A home loan is a secured loan used to purchase a property by offering it as collateral. Borrowers usually take out a home loan to purchase or maintain a home, land, or other various types of real estate.
There are eight types of home loans, and it is vital to understand what each offers so that you can choose the type of loan that is best suited for you.
#1 Fixed-Rate Mortgage
A fixed-rate mortgage interest rate stays the same over the entire term, usually 15, 20, or 30 years.
This type of mortgage is considered safe because the payments remain consistent. In addition, fluctuating interest rates won’t change your payment, making it easier to plan financially.
If interest rates fall, your mortgage continues at a higher rate. In such cases, you’ll have to refinance your mortgage to take advantage of lower interest rates.
#2 Adjustable-Rate Mortgage
An adjustable-rate mortgage (ARM), also called a variable-rate mortgage, typically offers a lower initial interest rate than a fixed-rate mortgage. However, after an initial period, the interest rate fluctuates.
The advantage of an adjustable-rate home loan is that the loan payment decreases as interest rates fall. If interest rates decline over time, your payment will lower without refurbishing.
The disadvantage of an adjustable-rate home loan is that the loan payment increases as interest rates rise. If interest rates rise over time, your payment will increase.
#3 FHA Home Loan
The FHA (Federal Housing Administration) allows buyers who may not qualify for a home loan to qualify for an FHA insurance-backed mortgage.
An FHA home loan typically requires a lower down payment, and the loan size may have limitations. The insurance payment is usually built into the monthly home loan but is affordable for most qualified homebuyers.
#4 VA Home Loan
A VA home loan is a mortgage loan that qualified lenders to issue the U.S. Department of Veteran Affairs guarantees to eligible American veterans or surviving spouses.
VA loans offer competitive rates with low or no down payments, but the loan size may be limited.
#5 USDA Home Loan
USDA Rural Development Guaranteed Housing Loan Program is a mortgage loan offered to rural property owners by the United States Department of Agriculture. These loans provide homeownership opportunities to low and moderate-income Americans in qualifying rural areas through several lending and grant programs
The loans have maximum household income limits that vary by County and income limits that change annually.
USDA loans require no down payment and allow you to finance 100% of the property value.
#6 Balloon Mortgage
A balloon mortgage typically has a fixed interest rate with relatively low payments for a fixed period. The mortgage doesn’t fully amortize over the note’s term, leaving a balance due at maturity that must be paid immediately. The final payment is usually large and called a balloon payment.
This type of loan may be risky for some borrowers but can be helpful for someone who will stay in a home for a relatively short time while home prices rise.
#7 Interest-Only Home Loan
Interest-only mortgages have a lower payment at the beginning of the loan while only interest is paid. Then, the latter part of the mortgage has higher payments because they include both interest and principal. This gives the borrower more flexibility because he is not forced to make payments toward the principal.
Common reasons for an interest-only home loan are:
- You can pay principal when convenient, especially if your income fluctuates.
- You can now buy a more expensive house and defer higher payments until your income increases.
- You can invest the cash flow while only paying interest on your home loan.
Interest-only home loans are considered riskier and aren’t regarded as appropriate for many home buyers.
#8 Reverse Mortgage
A reverse mortgage allows seniors to convert equity in their homes to cash. You don’t have to pay back the loan and interest as long as you live in the house. And you remain entirely responsible for the property, including physical maintenance, payment of all taxes, fire insurance, and condominium or maintenance fees.
#9 Jumbo Loans
A jumbo loan, or jumbo mortgage, is a mortgage loan that exceeds the limits set by the Federal Housing Finance Agency (FHFA). Because jumbo loans are not eligible to be secured by government-sponsored agencies and are considering a non-conforming mortgage loan, jumbo mortgages are considered riskier than FHA, USDA, and VA loans.
We specialize in mortgages for first-time homebuyers, conventional home mortgages, refinance loans, reverse mortgages, and FHA, VA, and USDA mortgage options. In addition, we’ve worked extensively with cash-out refinancing and help clients to lower their monthly mortgage payments.
Updated March 21, 2022