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What Are the Different Types of Mortgage Loans?

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A mortgage is the most significant financial transaction most people will ever make. With low mortgage rates, it’s a great time to buy a home. Whether this is your first mortgage or your fifth, it’s important to take a close look at the different types of mortgage loans, including home equity loans and lines of credit. In addition to knowing the ins and outs of different types of loans, you should also consider the quality of your lender. To help you make informed decisions about homeownership, we’ve put together a guide to different types of mortgage loans.

What Is a Mortgage Loan?

What sets a mortgage apart from some other types of loans is that it is secured by your home. If you fall too far behind on payments, your lender could seize your home. Fortunately, some lenders will often work with you if you’re having financial difficulties.

There are several types of mortgage loans; the right mortgage loan for you depends on your financial situation, the size of the loan, how long you plan to live in your home, the size of your down payment, and your financial history. For example, if you have a lower credit score, you may need to look at mortgages specifically designed for those with poor credit.

What Are the Different Types of Mortgage Loans?

What Are the Different Types of Mortgage Loans?

If you’re looking to purchase a home, you will see two types of mortgages:

  • Fixed-Rate Mortgages. Fixed-rate mortgages have a set interest rate for the life of the loan. Whether it’s a 15-year loan or a 30-year loan, the interest rate will stay the same from beginning to end.
  • Adjustable-Rate Mortgage (ARM). An ARM has an interest rate that changes periodically. Interest rates typically change once per year. Some ARMs start with an initial fixed rate. For example, it may have an initial rate of 4.5 percent for the first five years, and then a variable rate after that.

If you already own a home, you’ll see two types of mortgage-related loan products:

  • Home Equity Loans. A home equity loan is a second mortgage based on your home’s equity. Your home equity is the value of your home minus the balance of your first mortgage. For example, if the current value of your home is $250,000, and the balance of your mortgage is $150,000, then you have $100,000 of equity in your home ($250,000-$150,000=$100,000). A home equity loan is a lump sum loan based on the amount of equity.
  • Home Equity Lines of Credit. A home equity line of credit is a revolving line of credit. It’s granted by a lender based on the equity in your home. Instead of receiving a lump sum, you’re granted a credit line that’s like the credit limit of a credit card. You only borrow as much as you need, when you need it.

Each of these mortgage loan products is best suited for different situations. For example, if you’re purchasing a new home that you’re only planning to keep for three or four years, you might want an ARM with a low introductory rate. If you have extensive renovations to do on your current home, you may want a home equity loan or line of credit.

How Do You Compare Mortgage Loans?

How Do You Compare Mortgage Loans?
When it comes to mortgages, you may compare different mortgage products. As you compare your options, you should compare apples to apples. Some points of comparison include:

  • Interest Rate. As you look at each mortgage product, carefully compare the interest rates. In addition to the published interest rate, look for the APR, as that includes any closing costs. The APR will be slightly higher than the interest rate of the mortgage. If there’s a big difference between the two, that’s a red flag. It could indicate that there are high closing costs or other hidden fees, which you should investigate.
  • Loan Term. Mortgages typically have a loan term of 15 to 30 years. The longer the loan term, the lower your monthly payment, but longer loan terms also tend to have slightly higher interest rates.
  • Points. Mortgages may include up to two types of points: origination points and discount points. Origination points are fees for processing the loan. Discount points are prepaid interest. You can purchase points, and each point typically lowers your interest rate by 0.25 percent.

As you review your mortgage options, take the time to dig into the details so you find the product that’s right for you and your home.

Other Factors That Impact Your Mortgage

Your mortgage options will also be influenced by other factors. These include:

  • Your credit score and history. Having a lower credit score can make it more challenging to qualify for a mortgage, and it may impact your interest rate. Blemishes in your credit history could also make things challenging. If you’re concerned about your credit, though, it can help to talk to a lender. Experienced lenders can help you connect with the right products for your credit and can give you tips on improving your credit so you have access to lower interest rates.
  • Your down payment. Your down payment impacts the amount of your mortgage. If you make a higher down payment, you’ll have a lower mortgage balance. It also shows lenders that you have a higher level of commitment and that you’ve put more money on the line to secure the home. Different mortgages have different down payment requirements.
  • Private mortgage insurance. If you make a down payment of less than 20 percent, your lender may require you to have private mortgage insurance. This protects the lender if the home is foreclosed and sells for less than the balance of the mortgage. This does add to the cost of your mortgage. Private mortgage insurance is typically .5 to 1 percent of the home price. If the home is $100,000, your insurance would cost between $500 and $1,000 per year.
  • Loan-to-value ratio. Your loan-to-value ratio is the amount of your loan as compared to the value of your property. For example, if you’re purchasing a $100,000 home and you put down $20,000, your loan will be for $80,000. This means you have an 80 percent loan-to-value ratio.

