Buying a home for your family has been made easy by the government with financial help from lenders. If you are earning stable income every month and saved money to put forward as down payment, you can secure mortgage loan to realize your dream of buying a home. However, there are many choices in terms of types of loans making it complicated for the first-time home buyers. Here is a brief discussion of loan types to clear this confusion.
Fixed rate mortgage loans
As the name implies, these are loans offered by banks carrying a fixed rate of interest for the entire duration of the mortgage. This kind of loan offers peace of mind to the borrower as he knows he must pay the same monthly installment to his lender throughout the loan period. However, the rate offered is slightly higher than variable rate of mortgage.
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Variable rate mortgage loans
These are another type of mortgage loans offered by lenders around the country. The rate of interest charged by the lender is variable and it keeps changing depending upon market forces. Those who believe rates might go down in future opt for variable rate mortgage loan.
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Government backed loans
These types of loans are backed by the government with the help of mortgage insurance that is attached with the loan. The most popular government backed loans available to people are FHA, VA, and USDA loans. In these loans, there is an assurance to the lender in case of a default from the borrower. These loans come with a very low mortgage rate (3.5%) but they come with the burden of mortgage insurance which increases the monthly repayment of the borrower. VA loans are only for veterans and their families.
Conventional loans
These loans are offered by banks and are not backed by the government. A clear majority of homebuyers must remain dependent upon conventional type of loans.
Conforming and Jumbo loans
This distinction is made based on the size of loan. Freddie Mac and Fannie May, government-controlled organizations, buy loans from banks and sell them to investors through Wall Street. If the size of loan falls within maximum size limit prescribed by these two agencies, it is called a confrming loan. However, when the size falls outside this maximum limit, it is called a Jumbo loan.
As a buyer, you should understand the pros and cons of each type of loans before deciding which one is right for you.