Obtaining a mortgage loan is a vital step in buying a home. When it comes to mortgage financing options, you can be overwhelmed on the one to choose. If you take time to research property financing options, you’ll save both time and money. Here are some types of mortgages you can choose from.
1. Conventional mortgages
A mortgage not backed by the federal government is known as a conventional loan. If you have good credit, a conventional mortgage is an excellent option. You can choose the conforming loans that are within the maximum limit of the Federal Housing Finance Agency or the non-conforming loans that don’t fall within the maximum limit. It’s appropriate for borrowers with strong credit. You also need a 3 percent down payment, stable income, and an employment history.
Pros
- You can use the mortgage for a second home, primary home, or investment property.
- The borrowing cost is lower than other mortgage types.
- You can cancel the PMI when you reach 20 percent equity.
Cons
- You’ll require significant documents for verifying employment, down payment, assets, and income.
- Your debt to income ratio must be 45 to 50 percent.
2. Jumbo mortgage
The jumbo mortgages have non-conforming loan limits since the home price is more than the Federal loan limit. For instance, the maximum conforming loan limit for 2021 for a single-family home is US$548,250. The mortgage varies by county and is always adjusted periodically.
You’ll need a credit score of 700 or more to qualify for a jumbo mortgage. You also need a down payment of 10% or more. It’s best for owners who want to refinance their jumbo mortgage and buyers of expensive homes.
Pros
- You can borrow to buy a house in an expensive area.
- It has competitive interest rates.
Cons
- You need a down payment of at least 10 percent.
- Your debt to income ratio must not be above 45 percent.
3. Government-insured mortgage
Even though the United States government is not a mortgage lender, it plays a vital role in helping people own homes. The Federal Housing Administration (FHA loans), the U.S. Department of Veterans Affairs (VA loans), and the U.S. Department of Agriculture (USDA loans) are the government agencies that back mortgages.
Pros
- It has relaxed credit requirements.
- The loan is open for first-time and repeat buyers
- It doesn’t require a large down payment
Cons
- Your overall borrowing costs could be higher.
- You’ll need more documentation to prove eligibility
4. Interest-only mortgage
With an interest-only mortgage, you have the option to pay only the interest on the loan for a specified time period. Once the period is over, which is between five and seven years, you’ll start paying your principal. It’s best for borrowers with large cash savings, high monthly cash flow, and rising income.
Pros
- It has lower monthly payments.
- You can pay the loan faster.
- You can invest the extra money to build your net worth
- It provides flexibility – you can use the bonuses to apply to the principal.
Cons
- The rising rates increase your risks.
- The home may not appreciate as fast as you would like.
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