These factors will influence your interest rate and the type of mortgages available to you. Taking the time to meet with the lender in person will give you more insights into the right loan for you.

What Should You Look for In a Lender?

Some people just look at interest rates when it comes to mortgage loans. Given that mortgages are the largest financial transactions most people make, though, it’s important to look beyond just the interest rate. A good lender will be responsive to your questions and concerns and thoroughly explain the products available to you. Consider how long the lender has been in business and their level of experience with mortgages. Although the Internet can be helpful in shopping for mortgages, it’s only a starting point. An in-person meeting can provide you with valuable insights.

Your Partner in the Process

Your Partner in the Process

Arthur State Bank has proudly served South Carolina since 1933. We pride ourselves on taking a modern approach to traditional banking, including our mortgage offerings. We’ve simplified the mortgage process by offering quick loan approvals and a speedy closing process. Our products include:

  • First-Time Homebuyer Mortgage: Our 1st-time homebuyer mortgage offers a fixed-rate for seven years and then adjusts annually each year after that. No private mortgage insurance is required, which significantly lowers your mortgage payment. The maximum loan-to-value ratio is 95 percent.
  • Conventional Mortgage: This is our fixed-rate mortgage product, and we offer many different loan terms to suit your needs. Private mortgage insurance is required if the down payment is less than 20 percent. The maximum loan-to-value ratio is 95 percent. We recommend referring to loan terms generically
  • ARM: Our standard adjustable-rate mortgages offer a fixed-rate for the first five or 10 years. After that, the interest rate adjusts annually. No private mortgage insurance is required, which significantly lowers your mortgage payment. The maximum loan-to-value ratio is 90 percent.
  • Construction/Permanent Mortgage: With this product, you make interest-only payments for the first nine months during construction, and then the loan converts to an ARM.
  • Home Equity Line of Credit: We offer home equity lines of credit with a maximum loan-to-value ratio of 80 percent (less the balance of your first mortgage).

To learn more about our mortgages and your potential mortgage payments, try out our mortgage calculator. It will give you an idea of what to expect when it comes to your mortgage payments. You can start to prepare for homeownership by saving up or cutting expenses. For more specifics, contact us to make an appointment with a loan officer. A loan officer can help you find the perfect mortgage, whether you’re purchasing your first home, building a new home, or considering a home equity line of credit for renovations or other expenses. Contact us today!

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AnnualCreditReport.com is the only source for free credit reports authorized by the federal government. Every 12 months, you can get a free copy of your credit report from each agency.

Your credit report has your credit history for all of your credit accounts as well as any credit inquiries and public record court information such as collections. In addition, the report provides personally identifiable information such as your name, address, and employment.

Be sure to carefully review all three reports to identify any problem areas that you may need to clean up prior to applying for a mortgage. If there is any incorrect information, follow the reporting agency’s rules to correct it or add a notation to the report to explain the situation.

Your FICO Score is a score combines data from several areas include payment history, the amount owed, length of credit history, new accounts. Many lenders use this score as a guide. This score is not provided as part of the free annual credit report.

Learn more about how your credit score impacts your ability to secure a loan.

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Couple looking over finances

Primary considerations for setting your housing budget require an assessment of your income, debt and current savings for the down payment on the home. The following are generally recommended guidelines; however, you should meet with an Arthur State Bank lender to get personalized mortgage information.

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Couple meeting with lender

The pre-qualification/pre-approval letter is included with any offer you make on a house to inform the seller that you have met with a mortgage lender and you are prepared to make an offer. The letter states that based on certain assumptions, the bank is prepared to lend you up to a specified amount of money for a home mortgage.

When choosing a loan officer, we recommend going local to work with someone who understands your community’s real estate market. This blog on first-time home purchases includes questions to ask your lender that may be helpful when preparing for your meeting.

Helpful Resources:

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Realtor shaking hands with a client

When a house is sold, the seller typically pays real estate commission to both the listing agent and the selling agent. It is extremely beneficial for the buyer to use their own real estate agent. Loan officers can often recommend selling agents in the area; ask your officer about realtor referrals when discussing your loan.

A good realtor will know the local market and can help you find an ideal home based on your budget, location and desired features. During your search, understand that you will most likely need to compromise on some items, so it’s important to identify your critical needs versus your wants.

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Couple searching online for a home

Additionally, when you start with the house search and work backwards, homes can often go off the market while you’re completing steps 1-4. While browsing homes immediately can be tempting, we recommend following these steps in order so that, once you find your dream home, you’ll be well-positioned to take action immediately.

When you find the home you want and you think you are ready to put an offer on it, you will want to make sure you have all the information you need to make a solid offer.

