To some people, real estate is the most significant investment they’ll make. While buying a real estate property is many people’s “American Dream,” the process can be overwhelming, especially regarding financing.
If you’re a Massachusetts resident looking to buy a home, you’ll quickly find different types of mortgages available. The options can initially seem overwhelming, from adjustable to fixed-rate mortgages and everything in between.
However, taking the time to explore the different types of mortgages can ultimately lead you to the one that’s the best fit for your unique financial situation.
Whether you’re a first-time homebuyer or a seasoned pro, understanding your options is key to finding your dream home and securing the suitable types of mortgages to make it a reality. Despite the many choices available, finding the perfect mortgage doesn’t have to be a daunting task – and this guide will help steer you in the right direction.
Meaning of Mortgage
Mortgages are loans for buying real estate, like a piece of land, a residential house, or an investment property. A mortgage is used to secure a property under purchase, meaning the mortgage lender holds the property lien until the full loan repayment.
The buyer makes regular loan payments to the mortgage lender over a specified period, usually 15-30 years, until its full repayment. If the borrower fails to repay the loan, the lender can foreclose the property, meaning the lender can seize the property and put it up for sale to recover the loan balance.
However, before being approved for a mortgage loan, you’ll need to meet some financial requirements, including a high credit score.
Understanding Various Types Of Mortgages
If you’re considering applying for a mortgage in Massachusetts, we have various types of mortgage loans explained throughout this article to help you make an informed choice suitable for your needs.
Whether you’re considering refinancing or downsizing or are a first-time home buyer in Massachusetts, you’ll find various types of mortgages in real estate that suit your needs. However, it’s best to decide your preferred loan amount to help you choose the best financing option for your needs.
Two Types of Mortgage Loan
While many mortgage classifications exist, there are two types of mortgages based on loan qualification.
So, what are the two types of mortgages in this category? They include the following:
1. Conforming Loans
A conforming loan is a conventional loan Freddie Mac and Fannie Mae can purchase. However, for either of these government-backed institutions to buy your mortgage from the lender, it must meet the Federal Housing Finance Agency’s basic qualifications.
The following are the basic conforming loan requirements:
- The loan shouldn’t exceed the $726,200 maximum dollar limit unless you’re eligible for a super conforming loan.
- The federal government doesn’t back conforming loans. Therefore, Freddie and Fannie might not purchase your mortgage if it’s from the Federal Housing Administration or the Department of Veterans Affairs.
- The loan must meet lender-specific criteria, including a 620 credit score.
Conforming loans guidelines have less variation in their loan qualification and well-defined guidelines. Because Freddie or Fannie can buy the loan from the lender, conforming loans bear fewer risks, meaning you might get a lower interest rate with a conforming loan.
2. Non-conforming Loans
A non-conforming loan is a loan that doesn’t meet a conforming standard. Due to its less strict guidelines, you might get a loan with a lower credit score, borrow with no money down, or take out a large loan.
Even with a negative credit report item like bankruptcy, you can get a non-conforming loan. Most non-conforming loans are jumbo mortgages or government-backed loans.
Hopefully, with these explanations, you’ve gotten an answer to the question, what are two types of mortgages?
Three Types of Mortgages Based on the Structure of Their Interest Rates
While we’ve previously discussed 2 types of mortgages, three types of mortgages are available to Massachusetts home buyers based on their interest rate structure.
So, what are the 3 types of mortgages? We’ve explained them here:
1. Fixed-Rate Mortgages
This mortgage has the same principal/interest payment and interest rate throughout the loan duration. While the amount might vary monthly due to insurance and property tax rate fluctuations, fixed-rate loans mainly offer a predictable monthly mortgage payment.
A fixed-rate mortgage loan is suitable for Massachusetts home buyers purchasing a home they intend to stay in for a long time because the monthly repayment amount is fixed, helping to plan and budget for it long-term.
