Types of mortgage loans

In this article you will learn about the different types of mortgage loans in the United States and we will analyze which may be the most suitable for different scenarios.

The thought of buying a home in New Jersey for the first time can be overwhelming as you must consider the location, types of homes, closing costs, realtors, and other determining factors. Therefore, our experienced New Jersey real estate attorney will be able to help you in a clear, concise manner and with attention to detail throughout this process.

Types Of Home mortgage Loans To Consider In New Jersey, United States In 2023

In New Jersey, you will have a wide number of options to choose from when it comes to a mortgage loan, the choice depends largely on your situation. Therefore, below, we will go through some of the most popular types of mortgage loans in New Jersey and the rest of the United States:

1# 30-Year Fixed-Rate Mortgage

These types of mortgage loans maintain the same interest rates for the life of the loan. This means that the monthly mortgage payment will always be the same amount with a 30-year term, as long as the borrower maintains the mortgage.

With a longer payment period, you may qualify for lower monthly payments or a more expensive home. However, the interest rate will be high and you will have to pay more interest over the life of the loan.

Since the interest rate is fixed, homeowners can keep monthly payments the same no matter what, but taxes and insurance rates can vary.

Advantages

• Greater flexibility. The loan can be paid off faster by making additional payments.
• Low monthly payment. This is because the term is 30 years.
• Greater chances of qualifying. With smaller payments, more borrowers may be eligible.
• Higher range for a higher value home. By having lower payments, it is possible to qualify for a much more expensive home. 
• Higher tax deductions. Current tax laws allow home buyers to deduct mortgage interest on their taxes.

Disadvantages

• High interest rates. This is because the lenders run the risk of not receiving the payment in the agreed time. 
• Higher total cost. Because the borrower has to pay interest for 30 years.
• High maintenance costs. If you choose an expensive property, maintenance costs can be high. For example, a $300,000 home might require more than $3,000 in annual maintenance, while a $700,000 home might require more or less than $15,000 per year.
• Greater risk of over-indebtedness. Since most individuals tend to purchase a fairly large home with such a long mortgage term, it could lead the borrower to overpay.

Who Might Be Interested?

This type of mortgage is recommended for individuals who will keep their homes for many years and want to avoid changes in their monthly payments.

2# 15-Year Fixed-Rate Mortgage

Generally, a 15-year mortgage allows the borrower to own their home faster and with less interest. It is the most suitable for buyers who can pay high monthly payments and complete their mortgage in less time.

A 15-year term can save thousands of dollars in interest. However, for this mortgage to be effective, you need a reliable income and enough money after the monthly payment to cover expenses, savings or emergencies.

Advantages

• Allows you to build capital faster. Since the interest rate is low and the payment amount is high. This creates quick home equity because the principal balance is paid off more quickly.
• Allows a shorter path to full home ownership .
• Lenders are less exposed to risk. This is because interest rates are usually low. 

Disadvantages

• Large monthly payments. They are typically 50% higher than other 30-year home loans. In addition, the borrower has to pay property taxes, insurance, and if less than 20% of the down payment is paid, mortgage insurance.
• Tighter range of home affordability. 15-year mortgages mean a less expensive loan. Because of this, you may qualify for a smaller home.
• Opportunity costs. Putting more money toward monthly mortgage payments may mean it’s not available for other investments, like home improvements.

Who Might Be Interested?

It’s recommended for refinancers and homebuyers looking to build equity and pay off the loan faster. Payments are predictable since the interest rate does not change. By paying for fewer years, the total interest payments will be lower for the borrower.

3# Adjustable Rate Mortgage (ARM)

These have interest rates that can go up or down depending on market conditions, so they vary and are not constant. Most ARM loans have a fixed interest rate for the first few years before the loan changes to a variable rate for the rest of the term. 

An example is a 5 year/3 month ARM loan meaning the rate will stay the same for the first 5 years and will be adjusted every 3 months after the initial period.

Advantages

• Lower fixed rate in the first few years of ownership. This is not guaranteed, but in recent years 30-year fixed rates typically have 5-year/1-month ARMs.
• Greater savings. It is possible to save a great deal of money in regards to interest payments.

