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Which Type of Mortgage Is Right for You?

Which Type of Mortgage Is Right for You?

A house model and key

Homebuyers have many options to consider as they shop for a mortgage, including conventional, jumbo loans, government-backed mortgages, fixed-rate mortgages, and adjustable-rate mortgages. Finding the right one helps buyers make wise financial decisions as they shop for their home. It also helps them know how much home they can afford.

1. Conventional Mortgages

A conventional mortgage is one that a buyer gets from a lender and that does not have any type of government backing. These can be either conforming or non-conforming. Conforming simply means the loan meets the requirements set by Fannie Mae and Freddie Mac, so it is less risky for the borrower. Typically non-conforming loans are too large for these limits and are known as jumbo loans. Conventional loans require a good FICO score and a down payment.

2. Jumbo Loans

Jumbo loans are larger than the conforming loan limits, which in 2020 are $510,400 for most parts to the country and $756,600 in high-cost areas. These allow buyers to purchase larger or more costly homes, but they do tend to have higher interest rates because they are riskier to the lender. They also require at least 10 percent as the down payment with most borrowers and a high credit rating. Sometimes finding the right jumbo loan works best with help from a real estate attorney, because these loans can vary.

3. Government-backed Mortgages

Several mortgages come with government backing. These include FHA, USDA, and VA loans. If borrowers meet the requirements for these loan programs, they can borrow money with a smaller down payment, or in some cases no down payment, and fewer credit requirements.

4. Fixed-Rate Mortgages

Mortgages are also different based on the type of interest rate they have. Fixed-rate mortgages do not change. These are typically 15 to 30-year loans and have a slightly higher interest rate than adjustable-rate loans. Fixed-rate mortgages work best for those who are planning on staying in their homes for the long term or who want less risk.

5. Adjustable-Rate Mortgages

Adjustable-rate mortgages have an interest rate that can change with the changes in national interest rates. Typically the introductory rate is locked in for a few years, then the rate can increase or decrease based on what the national rates are doing. Sometimes, these loans work well for those who will need a mortgage for just a short term.

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