The Different Types of Mortgages: How to Choose the Best one for Yourself

Mortgages are used to finance the purchase of a property. Over the years, there have been many different options and types of mortgages to help people secure financing for their homes or investment properties. 

Whether you’re a first-time home buyer or refinancing an existing mortgage, knowing which type of mortgage is right for you and your situation can be challenging. 

This guide will help you make an informed decision by breaking down the main types of mortgages and comparing them based on essential factors before becoming a homeowner.

What Is a Mortgage?

A mortgage is a loan you take from a bank, government agency, or another lending institution to purchase a property. 

You can choose from many different types of mortgages, depending on your needs and financial situation. These mortgages are classified into three main categories: 

Fixed-rate mortgages

A fixed-rate mortgage is where the interest rate remains the same throughout the term. This means you'll know exactly how much your monthly payment will be, no matter what happens with interest rates. 

If interest rates go up, so will your monthly payment, but not as much as if you had a variable-rate mortgage. 

The main downside of this type of mortgage is that they are not easy to refinance into a new home loan should your financial situation change dramatically or if there's a drop in housing prices in your area. However, regarding certainty and security over one's future payments and investments, fixed-rate mortgages are one of the best types of mortgages available. 

An adjustable-rate mortgage (ARM)

ARMs have lower initial interest rates than fixed-rate mortgages because they have an index that changes periodically according to an agreed-upon formula. Typically these formulas allow for some adjustment by way of caps or limits on the maximum increase at any given period. Adjustments only occur at regular intervals rather than daily or even weekly, like a variable-rate mortgage would do.

Variable rate mortgages

Unlike other types mentioned above, with variable-rate mortgages, your interest rate applied can change over time. And that means your monthly rate will also change. Fortunately, it works both ways. You can expect to go up or down — which relies on wider financial markets. 

A variable rate mortgage has one of two possible interest rates: fixed for a specific period or adjusts according to current market conditions. Variable-rate mortgages may be more expensive than fixed-rate ones, but they can offer more flexibility should rates go down again during your loan.

The problem with variable-rate mortgages is that it's impossible to know the interest rate at any given time. What seemed like a good idea last month might not seem so great now, especially if interest rates have gone up since then. 

Types of Mortgages

Here are the six common types of mortgages to know before investing: 

1. Conventional Mortgages

The most popular mortgage is the conventional mortgage, which is also the least risky. The interest rate for a conventional mortgage is based on your credit score, debt ratio, and the loan-to-value ratio. 

Fortunately, the loan is not regulated by the federal government. 

2. Conforming Mortgage Loans

The other type of loan, a conforming mortgage loan, is bound by the federal government's loan limits. With such a loan, the limit amount will depend on your geographical location. You will find that FHFA has set higher maximum loan limits for specific parts like San Francisco and New York City. 

3. Nonconforming Mortgage Loans

Mortgage loans for people with lower credit scores. Some nonconforming mortgage loans can include special features like lower interest rates, higher LTVs (loan-to-value), reduced or waived down payment requirements, better loan terms, and more flexible repayment schedules. They are riskier to lenders, and some institutions like Fannie Mae cannot accept them because of their guidelines.

4. FHA Mortgage

FHA mortgages are government-backed loans, meaning you don't need a perfect credit score to qualify. The downside is that it's harder to pay off the loan early, so if you plan on owning your home for less than five years, you may want to consider conventional options.

5. VA Loans

VA loans are guaranteed by the US Department of Veterans Affairs and were created for veterans, military members, and their spouses. 

Eligibility is based on whether you served in a military branch, your discharge status (honorable, general, or other than honorable), how long you served, your current employment status, and your income level. Your credit history does not affect eligibility for a VA home loan.

6. USDA Loans

USDA guarantees mortgage loans so that they can help low-income people in rural areas to buy homes. You need little to no money to qualify for this type of mortgage. However, you must meet eligibility rules set by USDA. 

Which option is best for you?

The mortgage process can be overwhelming, especially if you’re looking to purchase your first home. With all the different types of mortgages available, from conventional loans to FHA loans, it can be difficult to know which type of loan you should choose. 

The following real estate education tips will help you determine which mortgage best suits your needs and help you get into your dream home faster than ever.

Consider the amount you can afford

Be realistic about your budget and what you need from a home you want to buy. Start by considering how much you can afford as an initial mortgage amount. Overdoing the amount is better than underspending and regretting not buying a property that matches your needs. 

You'll also want to assess what features are most important to you to help decide which loan type might be best, like 30-year fixed vs. 15-year fixed vs. adjustable rate loans. There are many factors in buying a home, so don't be too quick to commit; take some time and choose wisely.

Consider the length of the mortgage loan

Typically, homeowners will take out a thirty-year mortgage loan with a fixed interest rate. This means that your monthly payments and interest will stay the same over time. However, other types of mortgages are available depending on your needs: adjustable-rate mortgages (ARMs), interest-only loans, balloon payments, and biweekly mortgage plans.

Understand different types of mortgages

A mortgage is a loan made by a lender to the borrower that enables them to purchase, build, or improve a property. The other step in choosing your best mortgage is understanding what type of mortgage is best for you. These include the three types of mortgages; fixed-rate, adjustable-rate, and variable mortgages. 

Fixed-rate mortgages have interest rates that never change and usually have 30-year or 15-year terms. Adjustable-rate mortgages start with a lower interest rate that fluctuates based on market changes. 

Consider the best mortgage provider

One factor that many people tend to overlook when considering affordability is what it will cost them annually in interest. Online mortgage calculators are an effective way to compare mortgage rates and find the best rate for your situation. 

You also need a transparent mortgage lender who will not take advantage and provide you with a hidden cost. 

Conclusion

There are many different aspects that you need to consider when choosing a mortgage. After all, what is right for one person may not necessarily be right for another. Some people only plan on staying in their homes temporarily or would prefer to avoid making monthly payments altogether—in either case; some mortgages can fit their needs perfectly!

To sum up, we have laid out a framework of different types of mortgages and steps to choosing the best mortgage for you. When following these tips, you should be able to navigate through this new and exciting process with ease. With all of these in mind, get ready to meet your mortgage!