Fixed Rate Loan Pros
A fixed-rate mortgage helps borrowers easily budget for monthly payments since its fixed
Fixed Rate Loan Cons
A high fixed interest rate might lead to higher interest repayment
2. Hybrid or Adjustable-Rate Mortgages (ARM)
An adjustable-rate mortgage is a loan with a 30-year loan term and interest rates fluctuating depending on the market rate. After signing onto an adjustable-rate mortgage, there’s a fixed interest introductory period (between five, seven, or ten years).
After the introductory period ends, the interest rates change depending on the market rates. Adjustable-rate mortgages include rate caps dictating the amount your interest payments can change over the life of the loan and a given period. Rate caps protect borrowers from a rising interest rate.
Adjustable-Rate Mortgages Pros
- Low-interest rates throughout the introductory period
- Predictable payment during fixed-rate periods, making budgeting easier
Adjustable-Rate Mortgages Cons
- A rate increase can result in higher monthly payments
3. Interest-only Mortgage
Borrowers under the interest-only loan pay interest on the mortgage loan for a specific period (usually between 5-10 years). The monthly payment doesn’t include principal repayment throughout the interest-only period.
After this period ends, borrowers start paying interest on the principal, resulting in high monthly payments. This higher payment might cause financial strains on a borrower unprepared for the increased costs.
Pros of Interest-only Loan
- Since you’ll pay interest on the home loan during the interest period, the monthly payments are often lower.
- The interest paid on this mortgage type might be tax-deductible, resulting in lower taxes.
Cons of Interest-only Loan
- Since there’s no principal loan repayment during the interest period, the borrower will pay a higher total interest throughout the loan’s life.
- The borrower might acquire negative equity if the home’s value declines during the interest period.
Other Types of Mortgages
Besides the various categories and types of mortgages explained, some mortgage loans fall outside these classifications.
Some of these types of mortgages include:
1. Government-Backed Loans
These loans are insured and backed by government agencies, meaning lenders find them less risky because the insurer handles the bill upon the borrower’s default.
Government-backed home loans have certain eligibility criteria you need to meet to enjoy their unique benefits. You may save on down payment requirements or interest depending on your eligibility.
Some government-backed home loans include:
Insured by the Federal Housing Finance Agency, this loan enables you to purchase a home with a 3.5% down payment and lower credit scores (as little as 500), unlike a conventional loan.
Like an FHA and VA loan, the United States Department of Agriculture insures the USDA loans. However, the mortgage insurance requirements for USDA loans are lower than FHA loans, allowing you to buy a property without a down payment. Therefore, this mortgage loan suits borrowers who don’t qualify for a conventional loan.
However, you must be willing to purchase the property in a rural or suburban area and meet income requirements to qualify for this loan.
The Department of Veterans Affairs insures VA loans. This type of mortgage allows you to purchase a home with the lowest interest rates and zero down compared to other loan types. However, you need to meet the National Guard or Armed Forces service requirements to qualify.
Benefits of Government-Backed Loans
- You can save on down payments and interest, reducing closing costs
- Unlike conventional loans, these types of mortgage loans have less strict eligibility requirements
Drawbacks of Government-Backed Loans
- Most government-backed home loans have funding fees (insurance premiums) borrowers need to pay upfront, leading to higher borrowing costs
- Borrowers must meet specific eligibility criteria
2. Jumbo Loans
This type of loan is perfect for real estate investors looking to purchase a high-value property. A jumbo loan interest rate is similar to a conforming loan interest rate. However, the eligibility criteria are more demanding than other loan types.
Besides a higher credit score, you need a lower debt-to-income (DTI) ratio to get a jumbo loan.
