Understanding Your Mortgage Options for Residential Real Estate

8 Real Estate Mortgage Types You Should Know About

Cash, checks, credit cards, payment apps, and cryptocurrency provide us with more purchasing power than ever before. Whenever you’re buying groceries or shopping online, you likely have multiple ways you can complete the transaction.

Residential real estate adheres to the same trend; homebuyers have several mortgage options to consider when making a purchase. However, a home mortgage isn’t just a one-time purchase like a pack of gum or a bottle of soda. A residential real estate purchase is a financial obligation homeowners manage for years.

With several mortgage types available, each tailored to meet specific needs and financial situations, understanding your options is essential. Getting up to speed on the different mortgage options can help you avoid paying additional interest, private mortgage insurance (PMI), and stepping into financially risky situations.

Conventional Fixed-Rate Mortgage

A conventional mortgage is the most traditional type. It’s not backed or insured by the government, making it a private transaction between you and the lender. Conventional loans typically require a 20% down payment, but some lenders may accept less with PMI tacked on, which is money that protects the lender if the homeowner defaults on the loan. Conventional residential real estate loans are typically offered in 30-, 20-, 15-, and 10-year terms. The shorter the term, the lower the interest rate the borrower can secure.

Adjustable-Rate Mortgage (ARM)

ARMs offer lower initial interest rates than fixed-rate mortgages but will adjust after the fixed period is over. Typically, ARMs are offered in 3-, 5-, and 7-year fixed periods. Many borrowers are hesitant to go with this mortgage option due to the uncertainty of what could happen after the fixed period concludes; however, with interest rates being especially high right now, ARMs are surging in popularity. Keep in mind, you can always refinance before the fixed period expires.

Interest-Only Mortgage

As the name implies, an interest-only mortgage is a loan where the borrower is only obligated to pay interest every month. However, the interest-only arrangement only lasts for a set number of years. After that, the homeowner can refinance or start paying principal and interest; the interest rate is determined by the index.

These loans can be risky if the property’s value doesn’t appreciate. It should also be noted that interest-only loans are difficult to qualify for. Residential real estate buyers must put down a significant down payment and prove they have excellent credit, low debt-to-income ratio, and savings or assets.

Federal Housing Administration (FHA) Loan

FHA loans are government-backed and designed for first-time homebuyers, homebuyers who may not qualify for a conventional loan due to a variety of factors. FHA loans only require a down payment of 3.5% and are more lenient in terms of meeting borrower requirements. This makes homeownership accessible for those with limited savings, high debt-to-income ratios, and low credit scores.

Veterans Affairs (VA) Loan

VA loans are exclusively available to eligible veterans, active duty service members, and qualifying surviving spouses of service members. These loans are provided by private lenders and typically require no down payment and limited closing costs. Additionally, because the VA guarantees a portion of the loan will be paid, the borrower can typically secure highly competitive loan terms.

United States Department of Agriculture (USDA) Loan

USDA loans are intended for rural and suburban homebuyers with low to moderate incomes. They offer 100% financing – meaning no down payment, competitive interest rates, and no PMI, making homeownership affordable. The caveat for qualifying for this type of loan is two-fold: borrowers cannot make above a certain amount of income, and they must plan to purchase a home in certain rural areas.

Jumbo Loan

Jumbo loans are used to finance high-value homes that exceed the conforming loan limits set by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac. They typically require a larger down payment and have stricter credit and underwriting requirements. According to Investopedia, the current conventional loan limit for 2023 is $726,200; however, for counties with many high-value homes, the conventional loan limit is higher.

Balloon Mortgage

Balloon mortgages offer lower monthly payments for a fixed period, usually 5 to 7 years, with a lump-sum payment – the “balloon” – due at the end of the term. Out of all the mortgage options, a balloon mortgage is one of the riskiest. If the homeowner is unable to refinance before the loan balloons or they can’t make their balloon payment, it puts them in a precarious situation.

Weighing Your Residential Real Estate Mortgage Options

Choosing the right mortgage depends on your financial situation, homeownership goals, and personal preferences. For example, if you only plan to be in your home a few years, an ARM or a balloon mortgage are viable options. If you value stability and consistency above all else, a traditional 30-year fixed is probably the best way to go.

Be sure to consult with a licensed lender who can help you navigate these options and guide you toward the mortgage option that best fits your needs. Asking questions and keeping an open dialogue is the best way to learn about real estate. With the right mortgage, your path to homeownership becomes a more secure and achievable journey. When you’re ready to buy – or sell your home quickly – contact a real estate professional near you. They will be more than happy to answer any questions.