5 Common Types of Mortgages

by c21commonweath_ldowling 28. October 2019 14:39

When you're getting ready to buy a home, you have a lot of decisions to make. What neighborhood should you move into? How much should you offer? What if you get into a bidding war? One easy question to answer is: Should you have a mortgage? For most Americans, the answer to this question is yes.

Interest rates are low right now, and many Americans are taking out mortgages to buy new homes. At $9.4 trillion, Americans have more mortgage debt than ever before. However, this still leaves the question of what kind of mortgage you should use. When you take out a mortgage, it will be part of your life for the next 15 or 30 years. It's important to pick the right one.

Fortunately, choosing a mortgage isn't too difficult. When you have your budget figured out, and you know how big of a down payment you can afford, it’ll be easy to choose the right mortgage once you know which options are available.

The Five Most Common Types of Mortgages

Finances can be complicated in general, but mortgages are pretty simple. Here are the five most common types of mortgages on the market:

The Conventional Mortgage

A mortgage that isn't insured by the federal government is called a conventional mortgage. If the amount you borrow falls within industry guidelines for your income level, a conventional loan will probably work for you. Because conventional mortgages aren't backed by the federal government, lenders typically require that you carry private mortgage insurance if your down payment is less than 20% of your home’s value.

Fixed-Rate Mortgages

When you have a fixed-rate mortgage, you'll pay the same interest rate for the entire life of your loan. Fixed-rate loans are more popular when interest rates are low. Today, interest rates are less than 4%, so many buyers are currently opting for a fixed rate. 

Adjustable-Rate Mortgages

When you have an adjustable-rate mortgage, your interest rate can change. If interest rates go down, you save money, but if interest rates go up, you could end up paying more. Many lenders offer adjustable-rate mortgages with a cap on the maximum interest rate. This can save you if interest rates rise sharply.

Government-Insured Mortgages

The U.S. government doesn't loan money directly to home buyers, but there are three government agencies that back loans: the Department of Agriculture, the Federal Housing Administration, and the U.S. Department of Veterans Affairs. These agencies help buyers who may not qualify for many loans.

Jumbo Mortgages

If you want to purchase a home that exceeds industry loan guidelines for your income or area, you'll need a jumbo loan. These loans typically require more paperwork so lenders can be confident you won't default on the loan.

A home will probably be the biggest asset you’ll own, while your mortgage will usually be your biggest debt. A mortgage will be part of your life for a long time, so it's important to choose the right one for you.