Disadvantages

• High probability of default. In some cases, monthly mortgage payments can become unaffordable, resulting in a default on the debt.
• The value of the property can drop in a few years. This makes it difficult to sell the house or refinance before the loan is restored.

Who Might Be Interested?

It is ideal for individuals who do not plan to remain in their property for many years and/or who wish to save on interest payments.

4 # Conventional Mortgages

It is a loan that is not backed by the federal government. Generally, borrowers with good credit, earning history, stable employment, and the ability to make a 3% down payment typically qualify for this Fannie Mae or Freddie Mac -backed loan.

These mortgages meet the loan limits set by the Federal Housing Finance Agency (FHFA). It sets the loan limit each year, being at $647,200 for 2022 in most of the US. 

In areas like Alaska, Hawaii, Guam, and the US Virgin Islands, the limit is $970,800.

Similarly, conventional mortgages are of two types:

1. Conforming loans: The one established by FHFA indicated above.
2. Non-Conforming Loans: Does not meet FHFA standards. They are typically for large homes, individuals with poor credit, and/or those with a major financial crisis such as bankruptcy. 

To avoid the need for private mortgage insurance (PMI), borrowers must make a 20% down payment. Some lenders may offer conventional loans with low down payments and no PMI.

Advantages 

• It can be used for primary or secondary residences or for an investment property.
• Overall costs are usually lower. Even if the interest rate is slightly higher.
• Sellers may contribute to closing costs.
• As little as 3% can be paid on loans backed by Fannie Mae or Freddie Mac.
• The lender may be required to cancel PMI. This only after 20% of net worth has been reached.

Disadvantages

• Requires a high FICO score. It is generally 620 points or higher.
• High initial payment. It is usually higher than government loans.
• A debt-to-income (DTI) ratio is needed . This should be no more than 43% (50% in some cases).
• Requires important documentation: This is for verification of income, down payment, assets, and employment.
• Probability of paying PMI. Only if your down payment is less than 20% of the sale price.

Who Might Be Interested?

If you have a good credit score and can afford a hefty down payment, this mortgage is your best bet. Conventional 30-year fixed-rate loans are among the most popular options for homebuyers.

5# Government Insured Loan

The US government is not a mortgage lender. However, it can help Americans become homeowners. There are 3 government agencies that support mortgages:

1. Federal Housing Administration (FHA). For buyers who do not have a down payment or a sufficient credit score. A minimum FICO score of 580 is required to achieve the maximum FHA financing of 96.5%, with a 3.5% down payment. FHA loans require two PMIs: One is paid up front and the other is paid annually over the life of the loan if less than 10% of the down payment is paid.
2. Department of Agriculture (USDA). For moderate to low income buyers looking to purchase homes in rural areas. Some of these loans do not require a down payment for low-income borrowers. However, there are additional fees, such as an initial 1% of the loan amount and an annual fee.
3. Department of Veterans Affairs (VA). They provide flexible, low-interest mortgages for members of the US Armed Forces (service and veterans) and their spouses. These loans do not require a down payment or mortgage insurance, closing costs are usually capped, and can be paid by the seller. A financing fee is charged as a percentage of the loan amount to offset the cost of the program, except for:
   1. Veterans receiving VA benefits for service-connected disability.
   2. Veterans who would be entitled to VA compensation for a service-connected disability if they did not receive active duty or retirement pay.
   3. Surviving spouses of veterans who died in service or from a service-connected disability.
   4. Service members decorated with the Purple Heart.
   5. Service members with memorandum or proposed qualification establishing eligibility for compensation due to a pre-discharge claim.

Advantages

• Help finance a home when you don’t qualify for a conventional loan.
• Accessibility in terms of requirements.
• No large down payment or mortgage insurance required.
• Availability. These loans are available to both first-time homebuyers in New Jersey and repeat buyers.

Disadvantages

• Mandatory PMI on FHA loans that cannot be canceled unless refinanced into a conventional mortgage.
• FHA loan limits are lower than conventional mortgages.
• The borrower must live in the property.
• Overall borrowing costs may be higher.
• You may need to provide further documentation.

Who Might Be Interested?

