With the growing inflation, most have turned to get mortgages to buy a home, which provides the means for people who do not have enough money to buy a home. According to PewTrusts, over 36 million Americans take out mortgages to buy a home, which means one in every five Americans. However, there are different types of mortgages that you can choose, depending on your needs.
Below, we discuss the different types of mortgages and which one will be right for you. Read on to find out more.
Understanding the Different Types of Mortgages
A mortgage refers to a loan that home buyers use to purchase or refine a home. In the case of mortgage loans, the loan is secured by the property. Hence, homeowners can apply for different types of mortgages depending on their means.
The mortgage, like any loan, requires payments to be made to service the mortgage, called mortgage payments. These payments consist of the principal amount and the interest, which differ depending on the different types of mortgages. The interest rate can either be fixed or vary over the mortgage period.
The different types of mortgages can be divided into Residential and commercial, each with risks. Before discussing the different types of mortgages, we must first understand the two categories.
Residential and Commercial Mortgage
Simply put, a mortgage loan taken out to purchase or refine a residential property is a residential mortgage. Similarly, a mortgage loan taken out to purchase or refine a commercial property is a commercial mortgage.
While the two seem similar, they have some distinct characteristics that make them different. Some key differences between residential and commercial mortgages are mentioned in the table below.
|Residential Mortgage||Commercial Mortgage|
|An individual||occupies the property A company occupies the property|
|The individual uses their earnings to service the mortgage||The company uses business profits or rental income to service the mortgage|
|The property offers a loan-to-value of 75% to 90%||The property offers a loan-to-value of 50% to 70%|
Different Types of Mortgages
Now that you know the difference between residential and commercial mortgages, you can assess different types of mortgages that are right for you. Most mortgage types have a fixed rate over a 30 or 15-year. However, some mortgages can run for longer than 40 years and have varying interest rates.
Below are a few of the different types of mortgages that you can apply for.
1. Fixed-Rate Mortgage (FRM)
One of the most common types of mortgages is the fixed rate or traditional mortgage. Generally, all mortgage types are either fixed-rate or adjustable-rate (discussed below). As the name suggests, a fixed-rate mortgage is a 15 or 30-year loan with a fixed interest rate.
This makes it easier for borrowers to predict their mortgage payments and helps them budget accurately. Additionally, your interest rate stays the same regardless of the market condition and economy, so you can rest assured.
However, fixed-rate mortgages have stricter criteria on who can apply. This generally entails having good credit security, employment history, debt-to-income (DTI) ratio, and more.
2. Adjustable-Rate Mortgage (ARM)
The different types of mortgages are either fixed rates or adjustable rates. Adjustable rate mortgages are loans with an interesting fluctuating rate that changes over the mortgage period, depending on the market conditions.
However, that does not mean that the interest rate will surge spontaneously. Generally, an adjustable-rate mortgage has a fixed time in which the mortgage will not increase, which is written on your contract.
Some significant advantages of adjustable rate mortgages are that they are considerably lower in the first few years, and you can save a substantial amount. Additionally, they are easier to obtain than fixed-rate mortgages.
However, the interest rate can surge to unaffordable levels, even with the maximum limit. Hence, such mortgages are best for homeowners who do not plan to stay in a home for long.
3. Conventional Loans
A conventional mortgage is a loan that government organizations do not secure. These loans are offered through private lenders such as mortgage companies and banks. However, two government-supported organizations can guarantee the loans: Federal Home Loan Mortgage Corporation and Federal National Mortgage Association, also known as Freddie Mac and Fannie Mae.
Conventional loans can either be conforming or non-conforming loans. Conforming loans follow the standard set by the Federal Housing Finance Agency (FHFA). Non-conforming loans do not restrict FHFA standards and cater to borrowers’ needs.
Conventional mortgages are an excellent option for borrowing high amounts. However, they require a higher credit score and down payment than government loans.
4. Government Loans
The U.S. government does not provide mortgage loans. Still, they insure loans by the Federal Housing Administration (FHA), the U.S. Department of Agriculture (USDA), and the U.S. Department of Veterans Affairs (V.A.).
- FHA: FHA loans are great for borrowers with a less than excellent credit score and do not require a large down payment.
- USDA: ISDA loans are great for borrowers who wish to purchase real estate in that USDA-eligible area. These loans do not require a down payment but do have some extra fees that you must pay.
- VA: Va loans are only for veterans and members of the U.S. military as well as their families. They do not have a set down payment or credit score requirement.
Government loans are a great option for borrowers who do not meet the criteria for conventional loans and do not require large down payments. However, they do not offer a tremendous amount in mortgages and require that the borrower lives on the property.
How Robert DeFalco Realty Can Help
If you want to buy real estate in New York, Robert DeFalco Realty can help you look for that perfect property. With the knowledge of different types of mortgages, trained real estate agents can help you decide and help you find the right mortgage lender.
Contact Robert DeFalco Realty at 718-987-7900 or visit the officer in New York. You can also fill out a form online, and a DeFalco Realty real estate agent will get back to you.