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What Are the Most Common Types of Mortgages?

There are many different types of mortgage loans available that will suit a number of different needs so it is important to speak with a qualified mortgage professional to be sure you are getting the loan that best suits your circumstances. Also, when speaking with your mortgage broker be sure to fully disclose your needs and abilities so they can accurately advise you.

Conventional: This is also called a fixed-rate loan. The term can be anywhere from 10 to 50 years, but is traditionally a 30 year loan. This means that for the life of the loan, you will have the same interest rate, the same principal and interest payment and at the end of your mortgage’s term your loan will be paid in full. The only change that may occur in your payment will be adjustments for taxes and insurance should those amounts increase. This type of loan offers the most security and is best for those who are planning on owning the same home for a long time. The loan will be given for the balance of the purchase price that remains after the down payment is made. The percentage of the purchase price that is required as a down payment can vary so it is important to verify this information with a mortgage professional. This type of loan also requires full documentation including W2s, bank statements, pay stubs, and explanations for any derogatory accounts. On certain loans, depending on the loan-to-value ratio, there will also be private mortgage insurance. This insures the lender against any loss if the borrower defaults on the loan, and is automatically included as part of your monthly payment.

FHA (Federal Housing Authority): These loans are insured by the government and are beneficial because of their lower down payment requirements, and often, lower rates. It offers buyers the chance to get a loan with a higher loan-to-value ratio than a conventional mortgage. These loans very often can be easier to qualify for as well. While it still requires full documentation (W2s, pay stubs and bank statements), it does not rely as heavily on credit score and trade lines (number of active credit accounts).
The terms and limits are the same as with a conventional loan, but offers a reduced rate for mortgage insurance.

ARM (Adjustable-Rate Mortgage) and Interest Only Loans: These types of loans are when you start off at a low interest rate, with the expectation that it will increase over time. With interest-only, you are paying only the interest, with nothing initially going to reduce the principal loan amount. The principal is generally paid in one lump sum payment at the end of the loan’s term. There are many different types of ARMs, with many different adjustment intervals, and it is important to understand exactly what those terms are when determining whether this is the best type of loan for you. Although this type of loan has been the subject of a lot of negative press as of late, there are still situations where they can be beneficial, such as when a borrower knows they are going to be in a home for a short period of time.

Island Advantage Realty

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