Different Mortgage Loans
What are the different types of mortgage loans available to home buyers in 2016, and what are the pros and cons of each? This is one of the most common questions we receive here at the Home Buying Institute. This page offers some basic information about the types of loans available in 2016. Follow the hyperlinks provided for even more information. And be sure to send us your questions!
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If you already understand the basic types of home loans, and you're ready to move forward with the process, use one of the links provided below. Otherwise, keep reading below to learn about the different financing options available in 2016. You can always come back to these links later on.
Types of Mortgages Available in 2016, Explained
There are many different types of mortgages available to home buyers. They are all thoroughly explained on this website. But here, for the sake of simplicity, we have boiled it all down to the following options and categories.
Option 1: Fixed vs. Adjustable Rate
As a borrower, one of your first choices is whether you want a fixed-rate or an adjustable-rate mortgage loan. All loans fit into one of these two categories, or a combination "hybrid" category. Here's the primary difference between the two types:
- Fixed-rate mortgage loans have the same interest rate for the entire repayment term. Because of this, the size of your monthly payment will stay the same, month after month, and year after year. It will never change. This is true even for long-term financing options, such as the 30-year fixed-rate loan. It has the same interest rate, and the same monthly payment, for the entire term.
- Adjustable-rate mortgage loans (ARMs) have an interest rate that will change or "adjust" from time to time. Typically, the rate on an ARM will change every year after an initial period of remaining fixed. It is therefore referred to as a "hybrid" product. A hybrid ARM loan is one that starts off with a fixed or unchanging interest rate, before switching over to an adjustable rate. For instance, the 5/1 ARM loan carries a fixed rate of interest for the first five years, after which it begins to adjust every one year, or annually. That's what the 5 and the 1 signify in the name.
As you might imagine, both of these types of mortgages have certain pros and cons associated with them. Use the link above for a side-by-side comparison of these pros and cons. Here they are in a nutshell: The ARM loan starts off with a lower rate than the fixed type of loan, but it has the uncertainty of adjustments later on. With an adjustable mortgage product, the rate and monthly payments can rise over time. The primary benefit of a fixed loan is that the rate and monthly payments never change. But you will pay for that stability through higher interest charges, when compared to the initial rate of an ARM.
Option 2: Government-Insured vs. Conventional Loans
So you'll have to choose between a fixed and adjustable-rate type of mortgage, as explained in the previous section. But there are other choices as well. You'll also have to decide whether you want to use a government-insured home loan (such as FHA or VA), or a conventional "regular" type of loan. The differences between these two mortgage types are covered below.
A conventional home loan is one that is not insured or guaranteed by the federal government in any way. This distinguishes it from the three government-backed mortgage types explained below (FHA, VA and USDA).
Government-insured home loans include the following:
The Federal Housing Administration (FHA) mortgage insurance program is managed by the Department of Housing and Urban Development (HUD), which is a department of the federal government. FHA loans are available to all types of borrowers, not just first-time buyers. The government insures the lender against losses that might result from borrower default. Advantage: This program allows you to make a down payment as low as 3.5% of the purchase price. Disadvantage: You'll have to pay for mortgage insurance, which will increase the size of your monthly payments.