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8 Types of Mortgage Loans: Which one is for you?

Home Mortgages
May 26 2022

8 Types of Mortgage Loans: Which one is for you?

Loans

If you are getting ready to make a huge purchase like a home or commercial building, and you are applying for a mortgage loan, it is best to be as informed as possible. 

There are 8 types of mortgage loans, and depending on a few factors, there may be some types that will suit you perfectly and other types that just won’t be a good fit. 

Each mortgage loan has different advantages and disadvantages for the borrower, so it is important to know your options and speak with your lender about which is best for you. 

The 8 types of mortgage loans

  1. Fixed Rate Mortgage – As the name suggests, a “fixed rate” mortgage has an interest rate that will not change for the duration of your mortgage loan.
  2. Interest-Only Mortgage – This mortgage requires the borrower to pay only the interest of the loan for a certain amount of time. After which the principal of the loan must be repaid in lump sums by a specified date, or in subsequent payments. 
  3. Adjustable Rate Mortgage (ARM) – ARMs are also known as variable rate mortgages and have interest rates that may change from time to time depending on changes in the economy and financial conditions associated with the loan. In essence, your monthly payment could increase or decrease depending on these factors. 
  4. FHA Mortgage – These mortgages are backed by the Federal Housing Administration. These loans come with built-in mortgage insurance in case the mortgagor is unable to repay the loan. 
  5. VA Mortgage – These loans are specific for Veterans of the US Army Forces and sometimes their spouses. This mortgage is guaranteed by the Veteran Affairs and does not require a down payment. 
  6. Jumbo Mortgage – Jumbo mortgage loans are above a certain dollar amount that is too big for the Federal Government to guarantee. This dollar limit varies from county to county.
  7. USDA Mortgage – These loans are guaranteed by the US Department of Agriculture and require no down payment on most properties. 
  8. Balloon Mortgage – Similar to the Interest-Only mortgage, the Balloon mortgage requires that you pay the interest of the loan for a certain period of time, after which the total principal loan amount becomes due.

Pros and Cons of Different Mortgages

Mortgage TypeProsCons 
Fixed Rate Mortgage
  • The loan rate is predictable since it does not change. 
  • Lower interest rates. 
  • Higher monthly payments.
Interest-Only mortgage
  • Low monthly payments during the loan term.
  • Qualify for tax-deductible during the interest-only period.
  • The borrower can qualify for a larger loan later.
  • Principal payments can be hard to make when the time comes.
  • Rising mortgage rates increase risk if it is an ARM. 
Adjustable Rate Mortgage (ARM)
  • Low introductory rates.
  • Flexible repayment.
  • Payments could become complex.
  • Uncertainty of loan rates – rates could increase over time. 
FHA Mortgage
  • Low down payment. 
  • Lenient credit history allowed.
  • Great interest rates.
  • Low debt-to-income ratio requirements.
  • Mortgage insurance premiums.
  • Less attractive/exclusive offers.
  • Restrictive loan maximum.
VA Mortgage
  • No down payment needed.
  • No Private Mortgage Insurance (PMI) needed. 
  • Low debt-to-income requirements. 
  • No repayment penalty. 
  • Mandatory VA Funding Fee.
  • Loan can only be used to purchase the primary residence.
  • Sellers won’t always be on board.
Jumbo Mortgage
  • Higher loan limits.
  • Lower down payment.
  • One single loan.
  • Higher interest rates.
  • You need a high, clean credit score.
  • Higher closing costs.
USDA Mortgage
  • No down payment required.
  • Flexible credit and qualifying guidelines.
  • Low fixed interest rates.
  • No pre-payment penalty.
  • Mortgage insurance included in loan costs.
  • Geographic restrictions – typically only for urban areas.
Balloon Mortgage
  • Affordable initial payment amount.
  • Low interest rates.
  • Easy qualification.
  • High foreclosure risk.
  • Major payment at once after the interest payments.

Get your mortgage with CVF Credit Union

At CVF Credit Union, you can get a fixed-rate mortgage, ranging from 10 years to 30 years. The beauty of a fixed-rate mortgage is that you can have predictable monthly payments, so no need to worry about interest rate fluctuations. If this sounds like just what you need, click here to apply or speak with an agent who is more than happy to address any questions you may have!

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