What are the differences between the five types of mortgages?
Prospective home-owners should think carefully before deciding what type of mortgage they would like. We take a look at the pros and cons of each.
A report released on Thursday revealed that job growth in the United States is beginning to slow after a period of rapid growth as the nation recovers from covid-19. This is expected to see mortgage rates hold steady, or even fall slightly, in the coming weeks.
This could make it an appealing time to take out a mortgage and many prospective home-owners are expected to do so as we enter the summer months, when there is often an uptick in home purchases.
If you are considering taking the plunge, we take a look at the five types of mortgage available in the US…
These are loans not backed by the federal government, meaning you are at the mercy of the markets to find a package that suits you. They can be split into conforming and non-conforming loans.
Conforming loans are required to satisfy the standards put in place by the Federal Housing Finance Agency (FHFA), relating to credit, debt and loan size. Non-conforming loans do not necessarily meet FHFA standards, and are typically reserved for larger homes or offered to borrowers with insufficient credit scores.
Another type to fall outside of FHFA limits are jumbo loans, which are often found in areas of high-cost real estate, like New York City, Los Angeles and San Francisco. They can allow home-buyers to secure the money needed to buy a more expensive house, but typically require a larger down payment; sometimes as much as 20%.
Although the US government does not offer mortgages, it is involved in lending to home-owners. The Federal Housing Administration (FHA loans), the Department of Agriculture (USDA loans) and the Department of Veterans Affairs (VA loans) all provide backing for mortgages.
They are often designed to offer financing to those who would not qualify for a conventional loan and are more relaxed on the credit requirements. However they have lower limits than most other types of mortgages, limiting the options for the buyer.
If you want stability in your housing arrangement, a fixed-rate mortgage may be the best option for you. Fixed-rate mortgages keep the same interest rates over the whole life of your loan, ensuring that the monthly mortgage repayment remains the same.
This allows borrowers to more accurately budget for their other expenses because they will know exactly how much they are going to be spending on their mortgage payments. However, the interest rates are generally slightly higher.
Adjustable-rate mortgages (ARMs)
The opposite of fixed-rate is adjustable-rate mortgages, which have fluctuating interest rates. Often they come with a fixed rate for the first few years but will be subject to market forces after the fixed period elapses.
Typically the terms for these mortgages are expressed in the form ‘X-year/Y-month ARM’ - meaning that the rate will remain the same for the first X years, before being adjusted for inflation every Y months after that initial period.