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For most people, buying a home will be the biggest financial investment of one’s life. Since 99% of us cannot afford to buy a home outright, we would need to take a home mortgage loan from a bank or other financial lending institution. There are many mortgage options out there and an inexperienced home buyer can quickly feel overwhelmed when looking at hundreds of thousands of dollars and decades-long commitments. This article should serve as a simplified guide to the different types of home mortgage loans to educate the home buyer.
Some of the different types of mortgages include fixed rate mortgages, adjustable rate mortgages, government-insured loans, conventional mortgage loans.
Fixed rate mortgages carry the same interest rate for the entire life of the loan. This means that your monthly payment to the bank will be exactly the same every month, year after year. These types of loans are often packaged as 15 year or 30 year loans. A 15-year package will naturally have a higher monthly payment than a 30-year package as it has to be paid over a shorter period of time.
Adjustable rate mortgages, or ARMs, are loans whose interest rates fluctuate according to the market. Some ARMs are fixed for a certain number of years and then move to an adjustable rate, while some ARMs have an adjustable rate for the initial years and then remain fixed. These are hybrid ARMs. An example of a hybrid would be a 5/1 ARM loan where there is a fixed rate for the first five years, after which that rate will adjust to the market every year.
A conventional loan simply means that it is not backed by the government. A government-insured loan is a loan that is backed by the government, insuring the lender from borrower default. There are a few different types of government-insured loans; VA Loan, FHA Loan, USDA/RHS Loan.
A VA loan is a loan offered by the US Department of Veterans Affairs. VA loans are offered to former or current military service members and their families. A major advantage of this type of loan is that a borrower can get 100% of the loan upfront, which means no down payment.
An FHA loan is a loan offered by the Federal Housing Administration and managed by the Department of Housing and Urban Development (HUD). This type of loan allows you to pay a very low down payment, as low as 3.5% of the total loan amount, unfortunately, this means you will have to pay more in monthly payments.
The USDA/RHS loan is a United States Department of Agriculture loan program overseen by the Rural Housing Service (RHS). This loan is designed for low-income borrowers who live in rural areas who have trouble accessing financial assistance from traditional lenders.
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