There are a lot of factors to be considered when it comes to buying a home. The process usually involves a lot of research, finding out how much money you need to shell out, and taking a careful look at the properties that may interest you.
Before you imagine how fun it would be to move into your new home, you first need to consider how you can secure a mortgage loan. Just like that perfect home, there's a suitable mortgage plan out there that best suits you. But how do you know which one it is? And what options do you have? Find out below.
What is a Mortgage Plan?
According to moneyadviceservice.org.uk, mortgages are loans that prospective home buyers secure to buy a property. The property can either be a building or a piece of land.
A lot of these mortgages can go for as long as 25 years. But this can vary depending on the terms on the mortgage plan you've chosen.
Investopedia.com highlights the two main parts of a mortgage loan. These are the interest and the loan amount. The loan amount is how much money the lenders let you borrow. The interest is the additional amount that lenders charge you for lending you the money.
What are the Different Types of Mortgage Plans?
1. Conventional mortgage loans.
Conventional mortgage loans are the type of loans that are not insured by the federal government.
Conventional loans can be conforming or non-conforming. Conforming loans are the loans which terms are within the Federal Housing Finance Agency (FHFA) mandated limits and Fannie Mae and Freddie Mac guidelines.
With a conforming loan, it is possible to have a lower mortgage interest rate and a lower downpayment.
The non-conforming loans are those that exceed the loan limit defined under the conforming loan guidelines. Often, you would be required to make a 20 percent downpayment or more under a non-conforming loan.
Read also: Everything You Need to Know About Rent-to-Own Homes
2. Jumbo Mortgage Loans
A jumbo loan is the most common type of non-conforming loans. This option lets clients borrow money that exceeds the federal loan limits.
If your home choice is situated in an expensive area, a jumbo mortgage may be the right choice. However, you may be required to have a high credit score - 700 or higher. Also, lenders often require a downpayment of 10 percent or more.
3. Fixed-Rate Mortgages
This mortgage plan has the simplest terms. In this option, you pay the same interest rates over loan's life span. Fixed-term loan terms can be 15, 20, or 30 years.
If you are looking for stability in your monthly mortgage payments, you may consider this loan type.
4. Adjustable-Rate Mortgages
An adjustable-rate mortgage is the exact opposite of fixed-rate mortgage, which interest fluctuates according to the market conditions.
An ARM typically has its interest rate fixed for a certain period, then adjusts periodically. The loan can be set at a fixed initial rate from one up to 10 years.
However, there is a risk of your mortgage payment becoming unaffordable for you in the future. But if you don't plan to stay for too long in your property, an ARM is a loan type you may consider.
5. Government-Insured Mortgages
This option lets borrowers get help from the government. Government-backed mortgage loan involves a private lender issuing a loan to the borrower, and then the government guarantees that loan.
There are three government-backed loan types: FHA or Federal Housing Administration loans, USDA or U.S. Department of Agriculture, VA or U.S. Department of Veterans Affairs.
A government-insured mortgage loan typically includes a small downpayment and flexible criteria to qualify.
Securing a government-insured mortgage like an FHA loan is a great idea if you don't have a 580 credit score or better and cannot afford a large downpayment.
However, you may still get an FHA loan even if your credit score is 500, but you can afford at least a 10 percent downpayment.