  • Evaluate the neighborhood.
  • Drive by the house at different times of the day.
  • Examine how other houses in the neighborhood are maintained.
  • Consider any potential traffic or other disruptive noise.
  • Is there ample parking for you and visitors?
  • Read the details in any Homeowner Association agreements (HOA fees and rules).

Make sure to do a preliminary check of house details:

  • Check the water:
  • Does it have good pressure?
  • How long does it take to get the water hot?
  • Is it well water or city water?
  • Turn light switches on and off.
  • Open and close doors and windows to make sure they work properly.
  • Review previous utility bill expenses.
  • Consider the property tax bill.

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Family meeting with realtor at new house

When writing an offer contract, be sure to pay attention to all of the details.

Offer Price:

Your agent should do a market analysis that pulls data on recently sold comparable houses. The best comparisons will come from the same neighborhood.

If you are asking for the seller to pay some of the closing costs, remember that this cost plus the sales commission determines the net amount you are offering the seller for the house.

Work with your agent on your negotiation strategy. There are many things to consider, such as how badly you want this particular house, whether it is a buyer’s or seller’s market and an assessment of the seller’s motivation to get the property sold.

There isn’t one best strategy.

Be sure to document in writing everything you want included with the house, such as appliances, etc. Your agent should guide you through the contract step-by-step.

Contingencies:

  • Home inspection.
  • Mortgage.
  • Final walk through (24 hours prior to closing).

Proposed closing date. Typically, this is 30-45 days from an accepted offer.

A good-faith deposit is required for the offer. This is typically between 1-10% of the purchase price of the house. The deposit is kept in escrow until closing and the money is applied to the purchase price of the house at closing. If the house does not close due to one of the contingency clauses, the buyer receives their money back. However, if the buyer decides not to close on the property, the seller may get the deposit money.

Attach your pre-approval letter to the offer.

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Two people in professional meeting

The clock starts ticking for everything documented in the contract, including mortgage application, inspections and closing date.

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Woman advising other woman on mortgage application

You will need to decide which mortgage to select prior to the application.

Plan for the following potential fees:

  • Application fee (many banks and mortgage companies charge an application fee; however, there is not an application fee at Arthur State Bank).
  • Credit check.
  • Appraisal (may be paid at closing).
  • Loan origination fee (paid at closing).

Once you have approval for your loan, make sure you don’t change anything that will impact the status of your mortgage. Banks do a final check on credit and jobs just prior to closing, so now is not the time to change jobs or make another purchase on credit such as a car or furniture.

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Home inspector going over findings with home owner

Depending on the size of the house, an inspection can cost on average between $300 to $1000.

Many real estate contracts specify how problems uncovered in the inspection will be resolved, up to a certain dollar amount. Should necessary repairs exceed that amount, the buyer has the option to cancel the contract without penalty and receive their deposit money back. Another option is for the buyer and seller to renegotiate who will pay for additional repairs.

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Woman happily holding keys to her new home
  • Homeowner’s insurance is required by the lender prior to closing on the loan.
  • Turn on utilities in your name, effective the closing date.
  • Change your address with the U.S. Postal Service.
    • Make moving arrangements.

Three days prior to closing:

  • You should receive your final Closing Disclosure from the closing agency. The final Closing Disclosure shows a column for the seller and a column for the buyer. All closing charges and credits for both the seller and the buyer are documented in the closing statement.
  • Review the closing statement for accuracy prior to coming to closing.
  • The final amount in the buyer’s column shows you the amount of money you need to pay at closing.

The closing office will provide specific payment instructions. Closing funds have become recent targets for cybercriminals. If you are asked to use a wire transfer, call the office and ask to speak to someone you have been working with to double-check the instructions.

Closing day:

In South Carolina, the closing will usually take place at the attorney’s office. Everyone signing for the mortgage must be present to sign the closing paperwork. Make sure you bring the following:

  • Cashier’s check or proof of payment for wire transfer.
  • Driver’s license.
  • Checkbook, just in case there are any additional items that were not on the closing statement.

Be sure to understand this information:

  • How and when you will pay:
  • Your mortgage.
  • Your property taxes.
  • Your homeowner’s insurance.
  • Any HOA dues.
  • Who to call with any questions.

The best practice is to go through the homebuyer’s roadmap in this sequence. However, if you jumped ahead early in your journey, just circle back to address the steps you missed.

Arthur State Bank’s loan officers are closely tapped into local real estate markets and experts at helping clients get what they need on terms that work for them. We also offer mortgage specials for first-time homebuyers.

To start planning your journey to your dream home, try out our mortgage calculator. If you’re ready to talk to a loan officer, contact Arthur State Bank to request personalized mortgage information today. Don’t forget to ask about our first-time homebuyer offer.

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