What Are the Different Types of Home Loans That Exist Today?
Being a homeowner is one of life’s greatest ambitions. It’s more than just being a property owner. It’s the American symbol for settling down, hard work, and security.
However, the dream of having a house seems quite far-fetched for many Americans. With only 65.5% of Americans owning a home today, that leaves a little over 34% of people renting.
Rising home costs and stricter lending requirements have made it harder for younger generations to buy houses. That’s why younger people turn to different types of home loans from wholesale lenders to help them with their purchases.
There are many types of home loans available on the market today, and it’s important to know which one is best for you and your family. Below are eight types of home loans available for aspiring homeowners:
A conventional loan is a mortgage that the government does not back. These loans are available through private lenders, banks, and financial institutions. They are often used to purchase property that is not eligible for government-backed loans.
Conventional loans typically have higher interest rates than government-backed loans and may require a down payment of 20% or more. However, they can be a good option for borrowers with strong credit and a down payment of at least five percent.
Conventional loans also come in two different packages: non-conforming and conforming loans.
A non-conforming loan doesn’t meet the guidelines set by Fannie Mae and Freddie Mac, which are government-sponsored enterprises that buy and securitize mortgages. On the other hand, conforming loans adhere to these guidelines.
These are home loans that exceed the conforming loan limit. They are typically used to purchase high-end homes or luxury vacation homes.
You can also use a Jumbo Loan to refinance an existing home loan. If you are a first-time homebuyer, you may consider a jumbo loan if you have the required down payment and credit score.
Some advantages of a Jumbo Loan include:
- Access to more financing
- Competitive interest rates
- Flexible terms
- No prepayment penalties
If you are thinking of applying for a Jumbo Loan, shop around and compare offers from multiple lenders. Keep in mind that you will need excellent credit and a large down payment.
You should also speak with a mortgage specialist to see if a Jumbo Loan is the right fit for you.
These loans are typically insured by the federal government and have more flexible requirements than conventional and Jumbo loans. They can be a great option for first-time homebuyers or anyone with a limited budget.
Government-backed loans are typically backed by the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA).
You can get a government-backed loan with as little as a three percent down payment if you qualify. Other advantages of government-insured loans include:
- They don’t have strict credit requirements
- They can help you buy a home even when you don’t qualify for a conventional loan
- Available to both first-time buyers and repeat homeowners
- You won’t need a down payment or mortgage insurance for VA loans
These loans are a great option for anyone who needs a little help getting into the housing market. You may be able to get a lower interest rate and more flexible terms than you would with a conventional loan.
They are also great for people with lower credit scores or limited down payments for the property they want to purchase. If you are a veteran, military service member, or eligible spouse who can’t get a conventional loan, a government-insured loan is the best option for you.
A fixed-rate mortgage loan is the most popular type of home loan. That’s because it offers predictability and stability for your monthly payments.
With a fixed rate, your interest rate will not change over the life of your loan. You’ll always know how much your mortgage payment will be and can budget accordingly.
These types of home mortgages often come in 15 to 30-year terms. However, lenders have the freedom to pick any number between eight to 30 years.
A fixed-rate mortgage is a good option if you plan on staying in your home for a long time. It’s also a good choice if you prefer the stability and predictability of knowing your mortgage payments will stay the same each month.
However, some cons of fixed-rate mortgages include:
- They often have higher interest rates than other types of home loans
- If you sell your home before the end of your loan term, you may end up owing money to the lender
- A long repayment period means you’ll pay interest for a longer period.
Before deciding on a fixed-rate mortgage, ensure you weigh all the pros and cons to ensure it’s the right decision. Keep in mind that fixed-rate mortgages aren’t meant for everyone.
So, be sure to speak with a loan officer to see if this type of mortgage is right for you.
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage, or ARM, is a type of mortgage where the interest rate may change periodically. The initial interest rate on an ARM is usually lower than a fixed-rate mortgage, but it can increase over time.
For example, let’s say you have a $300,000 mortgage with a 30-year term and an interest rate of four percent. Your monthly payment would be about $1400.
But if you had an ARM with the same amount, term, and rate, your monthly payment would start at $1300.
After five years, the interest rate on your ARM could increase to as much as nine percent, depending on the terms of your loan. That would raise your monthly payment to about $2000 — a difference of $600 per month.
An adjustable-rate mortgage can be a good choice if you plan to own your home for only a few years.
That’s because you may be able to sell your home before the interest rate on your ARM increases. But if you plan to stay in your home for a long time, an ARM might not be the best choice.
You could end up paying more in interest over the life of the loan than you would with a fixed-rate mortgage.
If you’re not sure how long you plan to stay in your home, you might be better off with a fixed-rate mortgage. You’ll have the same monthly payment for the life of the loan so you can budget accordingly.
A balloon mortgage is a type of home loan that requires you to make periodic payments that are significantly larger than the interest payments.
The balloon payment is typically due at the end of the loan term, and it can be difficult to come up with the money if you’re not prepared. For this reason, balloon mortgages are not for everyone.
Some risks involved in balloon mortgages include:
- You could face foreclosure if you’re unable to make the balloon payment
- The value of your home could drop, leaving you with a mortgage that’s worth more than your home
- Interest rates could increase, making your monthly payments more difficult to afford
Balloon mortgages are good for people who are confident making the large payments and who are comfortable with the risks involved. If not, you might want to consider another type of home loan.
If you’re interested in a balloon mortgage, ensure you talk to your lender about the details and understand all the risks involved.
Construction loans are a type of loan used to finance the construction of a home. These loans are typically short-term, with most lenders only offering to finance for one year or less.
You can use a construction loan to finance the construction of a new home or purchase an existing home that requires repair or renovation.
Homebuyers typically use construction loans if they cannot obtain a traditional mortgage. The loan is beneficial for homebuyers who may not have the necessary credit score or down payment to qualify for a conventional mortgage.
Construction loans can also be used by investors looking to purchase a property, renovate it, and then sell it for a profit.
CalPATH is a mortgage loan specifically designed for California teachers, police officers, and firefighters. It offers below-market interest rates and up to $15,000 in down payment assistance.
CalPATH is also a good option if you plan on staying in your home for a long time. The program offers a 15-year fixed-rate mortgage with no origination fees and no private mortgage insurance required.
Now You Know the Different Types of Home Loans
If you are looking to purchase a home, there are many different types of home loans that exist today. It’s important to know the difference between them so that you can make the best decision for your financial situation.
Fortunately, our guide above covers everything you need to know about the different types of mortgage loans.
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