This article will list the types of Mortgage loans for you and analyze them to let you pick the best out of the list. So, if this is your first home purchase before you obtain a mortgage, it will be good you know the eight types of mortgage available. This post will also help you learn a few of the terms that you can use during meetings with mortgage lenders. Also, if you master the terms and know the different types of mortgage loans, you will be able to intelligently choose the best mortgage and conclude the deal with ease. So let me give you the types of mortgage loans now to enable you to pick the one that is right for you.
Types of Mortgage Loans
Conventional vs Unconventional
This type of mortgage loan meets Fannie Mae’s underwriting guidelines. Conventional mortgages are a safe bet because of the consistency of monthly payments over the term of the loan. An unconventional loan breaks the Fannie Mae’s underwriting Guidelines. Examples of unconventional loans are government programs that are insured like (FHA, VA, USDA) with their own underwriting rules. And if the loans meet the set guidelines then the Agencies will buy the house and if you fail to make payment and a lender forecloses on the house they will not lose money.
Pros of conventional loans: If you total the cost after interest and fees, they are lower than that of unconventional loans.
Cons of conventional loans: The government backs conventional loans and this lets lenders charge higher interest rates or ask for a higher down payment. And if your down payment is lower than 20 percent, you have to pay private mortgage insurance (PMI) to protect the lender in case of default.
Subprime mortgages are among the types of Mortgage Loans you should look at. So look below at the pros and cons.
Pros: In this type of mortgage, lenders will lend you money to buy a house with bad credit. Or lend you money without a down payment. These types of mortgages are for people with all kinds of problems like divorce, unemployment, and medical emergencies. This type of mortgage will enable them to get a house.
Cons: The mortgage terms are tough with hard prepayment penalties and high-interest rates.
Pro: When you receive the Federal Housing Administration loans, you can get a mortgage loan with a small down payment of 3.5 percent.
Cons: You have to pay a mortgage insurance premium (MIP) just like private mortgage insurance (PMI). The only difference is that you keep paying throughout the life of the loan. And to evade paying MIP you must make a down payment of more than 10 percent and pay it continuously for up to 11 years. also, paying MIP can increase your loan burden by up to $100 per month on the top of the normal mortgage payment. And if you collected a loan of $200,000 you will pay an extra $200.
The next in the list of types of Mortgage Loans are VA loans. Below are the pros and cons of this type of loan.
Pros: This loan comes from the Department of Veterans Affairs (VA). And if you serve(d) in the military, you will be able to buy a house with no down payment or mortgage insurance.
Cons: When you purchase a house without a down payment and the housing market changes, you could be paying for more than the market value of your house. Besides, when you collect a VA loan you pay Funding Fee that starts from 1.25 percent to 3.3 percent of your loan. This fee depends on your rank in the military, down payment amount, and if this is the first time you are buying a house using a VA loan. You could pay a funding fee of $2,500 to $6,600 for a loan of $200,000.
Pros: The United States Department of Agriculture (USDA) has a loan program that is being managed by the Rural Housing Service (RHS). They give this loan to people living in rural areas and those that prove they have a financial need or earn a low income. Also, you can buy a house with this loan at below the ruling interest rate without making a down payment.
Cons: This loan has horrible prepayment penalties and you cannot refinance your loan to get a lower interest rate. This loan makes sure people who are not ready to buy a house buy one.
Conforming vs. Non-Conforming Mortgages
This is another type of loan in this list of types of Mortgage Loans. It is the amount a lender lends to you that will determine whether your mortgage is conforming or non conforming. Your mortgage is considered conforming if it meets the normal underwriting rules or approval process of your particular mortgage program.
For example, FHA or VA makes the rules for unconventional loans. But it is companies that are sponsored by the government like Fannie Mae or Freddie Mac, which make guidelines for conventional loans. What these companies do is to buy loans from your lender to enable the lender to grant more loans. However, the loans they buy must fall within their own guidelines. So if you have a loan that does not meet their guidelines then it is a non-conforming loan. An example is a Jumbo loan.
Pros of Conforming Loans: If you have a conforming loan your interest rate will be low. This is unlike non-conforming loans. For 15 years, interest rates for conforming loans, are below 4 percent but over 4 percent for jumbo loans.
Cons of Conforming Loans: You ought to borrow from conforming loans of Fannie Mae instead of the FHA and VA loans that have fees and high-interest rates.
Jumbo Loans (Non conforming)
Pros of Jumbo loans: Jumbo loans are above the guidelines set by Fannie Mae and Freddie Mac. That means you will be able to borrow loans at a higher price.
Cons of Jumbo loans: But you must have top-rate credit and make large down payments. Also, their interest rates are higher than those of conforming loans.
Therefore, getting a Fannie Mae loan is cheaper for you when you make a 20 percent down payment to evade paying PMI.
If you get a mortgage you will own your house one day. But in a reverse mortgage, the opposite is the case. This is the last in this catalog of types of Mortgage Loans. Below are the pros and cons.
Pros of a reverse mortgage: This mortgage allows old homeowners to augment their small income by borrowing their home equity (that is the value of your home less the current loan balance.) The borrower gets tax free monthly payments or a lump sum from the lender.
Cons of a reverse mortgage: This type of mortgage means that you will sell off your equity for cash. You end up putting the home that you have fully paid for at risk. Also, you will pay high fees too. With a reverse mortgage, the amount of equity you own in your house reduces due to the accumulated interest rate.
This post gave you a list of the types of Mortgage Loans, and examined them to enable you to pick the one that is right for you. Use the list and then go out there to get your mortgage now that you have enough information. And, please send feedback on your experience.