It was designed to help people who experience setbacks-like divorce, unemployment and medical emergencies-get a house. Pros: The perceived pro is that lenders will give you money to buy a house, even if you have bad credit and no money.The subprime mortgage was designed to bring the dream of homeownership within everyone’s reach-even for people who are struggling financially. Okay, we already covered the most common types of mortgages-but now let’s cover some other mortgage types and terms you should know about. Keep more of your money and go with a fixed-rate mortgage instead. But, as many homeowners learned in the economic downturn, when your rate increases or you lose your job, the payment can quickly become too much for you to afford.īottom line: ARMs and variable-rate mortgages are among the worst types of mortgages out there. Many people find this type of mortgage appealing because they can qualify for a more expensive home. Cons: Sure, the initial low interest rate is appealing, but in exchange for that lower rate up front, the risk of higher interest rates down the road is transferred from the lender to you.Pros: ARMs offer a lower interest rate (and monthly payment) for the first few years.For example, if you get a 30-year mortgage with a 5/1 adjustable-rate, your interest rate will lock for five years, then adjust annually for the remaining 25 years. Here are two different options:Īn adjustable-rate mortgage comes with an interest rate that goes up or down over the years-depending on market conditions. Mortgages by Interest Rate TypeĪnother factor that goes into the mortgage you choose is related to how the interest rate is treated. Get the premium version of our EveryDollar budgeting tool, available only in Ramsey+, and make that happen.) 3. If you can’t qualify for a 15-year fixed-rate conventional loan, put your house dreams on hold for now so you can focus on getting your financial life in order. Go with a conventional loan and pay a lower total cost. If that’s the only way you qualify, then you can’t afford a home right now.īottom line: Avoid the higher fees and hidden restrictions of government mortgages. Cons: USDA subsidized loans are designed to get people who really aren’t ready to buy a house into one.Pros: With this loan, you can purchase a house with no down payment at below-market interest rates.The United States Department of Agriculture (USDA) offers a loan program, managed by the Rural Housing Service (RHS), to people who live in rural areas and show a financial need based on a low or modest income. If the loan meets these agencies’ guidelines, they agree to buy the house if the lender forecloses on the home, so the lender won’t lose money if you don’t make payments. They include government-insured programs (FHA, VA, USDA) that set their own underwriting guidelines. Government mortgages are considered unconventional because they break away from Fannie Mae and Freddie Mac guidelines. Government Mortgages (Unconventional Loans) If you want to get ahead with your money, you’ve got to take the total cost into consideration. 30-year mortgage, the 15-year is always the smartest option because it saves you tens of thousands of dollars in interest and decades of debt! Choosing a 30-year mortgage only feeds into the idea that you should base major financial decisions on how much they’ll cost you per month-that’s flawed thinking. Cons: You’ll have a higher interest rate, which means you’ll stay in debt longer and pay way more in interest than you would’ve with a 15-year term.īottom line: When you compare a 15-year vs.Pros: You’ll have lower monthly payments with a 30-year term, compared to a 15-year.The 30-year fixed-rate mortgage is pretty much the same thing as the 15-year one except your repayment plan is twice as long. 1 This type of mortgage is a deal between you and a lender that meets underwriting guidelines set by Fannie Mae and Freddie Mac-government-sponsored enterprises that purchase mortgages from lenders. Government Mortgages (Unconventional Loans)Ī conventional loan is the most common type of mortgage-making up more than 70% of all mortgages. Whether you get a mortgage through a broker, bank, credit union or direct lender, you’ll likely choose from at least one of these main types of mortgage loan categories:Ģ. That’s why at Ramsey we teach people about the different types of mortgages and their pros and cons so you can make a confident decision when buying a house. That’s because mortgage programs keep inventing new ways to “help” people who aren’t financially ready to buy a house to buy one anyway.īut getting the wrong mortgage could cost you tens of thousands of dollars and decades of debt-not to mention a lifetime of money fights! We don’t want that for you. It feels like there are a bazillion types of mortgage loans to choose from.
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