A mortgage loan is a loan taken by an individual to purchase real estate or by property owners to raise money for any other transaction by mortgaging their property. It is one of the most common loans taken by individuals and businesses.
Mortgage loans have an interest rate and are amortized over a period of time, usually 30 years. When considering purchasing a home using a mortgage loan, you must understand your options and terms. Here are six mortgage loans and their terms so you can choose the one right for you.
Fixed-Rate Loan
The fixed-rate loan is one of the most straightforward mortgage loans. The borrower pays a single interest rate every month, which usually ranges between 15% and 30%. The loan is recommended for homeowners who avoid taking risks and want to pay a fixed amount for the life of the loan.
Changes in the economy’s interest rate will not impact the mortgage loan; therefore, the borrower enjoys high predictability. However, a Fixed-Rate Loan is not for people who plan on moving to another house soon.
FHA Loan
An FHA loan is a type of mortgage insured by the Federal Housing Administration and is very popular amongst people buying their first home. The loan allows a down payment of 3.5% for people with a score above 580.
The loan for people with credit scores between 500 and 579 requires a 10% down payment. The interest will be higher for people with low credit scores. To get an FHA loan, the borrower must be at least two years out of bankruptcy and have a well-established credit score after the bankruptcy.
Conventional Loan
A conventional mortgage is a mortgage that the federal government does not insure. There are two types of traditional loans: non-conforming and conforming loans. A conforming loan is a loan within limits set by Freddie Mac or Fannie Mae.
Non-conforming loans do not meet any such guidelines. The lenders pay private mortgage insurance on various conventional loans when 20% of the purchase price of the real estate is paid. The overall cost of borrowing a conventional mortgage is lower than other mortgages. However, sometimes the interest rate is higher.
Adjustable-Rate Loan
An adjustable-rate mortgage has an interest rate that changes throughout the loan with changes in the country’s interest rate. The loan initially has a fixed interest rate for five to ten years, after which the interest rate changes per the prevailing interest rate. The variable interest rate is based on an index rate benchmark that varies with market conditions. The borrower enjoys a lower interest rate in the fixed-rate period than the one for a traditionally fixed-rate loan.
Non-Confirming Loan
Non-conforming loans are loans that exceed the limits of conforming loans. The conforming loan limit Fannie Mae and Freddie Mac set in the United States is $424,100. The loan limit may go up to $635,050 for high-cost areas of the United States. There are various types of Conforming Loans.
A Jumbo Loan is a loan given to borrowers when the limit of their respective area has been ceded. However, since the amount is higher, the Jumbo Loan is difficult to get. Most lenders require a score above 680 to qualify for the Jumbo Loan and a 15%—20% down payment.
Jumbo Loans exceeding $1 million are called Superjumbo Loans. Lenders may give up to $3 million to borrowers with excellent credit scores. Cash-out refinancing means the mortgage is refinanced, and the cash is acquired using the house’s equity. The borrower will have to make one monthly mortgage payment, and the interest rates are lower than other equity loans. Around 80% of the house’s value can be cashed with the Cas-Out Refinance loan.
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