Securing a mortgage is one of the most important steps on your journey to purchasing a home, but it's easy to feel overwhelmed by the many mortgage types available. Each mortgage type has its own pros and cons, so it's key to evaluate your options to find the one that best fits your financial goals. Our real estate agents have more on the most common mortgage types to help you evaluate your financing options.
Breaking Down Mortgage Types: Which One Fits Your Financial Goals
Fixed-Rate Mortgage
Fixed-rate mortgages offer a set interest rate for the life of the loan, with most loans lasting for 15 or 30 years. The key advantage is that your payment will be the same each month, with little fluctuation in your monthly budget. This is especially beneficial if you're choosing a fixed-rate mortgage when interest rates are low.
The disadvantages are that you can't take advantage of lower interest rates in the future unless you refinance, and that you'll pay more in interest during the early portion of the loan. A fixed-rate mortgage can be a good choice if you plan to own the home long-term and want a consistent budget.
Adjustable-Rate Mortgage
With an adjustable-rate mortgage (ARM), your mortgage payments and interest rates vary with the market over time. An ARM will often offer a lower introductory rate, followed by adjustments based on interest rate changes in the future. The downside is that you risk higher payments after your introductory period if interest rates rise. Since introductory rates for ARMs are often quite low, this type of mortgage can be an ideal choice if you plan to stay in the home for a shorter period, thus taking advantage of the lower introductory rate and selling before potential rate increases down the line.
Conventional Mortgage
A conventional mortgage is a mortgage offered by a private bank, rather than by a government entity. They come in the form of conforming loans which must meet standards for income and down payment, or non-conforming loans which are above conforming loan limits. Non-conforming loans are most commonly used when purchasing high-priced properties, which don't fit the standard for a conforming loan.
One advantage of a conventional mortgage is low down payment rates, with some requiring as little as a 3-5 percent down payment. The disadvantages are that a conventional loan can be more difficult to apply for with a lower credit score or debt-to-income ratio (DTI), and that you'll typically need to purchase private mortgage insurance when making a lower down payment.
Government-Backed Loans
There are a variety of government-backed loans available, which can offer advantages for military members, first-time buyers, and more. The most common types of government-backed loans are:
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FHA loans are insured by the Federal Housing Administration. These typically offer lower down payment and credit score requirements, making them a popular choice for first-time buyers.
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VA loans are backed by the Department of Veterans Affairs and are available to those who are currently serving or have served in the military. They offer no down payment requirement or mortgage insurance requirement, but they must be used for a primary residence.
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USDA loans, backed by the Department of Agriculture, have lower credit score requirements, no down payment, and lower income requirements. They can only be used for a primary home, and are only available in certain rural or suburban areas.
Searching for a home you love that also fits your financial goals? Our local team is here to help with all of your real estate needs. Contact us to buy and sell homes across Florida communities.
