When you are looking to buy a home, unless you have won the lottery or have inherited a fortune, you are going to need to apply for a mortgage.
Even though many banks and mortgage providers state that this process is easy, it’s a bit tricky! There are many different mortgage types based on the deposit amount that you have, the type of home you want to buy, or even your job!
So, how do you know which is the right mortgage type for your unique situation? Your best bet is to talk with a mortgage provider before settling on a specific type. Of course, to help you along, this article looks at the most common types of mortgage available in 2023, so you can go into this meeting with a bit of information.
Fixed-Rate Mortgage
This is the most commonly applied for mortgage; where the interest rate that you pay remains constant throughout the loan term. However, it can become concerning for homeowners, as the fixed rate does not change, which can be harder to pay off if you are going through a tough patch with your finances.
So, if you are applying for a fixed-rate mortgage, you should look for trusted mortgage lenders in North Carolina who can help you to understand the payment rates that are needed, as well as the steps that can be taken if there is a financial dry spell at any stage in the mortgage repayment.
These mortgages often require 10% minimum of the home’s value to apply for, so if you can save more than 10%, that will likely be better for a successful mortgage application.
Adjustable-Rate Mortgage
An adjustable rate mortgage has an interest rate that is initially fixed for a certain period; after the initial period, the rate adjusts periodically based on a predetermined index. The monthly payment can increase or decrease depending on the interest rate fluctuations, which means that your payments are going to be more volatile if the market is in a bad place.
However, adjustable-rate mortgages are often easier to apply for and are ideal for those who are new to the property ladder. They can also be applied for with a lower percentage of the household cost, but this will vary based on which mortgage company you go to.
Interest-Only Mortgage
With an interest-only mortgage, borrowers are only required to pay the interest portion of the mortgage loan for a specified period. After the interest-only period ends, the loan is usually converted into a traditional mortgage, and both principal and interest payments are required.
This can be a great way to get onto the property ladder as well for first-time buyers. However, the repayment period is quite long, and as it is an interest-only mortgage, the rate may change during the initial period. So, before entering into this kind of mortgage, make sure you understand all of the small print!
Shared Ownership Mortgage
A shared ownership mortgage, also known as shared equity or part-buy/part-rent scheme, is a type of mortgage arrangement that allows individuals to purchase a percentage of a selected property while paying rent on the remaining portion. It is primarily designed to help people who may not be able to afford to buy a property outright on the open market.
Usually, a shared ownership mortgage will allow the buyers to purchase around 50-75% of the property, whereas some homes will allow you to purchase as little as 25%; it will depend on the house and the mortgage provider.
This kind of mortgage is ideal for those who are looking to purchase a property that is in a high-price area.
Jumbo Mortgage
Suppose you want to live the dream and put down a mortgage on a home that is in the $1 million price bracket. Then, you will need to apply for a jumbo mortgage.
A jumbo mortgage is used for loan amounts that exceed the regular loan limits set by government-sponsored enterprises (GSEs). Due to the higher price of these loans, they typically have stricter qualification criteria and higher interest rates than other mortgages.
So, in order to apply for one, the best option is to seek out a mortgage specialist who can help break down the jargon that can come with applying for a jumbo mortgage.
FHA Loan
An FHA (Federal Housing Administration) loan is insured by the government and is designed for borrowers with lower credit scores or limited down payment funds.
Started in the 1930s, when foreclosures were high due to the great depression, these loans were designed to help people who didn’t have access to the coveted 10% deposit to get onto the property ladder. As a result, they often have more flexible qualification requirements, but they can and often do require higher mortgage insurance premiums.
VA Loan
Available to eligible veterans, active-duty service members, and surviving spouses, a VA (Department of Veterans Affairs) loan is guaranteed by the government.
The terms for this loan do change, though, based on how long you have been in service. If it is during wartime, then you need to have served for 90 days of active duty, 181 days during peacetime, or 6 years in the Reserves or National Guard.
As they are offered to people who are in the services, they have favorable terms and interest rates, so they are well worth looking into if you have served for a while!
USDA Loan
A USDA (United States Department of Agriculture) loan is intended for borrowers in rural or suburban areas who meet certain income requirements. However, these requirements are a bit tricky; you need to have a clean credit history, have a credit score of 640, and the property that you want to get must be in a rural area with a population of fewer than 20,000 people.
These loans provide 100% financing and may have lower interest rates, but, as you may have guessed, they are a lot harder to get! So, make sure everything in your credit report is glowing before you apply for one of these loan types.
