Different Types of Home Loans | Here’s a Quick Explainer

/different-types-of-home-loans-heres-a-quick-explainer/

May 12, 2021 Realtor Blog, resources

different types of home loans | Reach Home Loans

Planning on taking advantage of the current market to buy a home? Perhaps you’re researching different home financing options? Indeed, you came to the right place. There are various home loan products out there. As with anything involving heavy financing, it’s important to put some thought into what home loan to choose. After all, you’ll likely spend the next few years paying it off.

There are intricacies and unique features in each home loan. In this article, we’ve broken down the various types of home loans so that you can make an informed choice. Let’s get to it!

Applying for a home loan | Reach Home Loans

Fixed-Rate Mortgage

From the term itself, a fixed-rate mortgage promises a fixed interest rate. Common fixed-rate mortgages are the 30-year and 15-year mortgages. However, what’s with 30 or 15 years? Well, aside from being the term of the loan, it also serves as the basis for the interest rate. In a 30-year fixed-rate mortgage, the interest rate is fixed for 30 years. The same thing goes with 15 years.

Financial institutions often use complex statistical models to forecast future interest rates. Now, how does the time element affect your decision? First, you have to remember that interest compounds over time. Therefore, a longer loan term, i.e., a 30-year fixed-rate mortgage, will yield a high accumulated interest payment. However, since you’ll pay the mortgage in 30 years, you’ll have smaller amortization payments.

In the case of a 15-year fixed-rate mortgage, interest will compound only for 15 years. In effect, the accumulated interest will be lesser this time. But, your amortization payments will be higher since you only have 15 years to pay.

Key Takeaways

  • Longer loan term means higher accumulated interest but small amortization payments
  • A shorter loan term means lower accumulated interest but large amortization payments
  • 30-year fixed-rate mortgages are ideal for people with moderate monthly cash flow
  • 15-year fixed-rate mortgages are suitable for refinancing or for people with high monthly cash flow

Adjustable-Rate Mortgage

An adjustable-rate mortgage (ARM) works like a fixed-rate mortgage, except that it varies in interest rates. Common ARM terms include the following:

  1. 2/28 ARM features a fixed rate for two years and a variable rate for 28 years.
  2. 5/1 ARM features a fixed rate for five years and a variable rate starting from the sixth year until the maturity date.
  3. 5/5 ARM features a fixed rate for five years and a variable rate that changes every five years.

Rates used in ARM depend on indices such as the yield rate of treasury bills or the London Interbank Offered Rate (LIBOR). Usually, banks add a margin on top of these rates. For example, if the LIBOR rate is 1 percent and the bank sets a margin of 1.5 percent, the charged interest will be 2.5 percent.

Key Takeaways

  • ARM is favorable if the interest rate trend is going down
  • Apart from LIBOR, other banks use the consumer price index as a basis
  • ARM is best for short-term home loans
  • It has a fixed-rate element which can be tempting

FHA Mortgage

The Federal Housing Administration backs an FHA mortgage loan. It aims to help people with limited financial capacity get home mortgage financing. This type of loan is best for people with moderate to low income.

Key Takeaways

  • People with low FICO credit scores (500 and up) can apply
  • Down payments can be as low as 3 percent
  • FHA mortgage is best for people who can’t outright pay a large cashout

VA Mortgage

A VA mortgage is specifically designed for veterans or their surviving spouses as mandated by US law. This type of mortgage is available for military service members as well. However, applicants must be fully eligible to get this loan.

Key Takeaways

  • Requires 0% down payment
  • Doesn’t have mortgage insurance (it means lesser payments)

Jumbo Mortgage

From the term itself, a jumbo mortgage is a mortgage above statutory limits set by the Federal Housing Finance Agency. In other words, Fannie Mae and Freddie Mac can’t secure jumbo loans. Only people belonging to higher income classes can afford a jumbo mortgage loan.

Key Takeaways

  • This loan type is designed specifically for luxury properties
  • The loan amount can go above $1 million

Different types of home loans | Reach Home Loans

Are you still paying for your student loan? Learn how you can fix your student loan debt situation to qualify for a mortgage.

Get a Loan Now at Reach Home Loans

Did you know that interest rates in Florida are historically low? Yes, that’s why now is the best time to buy a home here. At Reach Home Loans, we can provide you a mortgage contract that’s agreeable on your terms and ours. Seize the low interest now and become a bonafide homeowner. Call us now at 954-703-1465 to get started.

Ready to Buy or Refinance?
Let us show you how.

With our years of experience, we are completely focused
on getting you the best deal.