If you have plans to buy a new home and have plans on visiting a bank for a mortgage, you should know about your options. Managing the finances in buying or building your own home can be a daunting process. Picking up a mortgage is not as stressful as you may think once you learn its types and how they work. Here are the types of mortgage that you should know about before heading to banks.
It is a home loan that is not insured by the federal government. There are two types of conventional mortgages – conforming and non-conforming loan. The conforming loan is offered when the demand falls under the limits of the bank that issues the loan. Similarly, the loans which do not meet any guidelines are called non-comforting loans. A conventional mortgage is a good type of loan for primary homes or investment property. The interest rates can be a little higher than other mortgage options. To get this loan, you at least need a ratio of 45 to 50 for debt-to-income.
Jumbo loans are very much similar to conventional loans, but they have non-conforming loan limits. The home prices are higher than the federal loan limits. The price of the home is more than what the federal loan limits can provide. Jumbo loans are more common in higher-cost areas and may also require in-depth documentation for getting the loan. The interest rates for jumbo mortgages can compete with other conventional loans.
This is the best mortgage option for low budget loan seekers. These fixed-rates provide the same interest for a lifetime. The typical fixed-rate mortgage can last for over 15, 20, or 30 years without any interest. The monthly interest and principal remains the same, which allows the borrower to keep a better track of the expenses. The only problem is that the interest rates can be higher from the beginning itself. Also, it can take a lot of time (up to 30 years) for you to build equity in your own home.
This mortgage has fluctuating interest rates which can get influenced by the rise and fall of the market. The bankers and lenders first provide fixed rates, but as the market changes, the interest rates can also change as they cannot compromise their profits. One should always be careful in predicting the rise or fall of the interest rate before taking an ARM. In the beginning, the interest on the loan can be very low, which can save a lot of money. But it also holds the risk of the future increase in the payments which can make it difficult for you to pay up. It can result in loan default.