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Here we are in 2024, still scratching our heads about which type of house mortgage suits us best. Oh, and did you catch this? According to the February 2024 Federal Reserve report, US mortgage balances rose to a jaw-dropping $12.25 trillion😯 That’s really something isn’t it? Let's settle this once and for all! Here are the 10 key types of mortgages for homebuyers.
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1. ADJUSTABLE-RATE MORTGAGES (ARMS)
Adjustable-rate mortgages offer a variable interest rate that fluctuates over the loan term, usually after an initial fixed-rate period. These loans often have lower initial interest rates, making them attractive for short-term homeownership.
One common type is the 5/1 ARM, which has a fixed rate for the first five years and then adjusts annually thereafter. While ARMs typically start with lower rates than fixed-rate loans, they can increase significantly, sometimes up to five percentage points, after the initial fixed period.
Requirements and Limitations:
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Typically requires a lower initial down payment.
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Borrowers should be prepared for potential interest rate increases after the initial fixed-rate period.
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Limits vary based on loan size and local housing market conditions.
✅Pros Cons❌ ✔️Lower initial interest rates compared to fixed-rate mortgages. ❌Interest rates and monthly payments can increase after the initial fixed-rate period. ✔️May benefit borrowers who plan to sell or refinance before the interest rate adjusts. ❌Potential for payment shock if rates rise significantly. ✔️Initial lower payments can increase affordability for some buyers. ❌May not be suitable for long-term homeownership or those on a fixed income. Who should consider adjustable-rate mortgages?
Ideal for homebuyers who plan to sell or refinance before the initial fixed-rate period ends. Also suitable for buyers who expect their income to increase in the future, allowing them to absorb potential payment increases.
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2. FIXED-RATE MORTGAGES
A fixed-rate mortgage maintains a consistent interest rate throughout the entire loan period. Whether you opt for a 15-year or 30-year term, the interest rate stated in your closing disclosure remains unchanged until you refinance. Unlike adjustable-rate mortgages, the best fixed-rate mortgages offer stability, making it easier to budget for housing expenses over time.
Requirements and Limitations:
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Generally requires a good credit score (typically above 620).
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The down payment typically ranges from 3% to 20% of the home's purchase price.
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Limits depend on the loan size and local housing market.
✅Pros Cons❌ ✔️Predictable monthly payments simplify budgeting. ❌Initially higher interest rates compared to adjustable-rate mortgages. ✔️Protection against rising interest rates. ❌Less flexibility if interest rates drop. ✔️Suitable for long-term homeownership. ❌May require higher credit scores and larger down payments. Who should consider fixed-rate mortgages?
Ideal for homebuyers seeking long-term stability and predictability in their mortgage payments. Best suited for those planning to stay in their homes for an extended period.
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3. CONVENTIONAL LOANS
Conventional loans, unlike government-backed loans, aren't insured or guaranteed by the government, which means they're subject to stricter eligibility criteria set by private lenders. To qualify for the best conventional mortgage loan terms, you need a good credit score and a considerable down payment.
Borrowers who provide less than 20% down payment often need to pay private mortgage insurance (PMI) for this type of loan.
Moreover, conventional loans, often conforming to guidelines from entities like Fannie Mae and Freddie Mac, come with set limits, adjusted annually to reflect increasing home values. For 2023, the conforming loan limit is $726,200 for single-family homes across most of the U.S.
Requirements and Limitations:
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Typically requires a higher credit score (usually above 620).
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Down payment requirements can vary but often range from 3% to 20% of the home's purchase price.
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Loan limits set by Fannie Mae and Freddie Mac, with higher limits for high-cost areas.
✅Pros Cons❌ ✔️Flexibility in terms and conditions. ❌Stricter eligibility requirements, including higher credit scores and larger down payments. ✔️No upfront mortgage insurance premiums (unlike FHA loans). ❌Private mortgage insurance (PMI) required for down payments less than 20%. ✔️May offer lower interest rates for borrowers with excellent credit. ❌Limited availability for borrowers with lower credit scores or smaller down payments. Who should consider conventional loans?
Ideal for homebuyers with good credit and stable finances who can afford a larger down payment. Also suitable for those purchasing higher-priced homes in areas with lower loan limits.
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4. FHA LOANS
FHA loans, how much you can borrowinsured by the Federal Housing Administration, assist low-to-moderate-income borrowers in achieving homeownership by offering more lenient qualification requirements.These loans typically require lower down payments and credit scores compared to conventional loans.
In 2024, the FHA loan limit is $498,257 for single-family homes in most U.S. counties, and $1,149,825 in high-cost areas.
To qualify for the best FHA loans you need to be prepared to pay a mortgage insurance premium. If your down payment is less than 10%, you'll be required to pay FHA mortgage insurance throughout the life of your loan, unless you refinance into a conventional loan after reaching at least 20% equity. However, if you make a down payment of at least 10%, you'll only need to pay mortgage insurance for 11 years.
