Understanding Different Types of Mortgages & How to Choose the Right One
Understanding Different Types of Mortgages & How to Select the Appropriate One
When shopping for a new home, it’s essential to be informed about all available options. You’ll have to decide between conventional and nonconforming loans, as well as the amount you wish to borrow.
Conventional mortgages are the most prevalent type of residential loan in America, making up two-thirds of all residential loans. They usually come from government-sponsored entities like Fannie Mae or Freddie Mac that set various guidelines for these loans.
They offer several interest rate choices, such as fixed and adjustable. The most popular choice is a 30-year fixed-rate mortgage which provides a set interest rate with predictable monthly payments for the life of the loan.
Another popular mortgage type is a home equity line of credit (HELOC). Similar to credit cards, an HELOC works as a revolving line that lets you use and repay funds over an agreed-upon term.
When considering applying for a home equity loan, the ideal time is when you have built up sufficient equity in your house to use for paying off credit cards, making major home renovations or saving up for an important purchase. A HELOC may also be useful in paying off high-interest debt such as student or car loans.
You can also utilize a home equity loan or HELOC for emergency expenses, such as medical bills or major repairs on your house. If you’re in the position to take out another mortgage on your residence, that may be an even better option for financing these types of costs.
Another option is a reverse mortgage, which allows you to access the equity in your home without making monthly payments for an agreed-upon period of time. This type of mortgage is often preferred by older homeowners who need to use their home’s equity for large one-time purchases or emergencies.
An adjustable-rate mortgage (ARM) is a type of mortgage with an interest rate that fluctuates based on market conditions. Unlike fixed rate mortgages, an ARM offers low introductory interest rates for an initial period before shifting to either higher or lower levels over its life. For instance, a 5-year/5-year ARM is popular; it features a fixed interest rate for five years before changing over to an adjustable rate for the remaining portion.
If your credit is strong, conventional mortgages could be the ideal option for you. While they tend to be more costly than FHA or VA loans, they do come with some advantages over other types of mortgages.
These mortgages provide more payment flexibility than shorter-term ones and allow you to build equity faster. Unfortunately, they may prove more costly in the long run due to their higher interest rate compared to other types of mortgages.
