Mortgages 101

What is a mortgage & what are the different types?

A mortgage is an agreement between you and a lender that allows you to borrow money to purchase or refinance a home.

The agreement gives the lender the right to take your property if you fail to repay the money you’ve borrowed. This is because a mortgage is a secured loan.

There are three types of home loans:

• Conventional: A conventional loan is a type of home loan that is not guaranteed or insured by the government. Private lenders, like credit unions or banks, make conventional loans. These loans tend to have the best interest rates and are loaned to people with high credit scores and steady income. The average down payment requirement is a minimum of 3%.

• FHA Loan: Federal Housing Administration mortgages, also known as FHA mortgages are federally insured by the government. They are designed to help first time home buyers as the credit score requirements are more lenient and typically require a smaller down payment amount.

• VA loan: A VA loan is a mortgage loan that is guaranteed by the United States

Department of Veterans Affairs. VA loans are a benefit for service members, including surviving spouses. VA loans often have lower interest rates and require little to no down payment without mortgage insurance. Borrowers can expect to pay a funding fee, which costs 1% of the total loan amount.

Fixed Rate vs. Adjustable Rate Mortgage:

A fixed rate mortgage has an interest rate that will not change. The rate remains the same from the day you take out the mortgage through the life of the home loan. Why is this important? Because you can lock in a low rate without having to worry about a fluctuating market.

An Adjustable Rate Mortgage has an interest rate that can go up or down. This often is identified as a riskier type of loan for borrowers because although your interest can decrease based on market conditions, it can also increase.