Requirements and Limitations:
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Lower minimum down payment requirement (usually 3.5% of the purchase price).
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Lower credit score requirements (usually around 580).
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Limits on loan amounts set by FHA, varying by location.
✅Pros Cons❌ ✔️Reduced down payment requirements, making it easier to own a home. ❌Upfront and ongoing mortgage insurance premiums (MIPs) required. ✔️Reduced down payment requirements make homeownership more attainable. ❌Limits on loan amounts may restrict purchasing power in high-cost areas. ✔️Competitive interest rates. ❌The property must meet specific criteria to be eligible for FHA financing. Who should consider FHA Loans?
Ideal for first-time homebuyers and those with limited funds for a down payment. Also suitable for borrowers with lower credit scores who may not qualify for conventional financing.
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5. VA LOANS
Loans for veterans , backed by the U.S. Department of Veterans Affairs, offer assistance to qualifying veterans, active-duty service members, and surviving spouses. These loans offer favorable terms, including no down payment requirement and no private mortgage insurance (PMI).
Requirements and Limitations:
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Accessible for qualified veterans, active-duty personnel, and surviving spouses.
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No down payment requirement for most borrowers.
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No PMI requirement, reducing monthly payments.
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Most VA lenders require a minimum credit score of 620, although the U.S. Department of Veterans Affairs (VA) does not set a specific score requirement for VA loans.
✅Pros Cons❌ ✔️No down payment requirement, making homeownership more accessible for eligible borrowers. ❌Restricted to qualified veterans, active-duty personnel, and surviving spouses. ✔️No PMI, resulting in lower monthly payments compared to conventional loans. ❌Funding fee required, though it can be financed into the loan. ✔️Competitive interest rates and flexible qualification criteria. ❌Property must meet VA appraisal standards. Who should consider VA Loans?
Ideal for eligible veterans, active-duty service members, and surviving spouses who want to purchase a home with no down payment and favorable loan terms.
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6. USDA LOANS
USDA loans, supported by the U.S. Department of Agriculture, aim to foster homeownership in rural and suburban regions.These loans offer low-to-moderate-income borrowers the opportunity to purchase homes in eligible rural areas with no down payment required, but do charge guarantee fees.
Requirements and Limitations:
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Available to low-to-moderate-income borrowers purchasing homes in eligible rural and suburban areas.
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No down payment requirement for qualified borrowers.
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Income limits apply based on location and family size.
✅Pros Cons❌ ✔️No down payment requirement, making homeownership more accessible in rural areas. ❌Limited to eligible rural and suburban areas designated by the USDA. ✔️Competitive interest rates and flexible credit requirements. ❌Income limits apply, varying by location and family size. ✔️Reduced mortgage insurance premiums compared to FHA loans. ❌Property must meet USDA eligibility criteria. Who should consider USDA Loans?
Ideal for low-to-moderate-income borrowers seeking to purchase homes in eligible rural and suburban areas without a down payment. Suitable for borrowers with limited funds for upfront costs.
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7. REVERSE MORTGAGES
Homeowners aged 62 and above might be eligible for a reverse mortgage, a different type of loan compared to a traditional mortgage. Instead of you making monthly payments to your lender, with a reverse mortgage, your lender pays you from the equity you've built up in your home, either in a lump sum or as monthly payments.
The most common kind of reverse mortgage is the Home Equity Conversion Mortgage (HECM), backed by the FHA and involving various upfront and ongoing expenses. Similar to FHA loans, HECMs also have loan limits, with the maximum claim amount increasing from $1,089,300 to $1,149,825, effective for case numbers assigned on or after January 1, 2024.
You have multiple repayment options for a reverse mortgage, including selling your home or refinancing with a forward mortgage to cover the owed amount.
Requirements and Limitations:
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Open to homeowners aged 62 and older who have ample equity in their homes.
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No monthly mortgage payments required, though borrowers are still responsible for property taxes, insurance, and maintenance.
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Loan amounts are based on factors such as the borrower's age, home value, and current interest rates.
✅Pros Cons❌ ✔️Provides supplemental income for retirees without requiring monthly mortgage payments. ❌Loan fees and closing costs can be high. ✔️Allows homeowners to access their home equity without selling the property. ❌Borrowers must continue to pay property taxes, insurance, and maintenance costs to avoid default. ✔️Offers flexible payout options, including lump sum, monthly payments, or line of credit. ❌Loan balance increases over time due to accruing interest. Who should consider reverse mortgages?
Ideal for older homeowners seeking to tap into their home equity to supplement retirement income or cover expenses. Suitable for those planning to remain in their homes long-term.
