Different types of mortgages explained

So you make an informed decision

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When it comes to buying a house, there’s a variety of mortgages available.

Understanding the different mortgages will allow you to make a smart financial decision when you decide to become a homeowner.

It’s important to know that there’s not a “right” type of mortgage.

Every mortgage has its pros and cons and accommodates to different circumstances. Your loan officer and your real estate agent should give you guidance as to what’s the best type of mortgage for you.

So let’s dive into it:

1. Conventional mortgage

The most common type of mortgage is the conventional mortgage. A conventional loan is not backed by the government, this means that the loans have a stricter credit requirement. 

The most common conventional mortgages are 30-year and 15-year mortgages.

In addition to the duration of the mortgage, conventional mortgages have fixed or variable interest rates.

Conventional 15-year fixed-rate mortgages have more long-term advantages than other types of mortgages.

For example:

• You finish paying off your house faster. 30 years is a long time to not have a house paid for.

 You save in interests. A 15-year mortgage has higher monthly payments than a 30-year mortgage, but that’s because a larger percentage of your money is paying off the principal balance. On a 30 year mortgage most of your payments go towards paying interest.

• You protect yourself from an increase in interest. A fixed rate mortgage is a mortgage where the interest you pay will not go up. This protects you from an increase in interest and therefore an increase in your monthly payment.

If you are able to lock a 15 year conventional mortgage with a fixed rate, you are getting a type of mortgage with a lot of advantages. But as I mentioned before, there are different types of mortgages for different circumstances. If you want a lower payment, a 30 year mortgage might be the best for you.

On a 30-year mortgage, you will have lower monthly payments than on a 15-year mortgage. The downside is that it will take you longer to pay off your house and you’ll end up paying way more interests than on a 15-year mortgage.

2. Adjustable rate mortgage

This mortgage offers you lower interest initially. As the name indicates, over time, the percentage of interest may change (usually they go up). When rates change, the risk of the loan is passed on to you in the form of higher payments. Although you initially pay low interest, it is possible that the interest, and therefore your monthly payments, go up.

3. FHA Loan

An FHA loan will help you buy your home with a low down payment (up to 3.5%). The disadvantage is that you will have to pay an extra fee for the life of the loan and you will have to pay extra interest since usually an FHA loan is only offered for 30 years.

4. VA Loan

A VA loan helps veterans buy their home with no money. The downside is that when you buy a home with no money, the market can change and you could owe more than the value of your home. Also a VA loan comes with a fee to finance the loan

5. USDA Loan

A USDA loan is designed to help people buy a home without a down payment. Buying a house without a down payment means that at the end of the loan you will have paid a high amount of interest. In general, if you can’t put money down, you’re not in an ideal situation to deal with maintenance expenses and emergencies that come with owning a home.

Programs for first-time home buyers

Each state has different programs that provide assistance for first time homebuyers. Because the programs are always changing, I suggest you contact me to be informed of the different programs you can be elegible for. 

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Flor Ibarra

Dallas-Fort Worth Realtor

I help families and investors in north Texas find and sell their properties.

Are you a first time homebuyer?

I have a free guide that will help you navigate the process

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