5 Types of Mortgages in Southern Illinois
Mortgages are a key part of the home buying process. There are various forms of mortgages available in the market, and it can be confusing to figure out which one is right for you. In this post, we will break down five common types of mortgages. We will discuss what each type of mortgage entails and how it can benefit you as a home buyer. By understanding the different ty
pes of mortgages available, you can make an informed decision about which one is the best option for you.
Fixed Rate Mortgage
The term fixed-rate mortgage denotes a housing loan with a fixed interest rate for the entire mortgage term. This means the mortgage carries the same interest rate from the beginning of the term until the mortgage is completely paid. This mortgage plan works best for those who want to ensure a steady payment for the whole mortgage period.
Key things to note:
- The interest rate on a fixed-rate mortgage does not change for the lifespan of the loan.
- The interest rate does not change or fluctuate regardless of the market conditions once you have locked into this plan.
- Borrowers who prefer to have a more predictable plan or tend to hold the property for a longer span prefer this type of loan.
Adjustable Rate Mortgage (ARM)
An Adjustable Rate Mortgage (ARM) is a mortgage term with a variable interest rate. This means that the interest rate is fixed for a certain period according to what the borrower initially agreed. After this, the interest rate will change periodically depending on the lender’s policies. This is typically calculated against the outstanding balance and may vary yearly or monthly based on the loan terms.
Other terms used for ARM are floating mortgage or variable-interest mortgage. An ARM margin is an additional spread above a benchmark or index used to determine the interest rate. Generally, ARMs include a cap that holds the amount of interest rate or payment price per year. This mortgage option is advisable for home buyers who do not plan to hold the property for a long time or are expected to receive an increase in their income periodically to handle the periodical increase of the interest rate.
A conventional mortgage or conventional loan is any type of loan that is not backed or offered by any government entity. This is usually available through private lenders such as banks, mortgage companies, credit unions, or other non-government institutions that offer mortgage financing. Conventional mortgages, however, are sometimes guaranteed by two government-sponsored enterprises; the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).
Since non-government groups offer this type of loan, potential borrowers must complete a mortgage application and submit necessary documents, credit score, and credit history. The conventional loan also tends to have a higher interest rate than government-offered mortgages.
A Jumbo Loan or Jumbo Mortgage is a house financing option that exceeds the limits set by the Federal Housing Finance Agency (FHFA). This option is not qualified to be securitized or guaranteed by Freddie Mac or Fannie Mae, the large companies that guarantee most of the mortgages around the U.S. Jumbo mortgages have a unique requirement for tax and underwriting as this option is designed for financing luxury properties or homes inside a highly competitive local real estate zone.
Jumbo Loan value depends on the state policies and even county and is set by the FHFA on an annual basis. The FHFA also sets a different provision for loan limit calculation for those states outside the continental United States, such as Alaska, Guam, Hawaii, and the U.S. Virgin Islands.
Government Backed Mortgage (broken down into FHA, VA, USDA)
A Government Backed Mortgage is any mortgage issued by an agency of the federal government. This type of loan is insured by one of the three federal government agencies: the U.S. Department of Agriculture (USDA), the Federal Housing Administration (FHA), or the Department of Veterans Affairs (V.A.).
- Debt to income ratio is up to 55%
- Credit Score: 580 (some lenders allow a 500 credit score with a 10% down payment)
- Those with limited credit history can still be qualified
- More lenient on credit and loan qualifications
- No income requirement but must provide proof of a steady source of income.
- Up to 100 percent financing.
- Credit score: 640
- Must live in a USDA-qualified area
- For Primary residence purposes only.
- Property and income eligibility should be met.
- Adjusted gross income must not be more than 115% of the median income in your area.
- Offered to active service members, veterans, or their surviving spouses.
- Up to 100 percent financing.
- Credit score: 600
- No mandated down payment unless required by the lender
- Private mortgage insurance is not included
- No prepayment penalty if paid off early
The five types of mortgages we’ve discussed are the most common and popular options. Each has its own set of benefits and drawbacks, so it is important to understand what each entails before making a decision.
If you are unsure about which type of mortgage is right for you, our team at Midwest Farm and Land Co. can help. We will work with you to find the best mortgage for your needs and guide you through the home buying process. Contact us today to get started!