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?
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?
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
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!