Mortgages: What's the Difference?
Whether you’re planning on buying your first home or fifth, you may find the different types of mortgages confusing. You’re not alone! Without clear communication from trusted lenders, it can be challenging to tell the difference among mortgages, let alone decide which one is best for you. We’re here to help remove some of the mystery.
Conventional Mortgages
Conventional mortgages are available through two government-sponsored enterprises, Fannie Mae and Freddie Mac, or through guaranteed private lenders, such as banks, credit unions or mortgage companies. The loans are between you and the lender without any guarantees from the FHA (Federal Housing Administration) or VA (Veterans Administration). As such, lenders typically require a 10-20% down payment, imposing a mortgage insurance payment on those who pay just 5%.
There are two main types of mortgages that fall under the conventional mortgage category:
- Fixed rate mortgages. These loans carry the same interest rate throughout the life of the loan. The monthly payment stays the same, partly paying off interest and partly paying off principal. This type of loan is good for borrowers who want a stable, predictable course of payment.
- Adjustable rate mortgages. These loans vary according to changes in the loan’s corresponding financial index, meaning borrowers must prepare for changes in monthly payments over the life of the loan. ARMs can vary in the number of fixed and variable years. In a 5/1 ARM, for example, the 5 stands for an initial 5-year period during which the interest rate remains fixed. The 1 indicates that the interest rate is subject to adjustment once per year thereafter. Because an ARM loan can present financial risks, with low payments suddenly becoming much higher, it is recommended for people with financial flexibility who can plan on paying off a loan quickly.
FHA Mortgages
While conventional mortgages require a 10-20% down payment, or as low as 5% with mortgage insurance, FHA mortgages allow borrowers to put as little as 3.5% down, depending on their credit score. Insured by the Federal Housing Administration or the Veterans Administration, FHA loans help low- to moderate-income borrowers realize the dream of owning a home. Rather than lend money directly to the borrower, the FHA minimizes the borrower’s risk by covering payments in the case of default. The borrower pays a mortgage insurance premium to the FHA to insure the loan. This type of mortgage is ideal for first-time home buyers with credit scores as low as 500.
Not all loans are good choices for you, and not all institutions offer every type of loan. Before diving into the mortgage world, check with a local loan officer to find out which type of loan you qualify for and whether that loan is a good match for you and your financial circumstances.
Which loan is the best fit for you?
First National Bank of Sycamore is dedicated to filling homes with families like yours. As your local experts in home mortgages, we invite you to contact us, make an appointment, and share your dream. We’ll help you find a place to call home!
