Common Types of Mortgages for New Homebuyers
If you’re buying a home, the chances are high that you’re up to your elbows in preparations—including budgets, home improvement, moving, and, most importantly, mortgages. If it’s your first time buying or you’re not entirely familiar with the process, a mortgage can be a real headache.
First, you have to choose what type of mortgage you want. That alone can leave your head spinning, as there are different kinds. How do you know which one is the best for you? Well, first, you have to assess your situation and see what fits best. It can be confusing on top of everything else. However, once you understand it, it will be easy to see what your best option is. It’s also best practice to consult with experts before diving headfirst, so you don’t end up biting more than what you can chew.
Without further ado, are some of the most common types of mortgages:
Conventional Loan
Conventional loans are mortgages that the federal government does not insure. These mortgages are also a conforming loan, meaning that it follows the maximum limits set by the Federal Housing Finance Agency (FHFA).
The current limit for conforming loans for one-unit properties is $548,250. For areas with higher-cost housing, where the standard prices exceed the previous amount, the limit is $822,375. Additionally, while conventional mortgages allow for a lower down payment, borrowers must qualify for a credit score of at least 620.
Advantages of conventional loans:
It can be used for a primary home, second home, or investment property.
Overall borrowing costs tend to be lower than other types of mortgages, even if interest rates are slightly higher.
You can ask your lender to cancel private mortgage insurance (PMI) once you’ve reached 20 percent equity or refinance to remove it.
You can pay as little as 3 percent down on loans backed by Fannie Mae or Freddie Mac.
Jumbo Loan
Jumbo loans are also conventional types of mortgages, although they are non-conforming. These are mortgages that don’t meet the FHFA guidelines because the loan amount exceeds the limit.
If you’re purchasing a home on the pricier side, this might be the right fit for you. Jumbo loans are more common in higher-cost areas and entail more requirements, documentation, and proof from your side that you can pay for this mortgage. Then again, just because you’re paying more doesn’t mean that you have little chances of saving money. The good news is that there are ways to win with savings through mortgage brokers, especially those that don’t charge hidden fees.
Advantages of jumbo loans:
You can borrow more money to buy a home in an expensive area
Interest rates tend to be competitive with other conventional loans
Fixed-Rate Mortgage
If you plan to keep or stay in the home long-term (about 20 to 30 years), this mortgage loan would be appropriate for you. A fixed-rate mortgage holds the same interest for the whole period of your loan.
The interest won’t go higher or lower no matter how long it takes to pay it all. Of course, that has its advantages and disadvantages, but for people with a sure plan or maybe even retirees with a stable source of income, this would be ideal. The terms for this loan can vary anywhere from 15 years to 30 years.
Advantages of fixed-rate mortgages:
Monthly principal and interest payments stay the same throughout the life of the loan
You can more precisely budget other expenses month to month
Adjustable-Rate Mortgage
An adjustable-rate mortgage (ARM) is just the exact opposite of a fixed-rate mortgage. These loans have fluctuating interest rates which can be an advantage for people with more unconventional sources of income. The interest rate can go up or down depending on market conditions, but to avoid sky-high interest rates, go for ARM that caps how high the interest can go.
Advantages of adjustable-rate mortgages:
Lower fixed rate in the first few years of homeownership
Can save a substantial amount of money on interest payments
Conclusion
At the end of the day, the type of mortgage you choose will depend on your financial situation, home location, and preference. Conventional loans provide low interest and fast processing. On the other hand, a fixed-rate or adjustable-rate mortgage might suit your lifestyle better. It’s just about evaluating your needs and finding the right mortgage that complements those needs.
If you are looking to buy a home with the right mortgage, we can help you. At Nextafi, we aim to give you low mortgage rates with a fast and easy loan experience. With our expertise and over 15 years of experience in the industry, we can help you get the home of your dreams hassle-free! We serve all of California and Orange County. Contact us today for more information!