Buying a home will be, for most people, the largest financial investment of their lives. Since 99% of us cannot afford to buy a house outright, we will need to obtain a mortgage loan from a bank or other financial institution. There are many mortgage options out there, and an inexperienced homebuyer can quickly become overwhelmed looking at hundreds of thousands of dollars and decades-long commitments. This article should serve as a simplified guide to the different types of home mortgage loans in order to educate the homebuyer.
Some of the various types of mortgages include fixed rate mortgages, adjustable rate mortgages, government insured loans, conventional home loans.
Fixed-rate mortgages have exactly the same interest rate for the life of the loan. This means that your monthly payment to the bank will be exactly the same every month, year after year. These types of loans are often packaged as 15 or 30 year loans. A 15-year package will naturally have higher monthly payments than a 30-year package because it must be paid off in less time.
Adjustable-rate mortgages, or ARMs, are loans whose interest rate changes based on the market. Some ARMs were fixed for a certain number of years and then changed to an adjustable rate, while some ARMs are adjustable for the initial years and then remain fixed. These are hybrid ARMs. An example of a hybrid would be a 5/1 ARM loan where there is a fixed rate for the first five years, after which that rate will adjust each year to market.
A conventional loan just means that it is not backed by the government. A government-insured loan is a loan that is backed by the government, which guarantees that the lender will not default on the borrower. There are a few different types of government insured loans; VA loans, FHA loans, USDA/RHS loans.
A VA loan is a loan offered by the US Department of Veterans Affairs. A VA loan is offered to training or current service members and their families. A great advantage of this type of loan is that a borrower can receive 100% of the loan up front, which means there is no down payment.
An FHA loan is a loan made by the Federal Housing Administration and administered by the Department of Housing and Urban Development (HUD). This type of loan allows you to pay a very low down payment, as low as 3.5% of the total loan, unfortunately this means you have to pay more in monthly payments.
A USDA/RHS loan is a loan from the US Department of Agriculture, this program is overseen by the Rural Housing Service (RHS). This loan is designed for low-income borrowers living in rural areas who have trouble obtaining financial assistance from traditional lenders.