When you're ready to purchase a home, navigating the muddy waters of mortgage lending can feel overwhelming. While there are subtypes to the various types of mortgages, the majority of homebuyers will qualify for one of three major mortgage types: traditional mortgage, Federal Housing Administration (FHA) loan, or Department of Veterans Affairs (VA) loan. Understanding the differences between these types of mortgages can help you decide which direction to go in when choosing a mortgage for your new home.
Traditional mortgages are what most people think of when they think of home loans. These types of mortgages usually go through major banking institutions and require 10% down payment (or more). Traditional mortgages may have lengths of 15 years, 20 years, or 30 years. Traditional mortgages are available in two different kinds: Fixed-Rate Mortgage or Adjustable-Rate Mortgage (ARM). In both terms, the "rate" refers to the interest rate of the mortgage loan.
Fixed-Rate Mortgage - In a fixed-rate mortgage, the interest rate is locked in when the mortgage is acquired and does not change throughout the life of the loan. Fixed-rate mortgages are ideal for buyers who are comfortable with the current interest rate and prefer to have a fixed payment amount that doesn't fluctuate with market conditions.
Adjustable-Rate Mortgage - In an adjustable-rate mortgage, the interest rate on your mortgage loan will fluctuate throughout the life of your loan - which means your mortgage payment will fluctuate as well. This type of mortgage is ideal for buyers who want to take advantage of times when interest rates are lower but can afford higher mortgage payments during periods when interest rates are higher.
FHA mortgages are home loans backed by the federal government through the Federal Housing Administration. FHA loans generally require smaller down payments and may even include access to down payment assistance programs. FHA loans are ideal for homebuyers who have lower credit scores or aren't able to afford the sizable down payments typically required for traditional loans. If a homebuyer meets the requirements for an FHA loan, they do have to use an FHA-approved lender and there are limits on the amount of the loan. FHA loans also require the borrower to carry mortgage insurance, which may not be required for other mortgage types.
Mortgages through the Department of Veterans Affairs offer the best terms of any loan type. VA loans are reserved for military service members, veterans, and surviving spouses of military members. To qualify for a VA loan, a buyer has to first obtain a certificate of eligibility from the Department of Veterans Affairs and also have sufficient credit. If a buyer can qualify for a VA loan, it is often the best of all loan options. VA loans often have the best interest rates, no down payment, no private mortgage insurance requirement, no pre-payment penalties, and limitations on closing costs.
Finding the right home can be challenging enough, figuring out what type of mortgage is right for you shouldn't be an overwhelming decision. Hopefully, this handy guide to the most common types of mortgages helps you determine which option is the right one for your new dream home.