Depending on where you are as an informed consumer, you may be aware of the different types of real estate mortgage loans now available on the market. However, being aware that there are a variety of mortgage financing programs and having to decide on one that may be best for your own purposes could be two different things.
It isn’t always easy to decide which type of mortgage loan will be most beneficial to you. All the possibilities opened to you are different and will provide different levels of benefits. So before jumping into a mortgage loan, you want to make sure you have evaluated your individual needs, keeping in mind that the main idea behind a mortgage loan is to help you financially in more than one way.
Let’s take a look at a few of the available mortgage types and an example of what each would mean to you, as well as what you have to bring to the table in order to take advantage of the particular mortgage type.
First is the Traditional or Conventional mortgage. This mortgage type does not require third-party mortgage insurance (e.g. PMI), and comes with the very best rates on the 30 year and 15 year fixed versions. To qualify for this type of mortgage you will need a minimum 20% down payment, great to pristine credit and a stable employment history with and highest qualifying income of all mortgage types listed..
Second is the type of financing known as the PMI (Private Mortgage Insurnce) mortgage. This mortgage type, although having the same qualifying guidelines in terms of credit, employment history and income, does require third-party insurance (thus the title PMI), thereby eliminating the need for a 20% (of the purchase price) down payment, but instead allow you, the borrower, to make a down payment of as little as 5%.
The additional 15% that would otherwise be required on the first mortgage type will be insured by the PMI company on the second mortgage type. The borrower will need everything required for a conventional mortgage loan except the full 20% down payment but will pay an increased monthly fee to cover the PMI premium.
Third is a mortgage loan insured by the Federal Housing Administration and is therefore referred to as a FHA-insured mortgage. Qualification requirements for this type of mortgage are, a “satisfactory” credit profile, minimum down payment of 3.5% (of the purchase price), and 2 consecutive years employment. What you must bring to the table is reasonable explanation(s) for any credit report blemishes, proof of sufficient enough cash to make the purchase as well as enough monthly income to cover mortgage repayments and credit obligations.
Fourth is a VA mortgage. This type of mortgage is guaranteed by the VA (Veterans Administration) and is restricted to veterans of the US Armed Services and their spouses. If you are a veteran and can present a Certificate of Eligibility, a “reasonable” credit profile and stable employment history, you will not be required to make a down payment, but you will have to pay settlement charges (closing costs) to complete your purchase.
The Adjustable Rate Mortgage (ARM) is not separate from Conventional, PMI, FHA and VA, but is an option available to mortgage borrowers qualifying for a mortgage under any of the programs mentioned, but is less popular among FHA and VA borrowers who primarily opt for a fixed term (15 year or 30 year terms) mortgage. There are different variations of the ARM, ranging from a 1 year ARM to a 7 year or 10 year ARM (referred to as a 10 year fixed rate mortgage in some cases).
The initial interest rate on the ARM is usually lower than that of a fixed rate mortgage, but at some point after the first, third, fifth or seventh year that rate will be adjusted to a higher or lower rate, depending on market rates at time of adjustment, but will not exceed the built-in cap for the particular mortgage type.
Once you are aware of the types of mortgage financing available and which will best suit your purposes, you’ll be able to select your home with the confidence in knowing exactly what type of home you want to buy, where you want to buy it and for how much you want to buy it. In fact, you may be able to select a mortgage type based on how long you plan to stay in a particular home. They will be a number of options available to you that did not seem to exist prior to availing yourself of good, usable information.