The different types of mortgages explained – how to choose a mortgage
Are you in the market for a new home, but feel overwhelmed by the mortgage process? With so many options out there, it can be hard to know which mortgage type is right for you. Fear not! In this article, we will break down the different types of mortgages, help you understand the pros and cons of each and help you determine which one fits your unique situation. To learn more about mortgages, visit this Mortgage Advisor Leeds.
What is a mortgage and how does it work?
First things first, let’s start with the basics. A mortgage is a type of loan that is commonly used to purchase property, but it can also be used to repair, renovate or restore a house. The borrower agrees to pay the lender regular payments, which are typically divided into principal and interest over a specified period of time. In exchange, the property is used as collateral to secure the loan.
There are various types of mortgages, but the most common are fixed-rate and adjustable-rate mortgages.
(i) Fixed-rate mortgages
As the name implies, a fixed-rate mortgage is a type of mortgage loan where the interest rate stays the same for the whole duration of the loan period. This implies that the monthly payments will remain constant throughout the loan term. A fixed-rate mortgage is an excellent choice if you prefer consistency and wish to budget your finances. However, these types of loans tend to have higher interest rates compared to their counterparts.
(ii) Adjustable-rate mortgage (ARM)
This is a type of mortgage loan where the interest rate can fluctuate over the course of the mortgage period. The interest rate is usually fixed for the initial period, (between 5 to 10 years), and then adjusts based on a pre-determined index like the Treasury Bill.
A major benefit of ARMs is that the initial rate is usually lower, making it easier to qualify for a loan or buy an expensive home. However, if the interest rates rise, so do the monthly payments, making financial planning and budgeting more challenging.
(iii) Government-backed mortgages
If you are a first-time homebuyer, you may be eligible for a government-backed mortgage. This is a type of loan that is insured or guaranteed by a government agency, with the aim of making homeownership more accessible. Agencies that provide these loans include the US Department of Agriculture (USDA), the Federal Housing Administration (FHA) and Veteran Affairs (VA).
FHA loans are ideal for people with less-than-perfect credit scores, VA loans are accessible to current and former military members and their loved ones and USDA loans are specifically designed for those in rural regions and have low-to-moderate incomes.
(iv) Jumbo mortgages
If you are looking to purchase a high-value property, you may want to look into a jumbo mortgage. This is a form of financing that goes beyond the limit set by the Federal Housing Finance Agency. Its sole purpose is to finance properties that are considered too expensive for a conventional conforming loan. As of this writing, if you want to purchase a property worth over $726,200, you may need a jumbo loan.
The takeaway
There are other types of mortgages, but the ones listed here are the most common. When picking a mortgage, it is important to consider your unique situation, credit score, how long you intend to live in the property and also how much you can afford to put down. You should also consider using a seasoned mortgage broker to help you compare the different options and find the best one that matches your needs.