Benefits of Jumbo Loans
- Similar interest rates to conforming loan
- A higher loan amount for an expensive home
Drawbacks of a Jumbo Loan
- Large down payment, between 10 to 20%
- Tougher eligibility criteria, including a low DTI ratio, significant assets, and a higher credit score (700 and above)
3. Construction Loans
As a short-term loan for financing an existing property’s major renovation or a new home’s construction, borrowers will need to repay the loan once the building is complete. Construction mortgages are provided by financial institutions like banks and the funds are disbursed in different stages during the construction process rather than the borrower getting a lump sum at once before construction begins.
The two primary construction loan types are:
Stand-alone Construction Loan
These loans are used in financing a major renovation or a new home’s construction. However, it doesn’t convert to a traditional loan upon the construction’s completion.
The borrower will need to obtain a second mortgage loan to repay the loan.
This loan is used to finance a new home’s construction serving as the borrower’s primary residence. The mortgage loan is used to pay for construction costs. Upon completion, the loan is converted to a traditional mortgage loan.
Pros of the Construction Loan
- This type of loan provides flexibility in its usage, meaning you can use it to pay for various construction-related expenses, like permits, labor, and materials.
- Borrowers make interest-only payments during construction, reducing the borrower’s financial burden.
Cons of the Construction Loan
- These types of loans have higher interest rates than most traditional loans because they’re riskier due to the construction process uncertainties.
- Mortgage lenders require a higher down payment for this type of loan than for other types of traditional mortgages.
4. Conventional Mortgage
As one of the most common mortgage loans, conventional loans have strict regulations on your debt-to-income (DTI) ratio and credit score. You can purchase a property with a three percent down payment under a conventional loan. However, you’ll need at least a 620 credit score to qualify.
With a 20% down payment, you won’t have to pay the mandatory mortgage insurance premiums, unlike borrowers that don’t meet the requirements. Fortunately, conventional loans offer private mortgage insurance rates more than other loan types, especially FHA loans.
A conventional loan offers the best option for borrowers with larger down payments looking to enjoy lower interest rates. If you’re unable to provide a minimum of three percent and can’t meet other eligibility criteria, consider a USDA or VA loan.
Borrowers can also get a reverse mortgage or other unconventional mortgages like balloon loans.
Will My Home Be Foreclosed If I Don’t Make Full Repayment?
A continuous failure to make monthly mortgage payments might lead to the lender foreclosing your home. The borrower will officially default if they delay one mortgage payment.
Are There Different Mortgage Loans?
Yes! That’s why it’s best to check various lenders to find the one that best suits your needs. Lenders and banks compete for the best terms and rates for qualified borrowers in Massachusetts.
Can a Low Credit Score Affect My Mortgage Eligibility?
Your credit score decides whether you’re qualified for a mortgage or not. A 520 credit score is considered low for conventional mortgages. However, other loan options have a minimum credit score.
While government-backed loans like FHA, VA, and USDA are some of the most common mortgage loan types, your preferred mortgage will depend on your situation and chosen loan amount.
Before choosing a home loan, it’s best to calculate your estimated refinancing and purchase costs to help you determine the loan amount you need. While exploring various types of mortgages available to Massachusetts home buyers, you need to have higher credit scores to increase your qualification. Also, consider the property location, debt-to-income ratio, and income, as it influences the mortgage different types you’ll get.
If you’re a first-time home buyer looking for a mortgage loan type that best suits your needs, we have various types of mortgages explained here. Besides working with a lender to choose the best home loan, you need a knowledgeable real estate agent to help you find the perfect property in Massachusetts.
At Homes by Ardor, we help seasoned property investors and first-time home buyers find their dream properties in Boston and Massachusetts. Contact us today to make your “American Dream” come true.
In her 25-year career, Steph Wilkinson has been involved in the acquisition, marketing and sales of over $3 Billion dollars of residential real estate. A number of years ago, Steph transitioned into Brokerage Leadership for National real estate brands and tech start-ups. She has served as a Business Strategist for real estate agents and brokerages alike and is also a real estate coach and trainer. In her new role with the Iconic Team, Steph will be responsible for the growth of the team and will be working with all of our agents to increase their productivity and bottom line.
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