If you can’t qualify for a conventional loan due to credit score or limited down payment savings, FHA and USDA loans will be a great option. Additionally, military service members, veterans, and their spouses may be eligible for the VA types of mortgage loans.

6# Jumbo Mortgage Loan

These loans are outside the limits of the FHFA. They are common in high-cost areas like Los Angeles, New York, and San Francisco. By having to lend more money, the risk for the lender increases, so the borrower requires more documentation to qualify.

Advantages

• The interest rate is usually competitive.
• More money can be borrowed to buy a high-cost house.

Disadvantages

• You need to have significant assets in savings accounts or cash.
• Requires an initial payment. It is usually at least 10% or 20%.
• Requires a high FICO score. Usually 700 points or higher.
• You cannot have a DTI ratio greater than 45%.

Who Might Be Interested?

Individuals looking to finance a sum of money greater than the ultimate conforming loan limits. 

7# Construction Loan

Applying for a construction loan can be an ideal option for individuals who wish to build a home. These loans are usually short-term (usually one year) and have a higher interest rate than other mortgages.

These types of mortgage loans in the United States can be paid in two ways:

1. Upon completion of construction, or
2. Converted into a traditional mortgage.

It’s also often a good option for those looking to buy a home or make significant changes to it through a renovation loan. The requested money is included in the mortgage.

Advantages

• Terms can be flexible compared to traditional loans.  
• If you choose the option to pay off the loan until construction is complete, you will only have to pay the interest during construction.

Disadvantages

• Qualifying for these loans can be difficult. This is because lenders impose high qualifying standards in terms of credit scores and down payments. 
• To choose a payment at the end of the construction. The loan can be risky because the loan will have to be paid in full.
• Monthly payments are typically higher than traditional mortgages.
• Interest rates are usually high.

Who Might Be Interested?

It is ideal for individuals who want to build a house or expand the structure of it.

8# Interest Only Mortgage

The borrower only pays the interest on the loan for a certain period of time. After meeting this period of time, the monthly payment increases while the equity is paid. This loan does not build equity quickly, since only interest is paid at the beginning.

Advantages

• Lower monthly payment. Only during the term of interest.
• Initial rates are usually lower. Since interest only mortgages are structured as adjustable rate loans. 

Disadvantages

• The owner does not earn any equity in their house. Only while interest payments are being made.
• Risk of losing the equity in the house. If market values ​​decline, there is a risk of losing the equity in the property provided by the down payment.
• Likelihood of paying high monthly installments in the future.
• Risk of becoming an underwater mortgage. If the value of the property depreciates, it could become an upside-down on your mortgage.

Who Might Be Interested?

It is ideal for borrowers with high monthly cash flow, large cash savings, or a growing income. Also for those who annually receive large bonuses.

9#  Piggyback loans

Also known as an 80/10/10 loan or combined mortgage, it involves obtaining two mortgages at the same time: One for 80% of the purchase price of the property and the other for 10%, with the remaining 10% covered by funds for the down payment. 

These percentages are designed to help borrowers avoid paying mortgage insurance. These combination loans require 2 sets of closing costs and two loans with accruing interest.

The piggyback loan eliminates the need to pay PMI, plus it can also help with some of the requirements of a jumbo loan. By separating the transaction into 2 mortgages, you could avoid the jumbo category.

There are 3 types of piggyback loans mortgage loans in the United States:

1. Home Equity Loan: If the borrower lives in a house that they paid for, they can obtain a home equity loan that can be placed for 80% of the purchase price.
2. Taking a second mortgage: It is a traditional piggyback mortgage that will have to be paid with 2 mortgages. Sometimes it can also mean using 2 different lenders.
3. HELOC: Similar to a home equity loan, except that the HELOC rate is variable so monthly payments will tend to change and you will withdraw funds instead of taking out a portion of it.

Advantages

• You can eliminate PMI without having to look for a smaller and/or cheaper home. 
• You can avoid jumbo loan requirements. They usually require a really high credit score, down payment, and cash savings. 
• Possibility of lower initial payment. These loans are usually 10% of the purchase price, but sometimes it is 5%.

