When you’re ready to buy a house, it’s important to understand the different types of mortgages that are available. Knowing what they are and which one is right for you can help you make the best decision for your current situation and future financial plans.
Fixed Rate Mortgages & What They Mean For You
The most popular type of mortgage is a fixed-rate mortgage, also known as a conventional loan. It features a single interest rate that remains fixed for the life of the loan, which is typically 15 or 30 years. If you choose a fixed-rate mortgage, it’s a good idea to lock in that rate now so your payments will remain consistent during the life of the loan.
Adjustable-Rate Mortgages & What They Mean For You
In contrast to fixed-rate mortgages, adjustable-rate mortgages (ARMs) feature a lower interest rate during an introductory period and then revert to a recurring interest rate that can fluctuate by several points annually. These ARMs can come with specific rules that govern how your rate and payment will adjust, so it’s important to understand the terms of any ARM you’re considering.
ARMs often come with pre-payment penalties and may have higher rates than fixed-rate mortgages. They can also increase your debt-to-income ratio and can have other risky aspects, so consult with multiple lenders to find the best deal.
Home Renovation Mortgages & What They Mean For You
If you’re looking to make improvements to your home, consider a home renovation mortgage. These loans are available from both private lenders and government-backed entities like Fannie Mae, Freddie Mac, or the USDA.
Construction Loans & What They Mean For You
A construction loan is a short-term mortgage that allows you to finance the building of a new home or renovate an existing property before moving in. These loans usually require a small down payment of just 3%, but they can also include private mortgage insurance.
Reverse Mortgages & What They Mean For You
For homeowners over the age of 62, reverse mortgages can be an excellent way to use equity in your home and convert some or all of it into cash. This type of loan can be particularly useful if you’re planning to move or want to sell your home to a family member, but it’s not for everyone.
Credit Scores & What They Mean For You
When you’re applying for a mortgage, lenders look at your credit score and debt-to-income ratio. These measures determine whether you’re a safe bet to pay back the loan. If your credit score is less than 620, it’s likely that you’ll not qualify for a conventional mortgage.
Your income, savings, and earning potential will also impact what kind of mortgage is best for you. If your profession is stable or growing, for example, you may be able to get approved for a mortgage with a low interest rate. However, if your profession is changing rapidly or you’re expecting your income to decrease over time, it might be better to choose a mortgage with a lower interest rate or a longer term.