Types of Home Loans
If you are interested in purchasing a home, there is a good chance that you will have to take out a mortgage. Not a lot of people can purchase a home with cash, but thankfully there are multiple types of mortgage loans to choose from. It is important to think about the different types of loans for homes, considering the pros and cons of each option carefully. That way, you can find the right option to meet your needs.
If you are curious about the different home loan types, we have some helpful information for you below. Learn more about the different types of home loans, and reach out to a professional who can help you find the right option to meet your needs.
What is a home loan?
A home loan is a loan that makes it easier for you to purchase a home. Because you may not have hundreds of thousands of dollars in cash, you can take out a loan for that home, allowing you to purchase it now. Then, you will gradually pay off the loan over an extended amount of time. It is not unusual for people to take 15, 30 or 40 years to pay off a home.
If you find a home that you like, you will probably be asked to put some money down. Then, you will take out a loan for the rest. The loan will have a specific interest rate attached to it, and you will be required to make monthly payments until the loan is paid off or until you sell the house. If you sell the house before the mortgage is paid off, you will use the proceeds from the sale of the house to pay off the remaining balance of the mortgage.
There are some situations where your monthly payment on that home loan could change over time. For example, you may have a loan with an adjustable interest rate. As the interest rate rises or falls, the monthly payment you have to make on your house will rise or fall as well.
Or, you may decide to refinance your house, replacing that home loan with a different loan. You might decide to refinance your house to get a better monthly payment. Or, you may decide to refinance your house to tap into the equity of your home, which might increase your monthly payment. There are a lot of options available, and it is important for you to work with a financial professional who can make it easier for you to budget accordingly.
There are a lot of different situations where someone might need a loan for a house. That is why there are numerous mortgage lenders who have created multiple loan types, allowing you to customize them to meet your needs. You must think carefully about the different features of each individual loan to find the one to meet your needs.
What are the different types of home loans?
There are lots of different types of home loans available, and each has its own stipulations. Here is a list of some of the most common home loan types.
A conventional loan refers to a loan that is not backed by the federal government. There are numerous types of conventional loans, but this is one of the first options that people think about if they are interested in buying a house. A conventional mortgage falls into three separate categories:
- Conforming loan: A conforming loan conforms to the standards that have been set by the FHFA. There are standards that have to be met for the size of the loan, the debt included in the loan, and the credit provided by the loan. In 2023, the loan limit for a conforming loan is $726,200.
- High-Balance Conforming loan: The Housing and Economic Recovery Act (HERA) establishes high cost areas, while setting a ceiling of 150% of the baseline conforming loan limit. Therefore, in 2023 the high-balance conforming loans are between $726,201 to $1,089,300. For example, San Diego County is $977,500.
- Non-conforming loan: This refers to a loan that does not meet FHFA standards. They are typically given to people who are looking to purchase more expensive homes or those who have an unusual credit history or profile. Non-conforming loans are also know as jumbo loans or non-agency loans. For example, if you had a loan amount over $977,500 in San Diego County it would be considered a non-conforming jumbo loan.
Even though this is a very common type of loan, it is critical to think about the benefits and drawbacks of conventional mortgages.
Some of the top benefits of this loan option include:
- You can use it for just about any type of property you choose. This includes a primary house or a secondary investment property.
- The overall cost to take out this loan tends to be a bit lower, even if the interest rate is a bit higher.
- You can take out mortgage insurance to purchase a house for less than 20% down, but you can also get rid of the insurance payment once you reach 20% equity in the house.
Even though there are a lot of benefits to this option, there are some drawbacks you need to keep in mind as well. Some of the top drawbacks to consider include:
- You typically need to have a minimum credit score of 620.
- There are some loans that will require you to put more money down.
- Your debt-to-income ratio typically has much stricter requirements if you want to qualify for this type of loan.
- If you put down less than 20%, you will typically be required to purchase mortgage insurance.
- The documentation to take out this type of loan is extensive. You will need to verify your employment history, your assets, and your income.
There are a lot of steps involved, but this is typically one of the first loan options that people need to think about. If you have a lot of money set aside and you have a high credit score, you may want to consider this option.
