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Understanding different loan types and options is important to any home buyer, so they make the best choice possible that suits their needs and situation. Get ready to dive into the world of home loans!
Before you begin the journey into home loan types and how they work, you may want to do some pre-homework on your end by determining what your are financially comfortable with. While many home buyers tend to focus on loan amount, monthly obligation, and rates; there are many more factors to consider.
Is this your forever home. a temporary house, future or current rental investment property , or it's possible that you are unsure at the moment.
What are the comparison homes in the area? Comparisons (aka: 'comps') are other homes in your area that have recently sold or are up for sale. This trend matters is you know you may be selling in the future and helps you understand what your home is worth.
Overall interest rate; while many home buyers consider the interest rate they tend to forget about the overall cost once the mortgage loan is settled (paid off).
Are you looking for additional monthly income or to pay off credit accounts?
What is your overall goal by agreeing to a mortgage loan?
While those are some other factors to consider lets jump into the reason you clicked on this blog in the first place; mortgage loan types:
1. Conventional Loans: Most conventional loans are also 'conforming' loans, which means that they meet the requirements for Fannie Mae or Freddie Mac, but are not directly insured by a government program. Fannie Mae or Freddie Mac programs are government-sponsored enterprises that purchase mortgages from lenders and sell them to property investors. This frees up operational lender funds so they can provide buyers like yourself funds to purchase more homes.
Other types of conventional loans are 'Nonconforming' (portfolio loans), 'Jumbo Loans', 'Fixed Rate Loans, 'Adjustable Rate', 'Nonqualified', and many more. They also are available with several different term options with most people choosing between 15-year and 30-year terms.
Because there are several different sets of guidelines that fall under the umbrella of 'conventional loans', there’s no single set of requirements for borrowers. However, in general, conventional loans have stricter credit requirements than government-backed loans like Federal Housing Administration (FHA) loans. Find a Realtor
2. FHA Loan: Loans backed by the Federal Housing Administration (FHA), don’t require your credit of financial status to be pristine. FHA loans can be the best option if you’re building up your credit or you’ve had some issues in the past. They also allow for lower down payments such as 3.5% of the total mortgage depending on your credit score and other loan history.
There are payment assistant programs out available for those that struggle to meet FHA down payment requirements, but can afford the monthly payment.
3. Reverse Mortgages: Reverse mortgage loans allow homeowners who are 62 or older to borrow against a percentage of the equity in their home.
Instead of making payments to your lender, your lender will make a payment to you. The loan first pays off your existing mortgage, if you have one, and then you can use the remaining funds for your needs. Also you should know that you must continue to pay your property taxes and homeowners insurance.
These loans are designed for older homeowners who may have retired and want to eliminate their monthly mortgage payments or to supplement their income.
4. Home Equity Loan: Home equity loans are a second mortgage or first if you have paid off your original mortgage, that allow you to use the equity in your home as collateral to borrow money. Typically you can borrow around 80% to 85% of the value of your home, minus what you owe on your mortgage. Contact Us
A home equity loan allows you to pull out a lump sum against the equity (the value of a homeowner's financial interest in their home) of your home, that you repay in fixed payments.
5. Home Equity Line of Credit (HELOC): Think of a HELOC as a credit card that is paid by the equity in your home. A home equity line of credit is a type of second mortgage or first if your first mortgage is paid off, that allows you to borrow money against the equity in your home as a line of credit. You can use the equity in your home to pay for home improvements, education, vacations, vehicles, consolidating credit card debt, or whatever your financial need is at the moment
There are two phases: 1) The draw period. The draw period means that your line of credit is open and available for you to use. During the draw period, the only payments you are required to make are interest payments on any money borrowed. 2) Repayment Period. Once you reach the end of your draw period, you'll have to make repayments based on your principal and remaining interest. Most HELOCs have variable interest rates, which means that they fluctuate based on the changes in the market.
There are many more mortgage loan options and types, but you didn't come here to read a home loan novel. If you did please visit our other educational real estate blogs to learn more. Whatever your goal is by agreeing to a mortgage, make sure you do your homework, and consider all your options. Whether purchasing your first home, getting into real estate investing, or something else; always do your due diligence in protecting your home and financial security.
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