Disadvantages

• Possible problems when refinancing. This is increased if the loans are through two different lenders.
• If you get a traditional second mortgage, you would have two bills at closing.
• Payments may change.

Who Might Be Interested?

These loans can help individuals skip certain requirements of a jumbo mortgage loan. However, they are not easy to qualify for. Those who have a good credit score and have analyzed their personal finances to pay off both loans can get a combination loan.

10# Balloon Mortgages

It is the payment of the outstanding balance of a loan. Unlike a conventional mortgage with monthly installments, a balloon mortgage allows the borrower to make lower payments or no payments for a period of time (sometimes paying just interest), while the remaining balance is deferred.

Some of these loans require a large payment at the end of the mortgage term. Payments are generally made on a 30-year basis, but only for a short period of time, sometimes 7 years.

At the end of this time, the borrower must make a large payment on the outstanding balance which may become unmanageable. 

Advantages

• They tend to have lower interest rates than fixed-rate or variable-rate mortgages.
• Monthly payments are usually low. Generally beneficial for borrowers who plan to live in their property for a short period of time.
• Monthly mortgage payments may be within the borrower’s budget.

Disadvantages

• It poses a great associated risk. Since the house can lose value and become a mortgage under water.
• You run the risk of facing foreclosure. This is because most homeowners with a balloon mortgage cannot afford their final payment.
• It can severely affect your credit score. For example, if the borrower’s credit score is 700 points and loses the house, the score will be reduced by 160 to 180 points, depending on the case. If the score is less than 600, then the best alternative would be to file for bankruptcy.

Who Might Be Interested?

Individuals who expect to stay in their home for a short period of time may opt for these types of mortgage loans, as it comes with low monthly payments and a low overall cost.

11# Reverse Mortgage

The Home Equity Conversion Mortgage or Reverse Mortgage (HECM) is designed for individuals age 62 and older and is used after a property has been purchased. The lender pays the homeowner, and the money comes out of the equity they have purchased in the home, which grows in debt over time.

After the home is sold (regardless of whether the owner is alive or deceased), the proceeds will go to the lender to pay off the reverse mortgage debt. Any additional money from the sale will go to the owner or their estate (if he or she is deceased).

If the owner’s heirs want to keep the property, they will have to pay the reverse mortgage.

Advantages

• Retirement expenses can be better managed.
• There is no need to move from the property.
• The heirs will have options. They can sell the home in New Jersey to pay off debt, keep equity above loan value, keep home, and/or refinance reverse mortgage balance.

Disadvantages

• Risk of losing the house if property taxes and insurance are not paid.
• The loan reduces the equity in the home.
• The fees are high. They generally cost thousands of dollars.

Who Might Be Interested?

Only individuals who are 62 years of age or older and meet FHA requirements may be eligible .

12# Mortgage Refinancing

When a home is refinanced, the original mortgage is replaced with a new one. This brings several benefits, such as: lower monthly payments, cancellation of private mortgage insurance, and lower interest rates. 

Since applying for a new mortgage, much of the process will be the same as the first time. 

Advantages

• It is possible to get a lower interest rate. 
• Lower monthly payments.
• It is possible to change to a fixed interest rate. If your original loan is an adjustable rate loan (ARM) and your initial fixed term is about to expire, it is possible to refinance to a fixed rate.

Disadvantages

• Minimal savings. But it depends on current rates.
• Refinancing takes time.
• There may be fees associated with refinancing.

Who Could It Suit?

As a general rule, a homeowner must have at least 20% equity in their home to refinance.

In our blog you can read the requirements to apply for a mortgage in New Jersey or learn more about mortgages for the self-employed. You will find multiple topics of your interest and all the legal support you need in private consultations with our firm of real estate experts.

How Can Curbelo Law Help You With The Different Types Of Mortgage Loans In The United States?

Curbelo Law has more than 10 years of experience in the real estate practice area. Therefore you will be able to clear all kinds of doubts about the different types of mortgage loans, questions or concerns that you may have regarding your real estate needs.

You can contact us by phone, e-mail or if you wish, by scheduling an appointment at our offices in Newark and Ridgewood. Get in touch with us and a book a private consultation with our attorney regarding your case and we will be with you throughout this process.