One loan option that a lot of people think about is called an adjustable-rate mortgage. As the name suggests, this is a mortgage that has an interest rate that fluctuates with the rest of the market. It is not unusual for an adjustable-rate mortgage to have a fixed interest rate for the first three years before it begins to change with the rest of the market.
In addition, this type of mortgage will typically specify exactly how frequently the interest rate will change. Even though market rates change every day, the interest rate on your adjustable rate mortgage may not change except once every six to twelve months. You always need to read the fine print to understand how frequently your interest rate can change, how much it can change, and the limits to which it can change during the life of the loan.
Some of the top benefits of an adjustable-rate mortgage include:
- You can still get an interest rate that is locked in for the first few years.
- If the interest rates drop, you can save money because your monthly payments will also drop.
- When you apply for a mortgage, an ARM typically has a lower rate than a fixed-rate mortgage issued at the same time.
On the other hand, there are several drawbacks to keep in mind as well. Some of the top drawbacks of this type of mortgage include:
- If interest rates rise too much, your mortgage payment could skyrocket, making your home unaffordable.
- If home values fall in your area, you may have a difficult time refinancing, which can make it difficult for you to fix your interest rates.
- It can make it very hard for you to create a monthly budget because your housing expenses are not as predictable.
If you are considering an ARM, think carefully about how much your housing payments can change, and always read the fine print before you sign the contract. If you have questions about this type of loan, you need to talk to a real estate professional who can help you.
Without a doubt, one of the most common types of loans is a fixed-rate mortgage. When compared to other types of loans, fixed-rate mortgages are much more predictable. Of note, fixed-rate mortgages can fall into many of the other categories on this list.
As the name suggests, the interest rate is going to stay the same over the life of the loan. Even if you start to make more money at work, and even if the market changes and interest rates go up, the rate on your mortgage will stay the same. The lender is able to write a fixed-rate mortgage for just about anytime you want. If you want to spread your mortgage out over 30 years, you can do so. If you want to pay off your home in ten years, you can do so.
Some of the top benefits of a fixed-rate mortgage include:
- The payment you will make on your house will stay exactly the same over the life of the loan. The interest and principal will not change, although changes in your real estate taxes and home insurance rates could cause the loan to vary slightly.
- Fixed payment amounts make it much easier for you to budget for your housing expenses every month.
- If the interest rates throughout the rest of the market start to go up, you don’t have to worry about being priced out of your house.
- It is typically easier to qualify for a fixed rate mortgage because the lender is not as worried about not getting his or her money back after the documentation process is done.
There are a few drawbacks to note when it comes to fixed-rate mortgages. They include:
- The interest rate on a fixed-rate mortgage typically starts higher than a comparable adjustable-rate mortgage being issued at the same time and under the same market conditions.
- If the interest rates throughout the rest of the market begin to drop, you will need to go through the refinancing process if you want to get a better interest rate.
- Closing costs on conventional loans that fall under this category can be expensive.
Always think about what the future looks like for you and your family before you decide if this loan option is right for your needs. If you plan on staying in your house for five or more years, then you might want to consider locking in your interest rate with a fixed-rate mortgage.
If you have a history of military service, or if one of your family members has served in the military, then you might be able to qualify for VA home loans. This is a specific loan program that has been designed for people with military ties, and it can make it easier for you to purchase a house. It is particularly helpful for people who do not have a lot of money set aside that they can put toward a house.
There are several significant benefits of this loan option, such as:
- This type of loan typically has a low interest rate.
- You are not required to make a down payment at all; however, if you want to secure the lowest interest rate, you might want to put a little bit of money down.
- There is no credit score required for this type of loan, but if you have a higher credit score, you increase your chances of getting the best loan terms.
- Closing expenses on a VA loan are typically capped.
- Mortgage insurance is usually not required with a VA loan.
On the other hand, there are a few significant drawbacks you need to keep in mind. For example:
- You are typically required to pay a funding fee with a VA loan, which can be expensive.
- This is a loan program that is only open to members of the military or people with a history of military service.
- Even though the interest rates are usually low, they can be high for people without perfect credit or those who are not putting any money down.
You should reach out to a loan professional to learn more about VA loans.
