An Overview of Mortgage Types
Are you tired of paying rent? Is it time to invest in a place of your own? Does the idea of securing a mortgage intimidate you? Fear not, there are many sensible home loan options available. As your licensed Virginia Realtor, I will work with you to ensure you get the best information and resources available to help you achieve your dream. I’ve highlighted several options here to consider.
This is the quintessential mortgage loan type—“the granddaddy of them all,” if you will. Fixed-rate mortgage loans are usually available in five to fifty year timeframes, all of which are completely amortized. This means that the loan has a fixed or constant interest rate for the entire term of the loan from beginning to end—making them popular for home buyers who want to know how much they will pay every month. Amortized fixed-rate mortgage loans are among the most common types of mortgages offered by lenders. Because the interest rate is fixed, the lender creates a set payment schedule where essentially, as the loan matures, the borrower pays more toward the principal amount of the loan and less toward interest. In the early days, however, much more of each month’s payment will go toward interest. This differs from a variable rate mortgage where the borrower will contend with fluctuating payment amounts as the interest rate changes.
Federal Housing Administration (FHA) Loans
This type of mortgage loan is insured by the government through mortgage insurance that is funded into the loan. This loan is popular among many homebuyers because the down payment requirements are minimal—as low as 3%—plus there is no minimum FICO® Score to qualify for an FHA loan that requires a down payment of 10% or more. (However, FHA loans are originated by private lenders, and these lenders will usually have their own minimum credit score requirements.)
Veterans Affairs (VA) Loans
This is a frequently-used loan option in the Richmond area, because a number of folks who have or currently serve(d) our country reside here. The Veterans Affairs loan is a government loan available to veterans who have served in the U.S. Armed Services and, in certain cases, to spouses of deceased veterans. The requirements vary depending on the years of service and whether the discharge was honorable or dishonorable. The main benefit of a VA loan is the borrower does not need a down payment. Obviously, the buyer must demonstrate that they can make the mortgage payments! The loan is guaranteed by the Department of Veterans Affairs but funded by a conventional lender.
USDA loans are offered through the U.S. Department of Agriculture for eligible homebuyers who want to purchase a qualified rural property. Oftentimes, there is no down payment, and a USDA loan may even be more affordable than an FHA loan.
Interest-only Mortgage Types
The name of this type of mortgage is a bit misleading because these loans are not really interest-only, meaning the borrower pays only interest on the loan. Interest-only loans contain an option to make an interest-only payment. The option is available only for a certain period of time and requires a balloon payment of the original loan balance at maturity.
There are also hybrid types of mortgage loans available as well as specialty mortgage loans. Here are a few options to consider:
Option ARM Mortgage Types
This type can be complicated. They are adjustable-rate mortgages, meaning the interest rate periodically fluctuates. As the name implies, borrowers can choose from a variety of payment options and index rates. But beware of the minimum payment option, which can result in negative amortization. Adjustable rate mortgages (ARMs), come in many flavors, colors, and sizes. The interest rate can fluctuate up or down monthly, semi-monthly, annually, or remain fixed for a period of time before it adjusts.
Borrowers who want to pay a lower interest rate initially often opt for mortgage buy-downs. The interest rate is reduced because fees are paid to lower the rate, which is why it’s called a buy-down. Buyers, sellers, or lenders can buy down the interest rate for the borrower.
Streamlined-K Mortgage Loans
FHA has another program that provides funds to a borrower to fix up a home by rolling the funds into the loan. The dollar limits for repair work are lower on a Streamlined-K loan, but it requires less paperwork than some other FHA loans.
There’s a lot of information to absorb and compare when thinking about taking the very large step of signing on for a mortgage. Your best bet is to find an excellent loan officer who will clearly explain all of your options, walk you through every aspect of the loan process, and perhaps most important, is very communicative. Any good realtor will have lenders they know and trust, and can make those referrals. My absolute favorite is Maddy Armstrong with Southern Trust. I’ve seen her handle some of the most complex situations with a calm and capable demeanor. This is key for a smooth transaction!