Different Types of Mortgages
It's a big decision to buy or refinance your home. You'll probably want to compare different mortgage types and get other financial information before making such an important commitment. Understanding the basics of mortgages will help you narrow down your options and make better comparisons.
Mortgages, including interest rates and terms, vary widely among lenders. If you are looking for a mortgage, remember that just because you have fair credit or are buying a less expensive home doesn't necessarily mean you'll qualify. As with any large financial decision, it's best to do your homework before committing yourself.
Knowing what questions to ask different lenders can help you get the most competitive rates and terms, and help you to explore the different types of mortgages that are available. To find the right mortgage, you have to ask the right questions.
What is a mortgage?
A mortgage is a long-term loan used in most cases to purchase residential real estate, as well as investment properties. Though the details may vary in some aspects from lender to lender, the general outline of how mortgages work is about the same. You borrow money from a lender (typically a bank or investment firm), which you agree to pay back, with interest, on a regular schedule. The lender provides this amount in return for title to your home until you've paid it all back plus fees and interest.
Why you may need a mortgage
A mortgage is a way to finance your home purchase and pay for some (not all) of your upfront costs. The interest rates on mortgages vary widely, as do fees charged for things like application and processing costs. But beyond those specifics, there are several general reasons why you may need a mortgage.
Typically, borrowers take out mortgages because it’s not feasible to pay for a home with cash. A down payment is often a percentage of the total cost of your property, and it's an excellent way for you to reduce the amount of your loan. Keep in mind that with most types of traditional loans, you can't qualify without a down payment. While lenders are more lenient about low credit scores, if your score is too low, you are likely to have to make a larger down payment or obtain private mortgage insurance that protects the lender in case you default. If you are looking to finance the entire cost of your home, however, you can explore government-backed loan options, such as VA loans and FHA loans.
If you aspire to own more than one property, you’ll also likely need a mortgage. Unlike investments, such as stocks and bonds, homes are considered personal assets. That means you can borrow money against your home equity as long as it is your primary residence, and the lender is willing to accept the risk of a second lien on your home.
Comparing various mortgage options
Aside from government-backed mortgages, you’ll also have several mortgage options to choose from even if you’re taking out a traditional mortgage. For instance, you’ll have choices when it comes to the mortgage term; while 30-year is the most common, other terms, such as 15 years and 50 years, are also available. You’ll also have the choice to determine how you pay interest: most people choose between fixed-rate mortgages and adjustable-rate mortgages. However, you may also want to explore less conventional options, such as interest-only mortgages and balloon mortgages.
At the end of the day, there isn’t a one-size-fits-all solution for every borrower. Each situation is unique, and what works best for you may not be a good solution for someone else. Whether you’re purchasing a home for your primary residence or you’re buying a vacation home, you’ll need to weigh all pros and cons. Talk to different lenders, crunch the numbers, and carefully consider your own specific situation before making any final decisions.