If you are looking for government help paying for your house, then you might be interested in an FHA loan. This is a loan that can make it possible for someone to own a house even if they don’t have a perfect credit score or a large down payment. In addition, this is a popular loan option for people who are interested in purchasing a house for the first time. As always, you should compare the terms of each possible FHA loan to figure out which one is best for your needs.
Some of the top benefits of taking out an FHA loan include:
- You only need a credit score of 500 to qualify for a house if you are willing to put down 10%.
- If you only want to put down 3.5%, then you will need a credit score of 580.
- You can purchase a house without having to put down a lot of money or having a perfect credit score.
- The seller can contribute to your closing costs, which can make the process of getting a home loan easier.
There are a few drawbacks to keep in mind with an FHA loan. Some of the biggest drawbacks include:
- This is not a program that is available to everyone.
- You are typically required to have two mortgage insurance premiums (upfront and monthly), which can increase the overall cost of your home loan.
- The interest rate on an FHA loan may be slightly higher than some of the other options, particularly if your credit score is not ideal.
You should reach out to a professional who can help you figure out if this is the best loan option to meet your needs.
If you are interested in taking out a loan that falls outside of the FHFA limits listed above, then you will need to use a jumbo loan. These loans are very common in areas with very expensive property values. Examples include Los Angeles, San Francisco, San Diego, Miami, Scottsdale, Tahoe, Seattle,, Chicago, and the entire state of Hawaii. The location of the property plays a significant role in how much it costs, so if you are purchasing a more expensive property, a jumbo loan could be the only option available.
Even though it can make it easier to purchase some properties, it is also important to take a look at the benefits and drawbacks. Some of the main benefits of a jumbo loan include:
- You can tap into a much larger loan if you want to purchase a more expensive house.
- The interest rate on a jumbo loan is not necessarily higher than a comparable conventional loan.
- If you are interested in owning a home in a specific part of the country, a jumbo loan might be the only option. It can remove a significant obstacle to homeownership for a lot of people.
Even though jumbo loans can be helpful, there are a few significant drawbacks you need to consider as well, including:
- You will typically be required to make a sizable down payment, which can make it hard for someone to qualify for this type of loan.
- Usually, a credit score of at least 700 is required.
- Your debt-to-income ratio cannot be any higher than 45%.
- The asset and income verification process for this type of loan is extensive.
- It can take a long time for you to get approved for this type of loan, which can stretch out the timeline.
Always think carefully before you decide to take out a jumbo loan.
How to choose the right types of mortgage loans for you
If you are interested in taking out a mortgage for a new home, you need to think carefully about which loan option is best for your needs. There are several important factors you need to consider.
- The amount of cash you have on hand. How much money are you willing to put down? This will dictate which types of loans you qualify for.
- How long you plan on staying in the house. If you are planning on staying in the house for the foreseeable future, then you might be interested in taking out a loan that has a fixed interest rate. If you aren’t planning on staying in the same place for very long, you might be interested in more flexible mortgages.
- Your future income stream. You need to think about what your budget looks like, not only today, but also in the future.
- Where you plan on living. There are some locations that have more expensive property values than others. This could dictate the types of home loans you qualify for.
- Government program assistance. Do you qualify for help from any government programs? You might be able to save money if you can go with an FHA, VA, or USDA loan.
- Your credit history. Always take a look at your credit score and your credit report before you start applying for home loans.
- Property cost. How expensive is the property you are looking at? If you are interested in purchasing a more expensive property, then you might have to take out a jumbo loan. This might mean that your paperwork is more expensive.
- Employment history. If you are self-employed, it might be more difficult to qualify for a mortgage than if you are a salaried W2 employee.
Because there are so many factors you need to think about, it is helpful to work with a professional who can walk you through the process. At Griffin Funding, we have a tremendous amount of experience working with homeowners of all backgrounds. We will work with you personally, helping you customize your home loan to meet your needs. We want to make it as affordable as possible for you to purchase your dream home. We understand that there is a lot of jargon involved, but we are here to explain all of it to you. That way, you will have an easier time understanding the different options available to you.
The Griffin Funding mortgage process is very straightforward, and you will have your personal professional who will help you go through the features and benefits of the different loan options for which you qualify. That way, you can figure out which option is best for your needs. Contact us today to speak to a member of our team.
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