Understanding Different Types of Mortgages

The thing about mortgages? They are not one size fits all and most of us will need one to buy a home. With so many different types of mortgages available – each having different pros and cons – it can get confusing to new buyers. That’s why I’m here to help you understand the different types of mortgages and how you can find the best fit for you. 

Conventional Mortgages

Conventional mortgages are one of the most common types and are not backed by any government agency. Typically, they require a down payment of at least 3% to 20% of the home’s purchase price. 

  • PROS: These types of mortgages are flexible in terms of length, often lower interest rates for borrowers with a good credit score and do not require mortgage insurance if a down payment of 20% or more is made. 
  • CONS: Some cons of conventional mortgages include stricter eligibility requirements, often have higher down payment compared to government-based loans and offer limited flexibility to borrowers with lower credit scores. 

Adjustable-Rate Mortgages

Adjustable-rate mortgages (ARMs) have interest rates that change over time. The initial interest rate is lower than a fixed-rate mortgage, making it an attractive option for some buyers. However, the interest rate can increase over time, which means your mortgage payment can increase as well. 

  • PROS: The pros of ARMs include lower interest rates, which could allow borrowers to pay less over time if the interest rate falls. 
  • CONS: Some cons of ARMs are the risk of higher monthly payments and that they make it difficult to plan budgets due to rate changes. 

FHA Loans 

The Federal Housing Administration insures FHA loans, which are for people who may not qualify for traditional mortgages. These loans require a down payment as low as 3.5% of the purchase price. 

  • PROS: Pros of an FHA loan include lower down payment requirements, lenient credit score and income requirements and option to finance closing costs.
  • CONS: FHA loans have a few cons too. Borrowers are required to pay mortgage insurance premiums for the life of the loan. These loans have strict property condition standards, and annual mortgage insurance premiums can increase the cost of the loan. 

VA Loans

VA loans are for active-duty service members, veterans and their families. 

  • PROS: These loans do not require a down payment and have lower interest rates than traditional mortgages. 
  • CONS: The cons with VA loans are strict property eligibility requirements and a funding fee is required.

USDA Loans 

USDA loans are required for low to moderate-income borrowers in eligible rural areas. They don’t require down payments and offer 100% financing. 

  • PROS: Pros for a USDA loan are lower interest rates and flexible credit guidelines. 
  • CONS: The main con for USDA loans is they require mortgage insurance premiums, which are additional costs calculated into the monthly payment of your loan.

Understanding the pros and cons of different mortgage options is necessary to make an informed decision when buying a home. Each mortgage type has its advantages and disadvantages – and I have partnered with experienced and knowledgeable lenders who can walk you through the process of deciding what loan option aligns with your needs. Email me at amychapman@michaelsaunders.com to get started.