5 Types of Mortgages Every Homebuyer Should Know

Buying a home is a huge undertaking. Nobody should enter into a mortgage without doing their homework first. For some people, a mortgage isn’t even the right decision because it could leave them in a risky position, prone to collapse. Some of you might rememberthe 2008 financial crash, originally triggered by widespread defaulting on mortgages and a couple of other issues. Afterwards, banks became much more demanding and less generous with their mortgages. Since then banks have slowly been getting more generous again, so it’s not unheard of for people to fall behind on their mortgage and end up financially ruined, homeless, or both.

Keeping this in mind, you know to do your homework properly before signing up to a mortgage. But did you know there are different types of mortgage to choose from? No? Read on!

1. FHA Loan

This type of mortgage is insured by the Federal Housing Administration. This type of mortgage appeals to those with lower credit scores because it allows them to get a mortgage loan regardless of the score, often with quite a small deposit (3.5-10%). That sounds great, so you might be wondering why everyone doesn’t use an FHA mortgage. Put simply, it’s because the cost of insurance is paid in premiums throughout the year. This is money that you have to pay for the mortgage, but which doesn’t affect either the principal loan or the interest on it – it’s literally a fee for insurance purposes, in case you ever default.

2. USDA Loan

Most land in the US is classified as rural, though less than 20% of the population lives in these areas. The government is trying to encourage a change here by offering low interest, no deposit mortgages. This can happen because the loan is guaranteed by the government. The program is particularly helpful for poorer families, though there are still some criteria you have to fulfill to get one.

3. VA Loan

Similar to the previous two, this is also guaranteed by the government. VA stands for Veterans Association, so obviously this program is for service personnel and their families. In return for the sacrifices they make for their nation, veterans can receive 100% mortgages and preferential interest rates, amongst other perks.

4.  Conventional Fixed Rate

This is what most people usually think of when they think of a mortgage. Well, either this or a conventional variable rate. With both types of conventional mortgage, you are borrowing the money from a private lender – usually a bank. Fixed refers toyour mortgage interest rate, which in this case will always stay at the same amount. That can be good if interest rates go up, or bad if they go down.

5.  Conventional Variable Rate

As you might guess, a variable rate loan is one where the interest rate can vary. It is usually tied to the base rate of interest set by the national bank, so it’s easy to keep track of any changes. This can prove a smart strategy if rates go down, though if they skyrocket it can be a very bad idea. Always do your homework first before deciding on a fixed or variable rate!