Understanding Different Types of Mortgages & How They Work
Mortgage loans come in many different shapes and sizes, each tailored to a different person. Lenders will take into account your credit, income and the type of home you want to buy before recommending which loan best meets your requirements.
Conventional mortgages (also referred to as conforming mortgages) are the most popular type of home loan. They adhere to loan limits set out by Fannie Mae and Freddie Mac, agencies of the federal government. Furthermore, these mortgages have stricter criteria regarding your credit score and debt-to-income ratio.
Conventional mortgages are the most popular choice for homebuyers with good credit scores and income. However, borrowers should consider whether a fixed interest rate and monthly payments make their mortgage easy to afford.
Adjustable-rate mortgages (ARMs) are another popular mortgage type. These have an initial period with a fixed interest rate that can then be adjusted according to changes in financial indexes.
Arms typically feature caps on how much the interest rate can increase each adjustment and in total over the loan’s lifespan. Some ARMs offer interest-only periods that help borrowers build equity faster.
Variable-rate mortgages, also known as variable-rate home loans, may be suitable for homebuyers who don’t plan on staying in their houses long and want to take advantage of lower interest rates when they come around. While they tend to be cheaper than fixed rate mortgages in the short run, they can make saving money easier but make it harder to repay a home loan over time.
Tracker mortgages are a type of variable-rate mortgage that tracks the Bank of England base rate. When this rate rises, your monthly repayments will also go up; otherwise known as an increase in principal.
Discount mortgages are a type of variable-rate home loan that’s cheaper than your lender’s standard variable rate (SVR). The discount will apply at an agreed percentage over an agreed period, usually two or three years.
Mortgages offer low interest rates and may be suitable for first-time homebuyers or those with less-than-perfect credit scores.
Are you unsure how to select the ideal mortgage type? Check out our guide on the most common loan types and discover which one works best for your situation.
Remortgaging Your Current Mortgage onto a New Deal
If your budget is flexible, remortgaging could be an ideal choice. Reducing the length of your loan could reduce your overall payment, and any extra cash saved can be put towards other projects.
If your home is larger than the limits set by Fannie Mae and Freddie Mae’s common loan programs, you might qualify for a jumbo loan. A jumbo mortgage is simply an amount greater than these limits set by lenders.