Types of Mortgages to Consider

Multiple types of mortgages are available to consider, but what is the best mortgage for you? Read a guide on the types of mortgages to consider in 2021. Buying a new house is a major life decision deserving of careful research and the utmost amount consideration for all possible outcomes. Unless you are able to buy your house in full with cash it is necessary to attain a home mortgage loan. Multiple types of mortgages are available for you to consider, but what is the best mortgage type for you? Which of the various types of mortgage loans are you qualified to attain?

Taking time to understand the various types of mortgages available today is an important step to take prior submitting any home financing applications. Are you a first-time homebuyer? Are you purchasing a rental property, or refinancing the mortgage on your current home? What are your financial qualifications and budget requirements? Read ahead for an informative guide on the various types of mortgages to consider in 2021.

Researching Mortgages in Modern Times

Researching various types of mortgages to consider is easy to do online if you know where to find the best information. Consulting your bank or credit union is an excellent place to begin your research. This approach helps determine the types and amounts of mortgages you qualify for by using a known and trusted source. Credit unions are particularly resourceful sources of information. A plethora of free information is commonly provided by credit unions as a means of educating you about the types of mortgages available and what they mean for your financial future as a homeowner. 

Some mortgage lending companies provide online-only services. Other provide a combination of online and in-person home lending assistance. Some online mortgage services provide rate-comparison website services and/or affiliate links to third-party lenders. For example, Better is an online-mortgage lender considered to be one of the best on the market in 2021. Better finances mortgages but also allows you to compare various rates. Better also provides excellent customer service and value. For example, part of the reason Better is highly popular with homebuyers today is its customer friendly price-matching guarantee

Other top mortgage lenders, resources and rate-comparison sites are also available online. Bank of America is an example of a well-known financial institution providing various types of mortgage services to its customers. Other banks and online mortgage services institutions to consider include:

Your 2021 Guide to Various Mortgage Types

What type of mortgage is best for you? Assuming you qualify for it, the best type of mortgage for you is one with the lowest possible annual percentage rate (APR) and the friendliest installment terms for your budget. The best mortgage type for you also depends on your status as a homeowner. Read below to explore different types of mortgages to consider.

Conventional Mortgage

One of the main factors to consider when researching mortgages is the type of APR applied to the loan. A conventional mortgage (also referred to as a conventional loan) typically carries a fixed APR, which means the interest rate does not change during the life of the loan unless you refinance your mortgage. Most conventional mortgages are not provided or backed by any U.S. federal government agency, which results in lenders enforcing stricter qualification requirements and charging higher APRs. Borrowers who qualify for private market conventional mortgage loans typically have high FICO scores, a strong employment history and sizable down payments.

Conforming Mortgage

The federally facilitated Fannie Mae and Freddie Mac programs do provide some secondary market conventional loans, however, which result in lower APRs and friendlier repayment terms for qualified borrowers. A conforming mortgage, while still a conventional loan, meets all foundational conditions and terms as required by Fannie Mae or Freddie Mac. 2021 conforming mortgage loans are capped at $548,250 in most U.S. states. Qualified borrowers need a 620 FICO score or higher, a minimum three percent down payment amount and a debt-to-income ratio no higher than forty-five percent plus other requirements. Occasional exceptions are made for qualified borrowers, which allow a debt-to-income ratio of up-to fifty percent.

Jumbo Mortgage

A jumbo mortgage is a type of conventional mortgage loan. Jumbo mortgages exceed maximum loan limitations as set forth by the Federal Housing Finance Agency (FHFA) and are therefore not qualified for Fannie Mae or Freddie Mac considerations. Because jumbo loan amounts are higher than those having the benefit of federal backing, approval requirements are strict. A FICO score of 700 or higher is required, as is a considerably low debt-to-income ratio. While the APRs set for jumbo mortgage loans are comparable to those charged for conventional loans, down payment requirements are stricter. For example, the average required down payment amount for a jumbo loan ranges between ten and fifteen percent of the entire loan amount/purchase price.

Fixed Rate Mortgage

Most mortgage terms are written as fifteen or thirty-year loan repayment plans. A fixed rate mortgage (fixed APR) is an unchanging finance charge amount lasting from the time of funding to the conclusion of your loan. The benefits of a fixed rate mortgage include knowing what your finance charges are every month until your loan is paid off. A potential downside of a fixed APR is, as financing rates change on the market, lower rates might become available. Changing a fixed rate mortgage requires a refinancing loan, which might include additional closing costs and other expenses.

Adjustable Rate Mortgage

An adjustable rate mortgage (ARM), also referred to as a variable-rate mortgage, begins with a fixed APR for a limited amount of time, and then varies throughout the rest of the life of your loan. Variations on the rate occur based on market fluctuations or pre-specified periods such as monthly, tri-monthly, bi-annually or annually. The initial APR on an adjustable rate mortgage is typically lower than those set for conventional loans. If you are able to pay off your mortgage prior to the APR increasing, an ARM loan is potentially beneficial to you. One significant risk associated with ARM loans is the possibility of your APR increasing and never going back to its initial low rate. The amount of variation and increase allowed on an adjustable rate mortgage APR is limited by strict regulations, however.

Mortgage Bridge Loan

A mortgage bridge loan involves short-term financing used to bridge the gap between the date a borrower purchases a home and the date his or her old home is sold. Mortgage bridge loans commonly carry one-year terms and have higher APRs than all other types of mortgage financing. The primary risk of a mortgage bridge loan is paying for two mortgages simultaneously while waiting on your old home to sell. The primary benefit of a mortgage bridge loan is the ability to purchase your preferred new home fast and not lose it to another buyer. 

First-Time Homebuyer & Refinance Loans

Certain types of mortgages are available for first-time homebuyers and loan refinancing purposes. Multiple benefits and assistance opportunities exist for first-time homebuyers, because purchasing homes is encouraged in the U.S. and also considered part of the American Dream. Fannie Mae or Freddie Mac both offer first-time homebuyer conventional loans. U.S. Department of Agriculture (USDA), Good Neighbor Next Door, Native American Direct Loan (NADL) and U.S. Department of Veterans Affairs (U.S. VA) programs also offer first-time homebuyer mortgage incentives.

Refinance loans help lower your APR and save money on monthly payments. Some refinance loans shorten or extend your loan terms as well. Refinance mortgage loans are also effective for debt consolidation, home improvement and increased energy efficiency purposes. Qualifying for a refinance mortgage loan is like qualifying for a conventional mortgage, although borrowers who have built-up equity in the homes might get betters rates/terms.