The Benefits Of An FHA Mortgage
- Low Monthly Payments
- Tax Deductions Up To $2,000 On Your Mortgage Interest
- No Bank Closing Costs Or Origination Fees (Many Offer Incentives For Veterans)
- Lower Rates Than Conventional Mortgages! With The Average 30 Year Rate At 3.43%!
The pros and cons of a VA loan
Pros - cash out is available, less engagement in the home than a conventional loan.
Cons - no guarantee that the loan will be sold to Fannie Mae or Freddie Mac, rate may be higher than other loans offered, no guarantee that payments will stay current on their own.
The advantage of a VA Loan is that it typically has lower rates and down payment requirements which can make it easier for you to qualify and afford.
The disadvantage is there's not as much incentive or regulatory oversight when compared to conventional mortgages.
Essentially this means there's a very real chance your monthly payments may go unpaid despite people meeting regular credit standards for other types of loans.
USDA Rural Development Home Loan Program
The USDA Rural Development Home Loan Program is a mortgage program operated by the U.S. Department of Agriculture to help people in rural areas purchase homes, build homes, and move into homes in rural areas. It can cover loans up to $200,000 as a percentage of adjusted gross income (AGI) for primary residences in participating counties.
In some instances, this program will have no down payment requirement and be able to lend up to 100%.
Is there a benefit available for those that are not living on their land?
A jumbo loan is a type of home equity loan that accommodates amounts higher than the conventional limits for obtaining a mortgage, typically conventional loans are capped at $417,000.
The pros and cons of a USDA Rural Development Home Loan
Pros - They might be a good fit if you want flexible, affordable homeownership and need help getting started (Rural Development Home Loans are available in communities too small to provide for regular mortgage lending), if you have a low income in rural areas, or if you're looking for more flexibility around income.
Cons - It MAY be better to stick with other financing options unless your credit is high enough. Bank loan rates can be lower than Rural Development Home Loan rates.
These loans are designed as low-payment mortgages for those who have proven ability to repay on time. If this sounds like you, then they may be worth considering – but make sure it's right for the specific property and your current financial situation before starting
Jumbo Loans
A jumbo loan is a type of home equity loan that accommodates amounts higher than the conventional limits for obtaining a mortgage, typically conventional loans are capped at $417,000.
A mortgage broker may have access to these "jumbo" loans and they can be quite attractive because they often come with competitive interest rates or lower fees. Keep in mind, however, that not all lenders offer these types of loans so it is important to do your homework before you commit to a lender who offers plain-vanilla mortgages but not jumbo mortgages.
You don't want to sign up for an eight-year fixed rate when all along you were dreaming about shorter-term debt relief!
Is a Jumbo Loan and a Balloon Loan the same?
Answer: No.
A jumbo loan is a home mortgage that exceeds the conforming loan amount for Fannie Mae and Freddie Mac loans. The limits are set annually in November by the Federal Housing Finance Agency (FHFA) and since 2008 have been as high as $601,400 in high-cost areas, such as New York City or San Francisco. Today, Jumbo loans can be well over $900,000.
Jumbo loans are not subject to down payment requirements or maximum debt-to-income ratios. They usually require more stringent credit qualifying standards than conforming loans on both the seller's and buyer's side; Capp Underwriting Services estimates them at 50% more costly to originate from a lender's perspective than their conforming counterparts.
The pros and cons of jumbo loans
Pros - Low monthly payments. Low-interest rates, longer grace periods, and fixed rates make for an added level of security for the borrower.
Cons - Higher interest rates than other loans --thus higher monthly payments which can make living difficult if there are many consecutive months without any income stream. Amortization tables vary depending on loan type and creditworthiness.
Understanding these pros and cons helps to understand what types of conditions warrant a jumbo loan versus any other loans available such as a consumer loan or refinancing an already existing mortgage.
A Jumbo Loan will not work for everybody in all situations with certain risk factors involved in its use (credit, 3% down payment), thus it should only be undertaken when necessary.
Reverse Mortgages
A reverse mortgage is a loan taken out by someone who already has a primary home and lets borrowers cash out the equity they have built up in their homes.. The loan can be repaid at any time, but it's typically repaid when the borrower passes away or moves to an assisted living facility.
Senior citizens might consider a reverse mortgage because they generally have no income and little in the way of liquid assets (since they're not working). It allows seniors access to cash for emergencies as well as medical care, meals, transportation, and other necessities.
A reverse mortgage can supplement their fixed incomes (pensions), Social Security benefits, and any investments that are generating income.
The pros and cons of reverse mortgages
Pros - Reverse mortgages include the ability to live in your home debt-free and access cash during retirement without having to sell the house. It's possible to keep your government housing assistance and, depending on where you live, take up a reverse mortgage with no money down.
Cons - Reverse mortgages include the lack of liquidity if you need fast money for emergencies or other unforeseen causes. Older homeowners are also more likely than younger people to be targets of predatory lenders, which is less of a concern when that homeowner is not on a fixed income and still capable of working.
This program does require paying taxes on any proceeds from the loan until all outstanding principal has been paid off (not including interest), so it will vary.
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