Buying a home can feel like a lifelong dream for millennials. Young people spend years trying to save for a down payment while juggling student loan payments and bills, but now the time has come. Now you’re ready to look into the five types of mortgage loans for homebuyers because you’re prepared to take your first big step towards moving out of your rental unit.
This guide explains those five types of mortgage loans so you know which one is best for you. After you’ve finished researching, take what you’ve learned to a financial expert to review your budget and finalize how much you need for your down payment.
1. Conventional Mortgage Loans
Conventional mortgages have been around for decades. They’re non-government issued loans that come in two forms: conforming and non-conforming.
There are a few key differences to understand before signing up for one of these mortgages. A conforming loan abides by the financing limits set by the leadership teams at the Federal Housing Finance Agency (FHFA) and the guidelines set by Freddie Mac and Fannie Mae. They’re easy to qualify for and often come with a lower interest rate and down payment.
Non-conforming loans require the traditional down payment of 20% or more if you have enough saved. There are strict criteria to qualify, so you’ll need an excellent credit profile and higher income. You’ll likely also have a higher interest rate. Most people who get these loans want to buy a large home in an expensive area.
2. Government-Insured Mortgages
Three government agencies that back mortgages for homeowners:
- The U.S. Department of Agriculture (USDA)
- The Federal Housing Administration (FHA)
- The U.S. Department of Veterans Affairs (VA)
These mortgages all have slightly different guidelines. USDA loans are for low to moderate-income borrowers who live in rural areas. Your new home must be in a USDA-eligible area and may not require a down payment.
FHA loans have helped make homeownership achievable for young people struggling with student debt and increasing living costs. If you have a credit score above 580, you can choose a 15 or 30-year fixed rate for your mortgage. Although you’ll have to pay for mortgage insurance, this option has helped millennial homeownership grow from 35.6% to 36.8% in 2016 because it makes homeownership possible for more people.
3. Jumbo Mortgage Loans
Jumbo mortgage loans are also non-conventional loans. They’re for people who want a traditional home in a pricier area or an expensive house. They have yearly limits, so research the limit when you decide to move forward with a loan. In 2020, the federal government limited jumbo loans to $510,400 in most locations but extended that to $765,600 in areas like Washington, D.C. and California.
4. Adjustable-Rate Mortgages
Some people get adjustable-rate mortgages (ARMs) because they have fluctuating interest rates. This means you’ll have a lower fixed interest rate during your first couple of years in your home, but that rate will rise and fall based on the market. As long as you get a capped rate, this type of mortgage loan could save a significant amount of money on your interest payments.
5. Fixed-Rate Mortgages
Fixed-rate mortgages are the most stable and come in a few term options. After you choose a 15, 20 or 30-year mortgage, your interest rate will always stay the same. This is an excellent option if you plan to live in your next home for close to 10 years or longer because you’ll need that much time to begin building equity.
Discuss With an Advisor
Now that you know about the five types of mortgage loans for homebuyers, discuss your options with an advisor. They’ll know the specifics of your financial life and point out the best loans for your needs. You’ll feel confident about how you decide to take out money and enjoy the process of buying your home much more than before.
About Kacey Bradley
Kacey Bradley is the lifestyle and travel blogger for The Drifter Collective, an eclectic lifestyle blog that expresses various forms of style through the influence of culture and the world around us. Kacey graduated with a degree in Communications while working for a lifestyle magazine. She has been able to fully embrace herself with the knowledge of nature, the power of exploring other locations and cultures, all while portraying her love for the world around her through her visually pleasing, culturally embracing and inspiring posts. Along with writing for her blog, she frequently writes for sites like US Travel News, Thought Catalog, Style Me Pretty, Tripping.com and more!