There are many different types of mortgages available and it can get a little confusing to know which one is best for you. Each loan type has its advantages and disadvantages and it is best to understand how each one works before deciding which one to go with. The three major types of mortgage loans are VA, FHA and conventional. The conventional mortgage is the most common and basic type of home loan.
When you take out a conventional mortgage to finance a home purchase you borrow a certain percentage of the price of the home. When you do so, you will sign a contract agreeing to pay back the loan through monthly, fortnightly or weekly repayments over a specified number of years.
An FHA loan is one that is backed by the Federal Housing Authority and a VA loan is one that is backed by the Veterans Administration. Both the FHA and the VA have the goal to help Americans be able to buy their dream home. They work along with certain lenders to enable people, who may not otherwise qualify for a conventional loan, to be able to purchase a new home. They do this by providing mortgage insurance to the lender should you, for any reason, default on your home loan repayments.
An FHA or VA loan is much easier to qualify for and they have lower interest rates and a lower down payment requirement. The FHA and VA will set the requirements of the loan you apply for such as how much you will need to pay for the down payment, the interest percentage that will be charged and the inspection of the property. However it is for these reasons that some lenders don’t like to deal with VA or FHA loan types.
Most lenders do prefer to give conventional mortgage loan types as they themselves have more control with these. Another difference that you want to consider with different loan types is the type of rate that is charged, some loans have a variable rate while others have a fixed rate. With a fixed rate loan the interest rate will be fixed at a particular percentage rate for a specified period. Often this may be for a period of five or ten years. When interest rates are low and it is a ‘buyer’s market’ then many people will opt for a fixed rate loan so that their interest rate will remain low even when the general interest rates begin to rise. When house prices are low and interest rates are low it makes sense to purchase a home and fix the rate to take advantage of those low rates.
The other benefit with having a fixed interest rate loan is that your payments remain the same so you can plan your budget accordingly without worrying about whether interest rates are going to increase and your payments increase as a result. A fixed rate loan however can be more difficult to qualify for at times so many people will apply for variable rate because it is easier to qualify for.
With a variable rate mortgage the interest rate will change throughout the life of the loan in conjunction with general interest rate changes. The interest rates follow in line with market conditions and so the rate you are charged may depend on the state of the economy at the time. Variable interest rates may rise and fall quite a bit throughout the life of a loan.
Unconventional mortgage loan types are another option for finance. These types of loans are reasonably new within the home lending industry and there are a variety of types. These include interest only mortgages, balloon mortgages and interest only mortgages.
When you are buying a new home and are looking for a home loan be sure to check out the different types of loans and how they all differ so you can find the one that best suits your needs.