Are you planning to buy a house? Well, Congratulations! Moving to a new house is an overwhelming experience. But before you start hunting for a house, you first need to make arrangements to fund it. One of the most common ways to finance the purchase of a home is to get a mortgage loan. There are many different types of mortgage loans available on the market, and it will be challenging to select the right one. But do not panic. If you have never applied for a mortgage before, contact a Florida mortgage company. They will help you to get the right mortgage to help you own your dream house.
Before you apply for a mortgage, you should learn about the different types of mortgage loans available. This guide will provide an overview of the most common types of mortgage loans and which will best suit you.
How to choose the right mortgage
Choosing the right type of mortgage can be difficult. You need to consider a lot of factors, including the term of the loan, the interest rate, and your credit score. You should also think about what you can afford each month. Besides these financial aspects also focus on the non-financial aspects of the purchase. Picking the wrong mortgage type can lead to severe financial consequences in the future.
So, analyze and ask yourself a few questions before making the decision
- How secured is your career? Whether you are working in an industry that is expected to grow in the future or is at least stable. This will help you to decide the monthly mortgage installment that you can afford in the future.
- How long do you plan to live in the house? Whether you plan to live in the house for many years or you do not want to settle in one place long enough. This anticipation will help in determining whether a fixed-rate loan or adjustable-rate mortgage is your option.
- What is your potential future income? Whether you expect your salary to increase in the near future or remain the same or even decrease depending on your business growth. Your paycheck will influence your future loan-paying capacity.
- Do you anticipate any large expenses in the near future? Are you expecting to start a family soon or do you plan to go for higher studies to build your career? This anticipation can help you to determine the down payment and interest rate.
These questions will help you to narrow down your choices and along with Florida mortgage lending you can make a better decision about mortgages. Also, you can get a pre-approved mortgage which will help you in buying your new house easily and quickly.
Different types of mortgages
The following are the most common types of mortgage loans:
A conventional loan is the most common and popular type of mortgage. it is not insured or guaranteed by the government. This type of mortgage is offered by private lenders such as banks, credit unions, private lending institutions such as conventional loans in Florida, or two government-sponsored enterprises such as Fannie Mae and Freddie Mac. It usually has a fixed interest rate and a shorter repayment term than other types of mortgages. Conventional loans have stricter requirements for qualification. They have lower rates of interest and you can also get it with a down payment of as little as3%. But if you have a down payment of less than 20% then you need to buy private mortgage insurance (PMI). It is beneficial to people with stable income and strong credit.
Conventional loans come in two packages: conforming and non-conforming.
A conforming loan is a mortgage that falls within the limits set by Fannie Mae and Freddie Mac. These two companies purchase mortgages from lenders, securitize them, and sell them to investors. The maximum loan limit for a conforming loan varies from county to county.
A non-conforming loan is a type of conventional loan that doesn't meet the guidelines set by Fannie Mae or Freddie Mac. These loans are of a larger amount and have less strict guidelines. They are usually for people who have a low or bad credit history like bankruptcy. It usually carries a higher interest rate and has a shorter term than conventional mortgages. non-conforming loans are similar to jumbo loans.
A fixed-rate mortgage (FRM) is a mortgage where the interest rate is locked in for the life of the loan. The monthly payment will never change, regardless of what happens to the market interest rates. This type of mortgage is very popular since it offers peace of mind and predictability. It helps you to budget and plan for the long-term Fixed-rate mortgages are available in both conforming and non-conforming loans. The interest rate on a fixed-rate mortgage is usually higher than an adjustable-rate mortgage (ARM). you need to have a good credit score (at least 620) to qualify for it. It is a good choice for people who plan to stay in their home for many years. The disadvantage of a fixed-rate mortgage is that you may end up paying overtime if the interest rates are high. Moreover, you do not benefit if the interest rates go down during your loan tenure.
Fixed-rate mortgages come in three types: 15-year fixed, 30-year fixed, and 20-year fixed.
An adjustable-rate mortgage (ARM) is a mortgage where the interest rate changes periodically, usually every 1 to 7 years. The monthly payment may also change depending on the interest rate. This type of mortgage usually starts with a lower interest rate than a fixed-rate mortgage and the initial monthly payment is low. But, since it is a variable rate loan, the interest rate can go up or down whenever the market changes. Thus your loan will be more expensive over time if the interest rate goes up. An ARM is a good choice for people who plan to move or sell their home within a few years.
Jumbo loans are a type of non-conforming loan. They are for people who need a large amount of money, usually more than $417,000. Jumbo loans have less strict guidelines and a higher interest rate than conforming loans. Since the loan amount is high you need additional documentation. The down payment requirement is also higher at least 10% to 20%. You should have a good credit score (at least 620) to qualify for it.
The government offers two types of home loans: the Federal Housing Administration (FHA) loan and the Department of Veterans Affairs (VA) loan.
The FHA loan is a government-insured mortgage that is available to all borrowers, regardless of credit score. The down payment requirement is only 3.5%, which makes it an attractive choice for borrowers with modest incomes. The FHA loan is especially popular among first-time homebuyers since there are no income limits and the credit score can be as low as 500 to qualify for it. However, people with low credit scores need to put at least 10% of down payment. Also FHA loans require two mortgage insurance premiums: the first mortgage that is paid upfront and the FHA mortgage insurance paid monthly.
The VA loan is a government-backed mortgage with no down payment requirement. It is available to veterans, or active duty military members and their families. There are no credit scores or income restrictions. The VA loan offers a competitive interest rate and there are no monthly mortgage insurance premiums.
The USDA loan is a government-backed mortgage that is available to borrowers in rural areas. It helps moderate-to-low income borrowers to buy homes in designated areas where access to home loans may be limited. The USDA loan does not require a down payment, but the house should be located in an eligible area. Borrowers get an attractive interest rate and no monthly mortgage insurance premiums. But you need to pay an upfront fee of 1% of the loan amount (which can be financed with the loan). There are no income restrictions and no credit score is required to qualify for this type of loan.
Mortgage loans are a big decision and the right type of mortgage decision will avoid future financial crises. Borrowers should carefully consider which type is best suited for their situation based on their financial goals and needs. Consult with experienced Florida mortgage lenders before buying a home to find the best loan product.