An individual takes a mortgage loan to purchase real estate. Property owners may also use it to raise money through mortgaging their property. A mortgage loan is one of the most common loans taken by individuals and businesses. Mortgage loans come with an interest rate and amortize over a period, typically 30 years. This article discusses the various types of mortgage loans in order to help you choose the one that fits your needs!
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Fixed-Rate Loan
The fixed-rate loan is one of the simplest mortgage loans. The borrower must pay a single interest rate every month, which usually ranges between 15-30%. This loan is recommended for homeowners who wish to avoid taking risks by paying a fixed amount throughout the life of the loan. Changes in the economy will not have an impact on the mortgage loan; therefore, the borrower enjoys high predictability. However, this option is not for people who plan on moving to another house soon.
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FHA Loan
An FHA loan is a type of mortgage that the Federal Housing Administration ensures and is very popular amongst people who are buying their first home. This loan requires a down payment of 3.5% for people with a credit score above 580. For people with credit scores between 500-579, the loan requires a 10% down payment. Typically, the interest rate will be higher for people with low credit scores. Additionally, to secure an FHA loan, the borrower must be at least two years out of bankruptcy with a well-established credit score after the bankruptcy.
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Conventional Mortgages
A conventional mortgage is a mortgage that the federal government does not insure. There are two types of conventional loans; non-conforming and conforming loans. A conforming loan is a loan that is within the limits set by Freddie Mac or Fannie Mae. Non-conforming loans do not meet any such guidelines. Lenders pay private mortgage insurance on various conventional loans when 20% of the property’s purchase price is paid. The overall cost of borrowing a conventional mortgage is lower than other mortgages. However, the interest rate tends to be higher.
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Adjustable-Rate Mortgage
An adjustable-rate mortgage contains an interest rate that changes throughout the period of the loan, depending on the changes in the country’s interest rate. Initially, the loan has a fixed interest rate for a period of five to ten years, after which the rate changes as 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 within the fixed period than a traditional fixed-rate loan.
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Non-Confirming Loans
Non-conforming loans are loans that exceed the limits of conforming loans. Fannie Mae and Freddie Mac set the conforming loan limits and are currently $424,100 for the United States. The limits of this loan may exceed $635,050 for high-cost areas of the United States.
There are various types of non-conforming loans. A Jumbo Loan is a loan given to borrowers when their respective areas’ limit has been exceeded. However, since the amount is higher, the Jumbo Loan is difficult to secure. Most lenders require a score above 680 to qualify for the Jumbo Loan, along with a 15% – 20% down payment. Jumbo Loans that exceed $1 million are called Super Jumbo Loans. Lenders may give up to $3 million loans to borrowers with excellent credit scores.
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Cash-Out Refinance
A Cash-Out Refinance means that the mortgage is refinanced, and the cash is acquired by taking from the equity in the house. The borrower must make one monthly mortgage payment, and the interest rates are lower than other equity loans. Around 80% of the value of the house can be borrowed with the Cash-Out Refinance loan.
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