The Different Types of Mortgage Loans: Which One Is Right for You?

Interested in buying a home but don’t know where to start when it comes to financing your purchase? There are different types of mortgage loans to fit your needs.

Whether you plan on living in your home or using it as an investment property, understanding the different types of mortgages and their characteristics is key to getting the best loan for you.

Here’s what first-time home buyers need to know about mortgages.

Types of Mortgages

1. Conventional Mortgage Loans — Best for Good Credit Borrowers

A conventional mortgage loan is not insured by a federal agency such as the Department of Veterans Affairs (VA) or the Federal Housing Administration (FHA). These loans typically have lower interest rates than other types of loans but require a higher credit score for approval.

They also include private mortgage insurance if the down payment is less than 20%, which may mean additional costs to the loan.

2. Collateral Mortgage Loans — Best for Additional Funds

A collateral mortgage can be a useful option for borrowers looking to access additional funds. They provide a cash reserve that the homeowner can use now or in the future without needing to go through an approval process each time they need reimbursements.

While this convenience is advantageous, they typically feature higher interest rates and must be repaid at some point. Homeowners should understand their long-term financial expectations before agreeing to use this mortgage option.

3. High-ratio Mortgage Loans — Best for Low-income Buyers

A high-ratio mortgage loan is a loan with a value that is close to or exceeds 80% of the property’s value. This type of loan is often used as an option for borrowers who do not have enough money to make a sizeable down payment.

Financial institutions use the loan-to-value (LTV) ratio to assess lending risk before approving a high-ratio mortgage.

The higher the LTV ratio, the more risk associated with the loan, which may require additional conditions upon approval like the following:

• higher interest rates
• private mortgage insurance
• credit use and debt levels restrictions

4. Private Mortgage Loans — Best for Poor Credit Borrowers

A private mortgage loan is a type of real estate financing provided by an individual or informal group instead of a traditional lender, such as a bank, credit union, or mortgage company. It can be used to purchase, refinance, or renovate residential properties.

This type of loan is often sought out by people who don’t qualify for traditional loans or wish to avoid the associated red tape and bureaucracy. Some private lenders offer creative financing options that can help those with less-than-stellar credit scores finance their home purchases.

Final Thoughts

It’s important to understand the details of the various types of mortgages before signing any paperwork to avoid paying hidden fees or unexpected costs. A real estate agent can walk you through all the steps of purchasing a home from start to finish.

With their help and knowledge about the different types of mortgages available, finding the right loan for you will be much easier.