Loans have been there since time immemorial. In fact, lending is one of the oldest forms of business. Today, the number of lenders is on the rise and the loan values they offer continue to increase. They lend to businesses, individuals, governments, charities, and learning institutions among other types of legal entities. Knowing the different types of home loans available on the market is the key to financial literacy. At Tundra Mortgage Brokers, you can get all the help you need to purchase the home of your dreams or buy an investment property. You can also invest in commercial real estate to increase your income.
Types of Home Loans
1. Fixed Rate Home Loans
These are home loans with a fixed mortgage rate. This means that government policies, economic uncertainties, and changes in lenders’ policies cannot affect the rate of interest charged on these home loans. During the real estate bubble burst of 2008, interest rates rose to unsustainable levels, leaving homeowners with mortgages they could not afford. This led to hundreds of thousands of foreclosures.
The main advantage of fixed-rate mortgages is that they come with fixed monthly payments throughout the term of the loan, which means budgeting is made easier. This reduces the risk of default for the average homeowner.
However, homeowners should know that fixed-rate mortgage rates are usually higher than the mortgage rates charged on adjustable-rate mortgages. This means that you may end up spending more money on interest payments over time.
2. Adjustable-Rate Mortgages
As the name suggests, these are loans that come with a fluctuating interest rate. If the economy is doing well and interest rates reduce, you will pay a lower mortgage rate and vice versa. With this type of loan, you can wait for interest rates to reduce before applying for a home loan. Unfortunately, if there is excess liquidity in the market and the Fed decides to raise interest rates, you will also have to pay a higher rate of interest on the outstanding balance.
As you can see, adjustable-rate mortgages come with some degree of uncertainty as interest rates can fluctuate from time to time. In most cases, however, adjustable-rate mortgages are usually cheaper than fixed-rate mortgages. If you only want to live in a home for a couple of years, an adjustable-rate mortgage might just be perfect for you.
3. Government-Backed Loans
The government supports its citizens who want to own a home by offering them incentives in the form of government-backed or insured home loans. Below is a list of government-backed loans everyone should know about:
The Federal Housing Authority promotes homeownership by offering cheap loans to consumers who have bad credit as well as those who do not have a significant amount of money to pay the deposit required by lenders. To qualify for an FHA home loan, you will need a FICO score of 500 and make a down payment of 10%. If you have a minimum FICO score of 580, you will only be required to make a down payment of 3.5%, which is quite affordable for most people.
ii) VA Home Loans
Veterans usually enjoy a number of benefits after offering selfless service to the country. One of these benefits is VA Loans. Please note that VA loans also apply to active duty personnel and their families. To get a VA home loan, you do not need any down payment. There is also no requirement for mortgage insurance. In fact, any closing costs are capped and may even be paid by the seller of the property.
iii) USDA Loans
The United States Department of Agriculture insures home loans for low-income earners who want to buy a home in rural areas. No down payment is required to qualify for these USDA-backed home loans. However, a fee of 1% of the loan amount must be paid by the applicant. This can be financed with the home loan together with the applicable annual fee.
4. Jumbo Loan
As the name suggests, a Jumbo loan is a large home loan typically higher than $548,250. You will need this type of loan if you want to purchase a luxury house worth a lot of money. Most lenders offer jumbo loans of up to $2.5 million. However, borrowers typically have to make a down payment of 10% to 20% of the property value. Only individuals with low DTI ratios and significant assets can qualify for these loans. Additionally, borrowers must have a credit score of at least 700 FICO points.
5. Conventional Home Loan
This is the most common type of mortgage as it does not have strict requirements. Anyone with a decent credit score and a reliable income can qualify for a conventional home loan if they can come up with the required deposit. There are two types of conventional home loans:
Conforming Loans – These are home loans that meet the FHFA standards. The maximum loan value for conforming loans is $647,200 for most homes, but loans of up to $970,800 can be approved for consumers who want to buy a home in a high-end neighborhood.
Non-Conforming Loans – These are loans meant for individuals who have gone through bankruptcy and other major life events. They do not meet FHFA standards and are mainly meant for borrowers with subpar credit.