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8. SECOND MORTGAGES: HOME EQUITY LOANS AND HELOCS
A home equity loan allows you to borrow against the value you've built up in your home through mortgage payments. Similar to your primary mortgage used for home purchase, a second mortgage is backed by your home. However, it holds a subordinate position to the primary mortgage, meaning it gets repaid after the primary mortgage in case of foreclosure.
Both home equity loans and home equity lines of credit (HELOCs) fall under the category of second mortgages. A home equity loan offers a fixed lump sum at a set interest rate, paid back in regular installments. In contrast, a HELOC offers a fluctuating credit line with a variable rate, much like a credit card. Users can borrow, repay, and reuse funds as long as the credit line remains open.
Requirements and Limitations:
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Lender requirements and loan types determine eligibility criteria.
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Loan amounts determined by the amount of equity in the home.
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Interest rates may be higher than first mortgages, and repayment terms vary.
✅Pros Cons❌ ✔️Access to funds for major expenses such as home improvements, debt consolidation, or education costs. ❌Your home serves as collateral, putting it at risk of foreclosure if you default on the loan. ✔️Interest may be tax deductible, depending on how the funds are used (consult a tax advisor). ❌Closing costs and fees may apply, including appraisal and origination fees. ✔️Flexibility in borrowing and repayment options with HELOCs. ❌Monthly payments may vary due to HELOCs' adjustable interest rates. Who should consider second mortgages?
Ideal for homeowners seeking to leverage their home equity for large expenses, such as home renovations or debt consolidation. Ideal for borrowers with steady earnings and ample equity in their properties.
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9. JUMBO MORTGAGES
A jumbo mortgage is a sizable conventional loan used primarily for purchasing high-end properties. These loans surpass all conforming loan limits and often necessitate a substantial down payment, usually around 20%.
Unlike high-balance conforming loans, jumbo loans do not adhere to the guidelines set by Fannie Mae and Freddie Mac. Eligible borrowers may secure larger loan amounts, potentially exceeding $1 million or more.
In recent times, jumbo mortgage rates have remained relatively comparable to conforming conventional loans, without significant fluctuations in either direction.
Requirements and Limitations:
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Borrowers must meet strict credit and income requirements to qualify.
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Loan amounts exceed the maximum limits set for conforming loans.
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Typically require larger down payments and higher credit scores compared to conventional loans.
✅Pros Cons❌ ✔️Allows borrowers to finance high-value properties that exceed conventional loan limits. ❌Higher down payment requirements compared to conventional loans. ✔️Flexible loan terms and options available, including fixed and adjustable rates. ❌Stricter credit and income requirements may limit eligibility. ✔️May offer competitive interest rates for well-qualified borrowers. ❌Interest rates may be slightly higher than conforming loans. Who should consider jumbo mortgages?
Ideal for high-net-worth individuals purchasing luxury homes or properties in high-cost areas. Suitable for borrowers with excellent credit and substantial financial reserves.
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10. HIGH-BALANCE LOANS
High-balance loans are conventional mortgages that exceed the standard loan limits set by the Federal Housing Finance Agency (FHFA) but fall below the threshold for jumbo loans. These loans are designed for borrowers purchasing homes in high-cost areas where housing prices exceed the conventional loan limits.
Requirements and Limitations:
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Borrowers must meet standard eligibility criteria for conventional loans.
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Loan amounts exceed the maximum limits for conforming loans but are below the threshold for jumbo loans set by Fannie Mae and Freddie Mac guidelines.
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Typically require higher credit scores and larger down payments compared to standard conforming loans.
✅Pros Cons❌ ✔️Allows borrowers to finance homes in high-cost areas without resorting to jumbo loans. ❌Higher down payment requirements compared to standard conforming loans. ✔️Offers competitive interest rates and terms comparable to standard conforming loans. ❌Stricter credit and income requirements may apply due to the higher loan amounts. ✔️Provides flexibility in loan options and terms to accommodate various borrower needs. ❌Interest rates may be slightly higher than those for standard conforming loans. Who should consider high-balance loans?
Ideal for homebuyers purchasing properties in high-cost housing markets where standard conforming loan limits are insufficient. Suitable for borrowers with strong credit profiles and sufficient financial resources to meet the down payment and income requirements.
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Which mortgage should you go for?
Take a good look at your credit and finances when picking a mortgage. Some loans may not be available based on specific criteria, like VA loans for military members and their spouses.
Here's what to consider:
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Credit score: See which loans match your credit score.
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Risk tolerance: Choose between a stable monthly payment or expecting future income growth.
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Debt-to-income ratio: Make sure you can cover your mortgage after paying off other debts.
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Down payment: Decide if you need help with a low-down payment.
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Future plans: Think about moving soon or paying off your mortgage faster.
Having weighed these factors, it's time to begin your search and reach out to loan officers who can assist you in selecting the ideal option.
📖 Read More >> How to buy a mortgage?