Types of Mortgages Available
Buying a home is often one of the most significant purchases people will make, and it’s crucial to understand the different types of mortgages. Knowing what type of loan is best for you can help you save money and build equity in your home over the long haul.
There are many reasons to consider a mortgage for your home purchase. A mortgage can be a great way to buy your dream home without putting up all the cash upfront. It also allows you to purchase a more affordable home while building equity, which can help you avoid future debt.
But there are some essential considerations before you choose the right mortgage for your needs, including how much of a home you can afford to buy and whether you want to pay off your mortgage as soon as possible. You’ll also need to decide whether you’re comfortable with an adjustable or a fixed-rate mortgage and what loan term you prefer.
Conventional Mortgages
The most common type of mortgage is a conventional loan, which has no government guarantees. They’re backed by private lenders, such as banks and credit unions, who often resell them on the secondary market. These mortgages are ideal for people with solid credit and a down payment of at least 3%.
Conforming loans are a subset of conventional mortgages that follow guidelines set by the U.S. government’s Fannie Mae and Freddie Mac and maximum loan amounts. These mortgages have limits based on the area where you live and typically change annually to reflect increases in home values.
Jumbo Mortgages
If your home’s value exceeds the limits of a conventional mortgage, you might be eligible for a jumbo loan. Private lenders also back these mortgages, but they’re more expensive than traditional ones.
A jumbo loan has higher interest rates and fees than a regular mortgage. It’s also a risky investment, so be sure you know what to expect before deciding on this type of mortgage.
Nonconforming Mortgages
Finally, a few types of mortgages don’t fall into any of the other categories. These include a second mortgage, which can be used for home improvements, debt consolidation, or college funds.
Reverse Mortgages
This type of mortgage is available for people ages 62 and older who own their homes. It allows homeowners to tap into their home’s equity in a lump sum, with fixed monthly payments, or as a revolving line of credit. This can be a good choice for seniors who want to spend their retirement years in their homes rather than rent them out.