Types of mortgage loans

In the United States, there are several types of mortgage loans that can have a significant impact on your financial capacity. 

These loans influence aspects such as the down payment, monthly payments and the equity of your desired home.

Selecting the right loan can be a complex task, but it is key to determining the home you can purchase. The right choice could reduce certain payments throughout the loan.

What Types Of Mortgage Loans are available In New Jersey And The Rest Of The United States In 2024?

New Jersey offers a wide variety of mortgage loans, but the choice depends on several factors. Some of the most popular include:

Conventional Loan

Conventional loans are usually one of the most popular types of mortgage loans in the United States and are divided into:

• Conforming loans: When they meet the standards of the Federal Housing Finance Agency (FHFA) and can be backed by Fannie Mae and Freddie Mac.
• Non-conforming loans: When they do not meet FHFA standards. Generally, this type of loan is considered risky to lenders.

It’s worth noting that conventional loans typically require a minimum credit score of 620 and a debt-to-income (DTI) ratio of up to 50%. 

Thanks to this, you can buy a house in New Jersey with a down payment of 3% to 5%, but if it is less than 20%, you will require private mortgage insurance (PMI).

Advantages

• It is available from most lenders.
• The total cost of the loan, including fees and interest, is usually lower than other types of loans.
• The down payment can be as low as 3% to 5% for qualified loans.
• It can be used to finance primary residences, second homes, investment or rental properties, as well as vacation homes.

Disadvantages

• You must have a credit score of at least 620 to qualify.
• The DTI threshold is lower compared to other types of mortgages.
• PMI is required if you make a down payment of less than 20%.

Who Might Be Interested? 

If you have a strong credit score and can afford to make a sizable down payment, a conventional mortgage will be your best option. 

In fact, a 30-year fixed rate is often the most popular choice for homebuyers.

Fixed Rate Home Loans

Fixed-rate mortgages maintain a constant interest rate throughout the life of the loan, ensuring that your monthly payment remains the same. 

These loans typically have terms of 15 or 30 years, although some lenders offer more flexible options.

Advantages

• Maintain a constant monthly payment.
• Facilitates budget planning.

Disadvantages

• It has higher interest rates than adjustable rate loans.
• Requires refinancing to access a lower rate.

Who Might Be Interested?

This mortgage loan is ideal for those who intend to remain in their home for a long time and are looking for the peace of mind of a constant monthly payment.

Adjustable Rate Mortgage Loans (ARM)

Unlike fixed-rate loans, ARMs have interest rates that vary over time. 

Generally, with an ARM, you are offered a low, fixed introductory rate for a certain period of time. 

After this time period expires, the rate changes, either up or down, at predetermined intervals for the remainder of the term. 

For example, a 5/6 ARM has a fixed rate for the first 5 years, then the rate increases or decreases every 6 months until the loan is paid off. When the rate increases, the monthly payment also increases, and vice versa.

Advantages

• It has low initial fees.
• You may be able to pay less over time if interest rates decrease. 

Disadvantages

• It is difficult to plan a budget as rates change.
• There is an ongoing risk in higher monthly payments.

Who Could It Suit?

This mortgage loan is a good option for those who do not plan to stay in their home for long. What’s more, an ARM could help you save on interest payments. 

Interest-Only Mortgages

With an interest-bearing mortgage, the borrower makes interest-only payments for a specified period. 

These are typically 5 or 7 years, followed by payments that include both principal and interest. 

Since you only pay interest initially, the principal does not accumulate as quickly as with other loans. 

Advantages

• You will get a larger property for your investment, allowing you to enjoy a more spacious residence.
• Initial monthly payments are typically lower than conventional mortgages.
• You can defer or avoid large mortgage payments in the future if you plan to move out of your residence before the introductory period ends.
• If interest rates are high, you can bypass them initially and benefit from lower rates when the interest-only period ends.

Disadvantages

• You won’t build home equity, which can result in a capital loss if the home’s value declines.
• You could face a significant increase in monthly payments after the interest-only period.
• You’ll be exposed to having to make higher-than-expected monthly payments if rates rise.
• Changes in your income may make the home unaffordable in the future. This can lead to financial problems if your income does not match your expectations.

Who Might Be Interested?

These types of loans are best suited for those who are certain of selling a house in New Jersey or refinance in the future. It is also useful for those who hope to be able to afford higher monthly payments.

Jumbo Loans

“Jumbo” mortgages are home purchase loans that exceed the FHFA conforming loan limits. 

This means any amount over $766,550 or $1,149,825 in higher cost areas. However, Jumbo loans are very risky because they are too large for government agencies to acquire.

Advantages

• You can finance a more expensive home.
• They are often the only option in areas with high home values.
• They offer competitive interest rates, currently comparable to conforming loans.

Disadvantages

• Not all lenders offer this type of loan.
• A high credit score is required, usually at least 700 points.
• A large down payment is required, typically between 10% and 20%.

Who Might Be Interested?

This type of information may be of interest to those considering financing a home whose purchase price exceeds conforming loan limits.

Balloon Payment Mortgages

With a balloon payment mortgage, you make small payments over a defined period of time and then make a large final payment. 

Down payments may go toward interest only or both interest and the principal of the loan, depending on how the mortgage is structured. 

It should be noted that usually, the final payment will be more than double the monthly payment. Therefore, we would be talking about thousands or tens of thousands of dollars.

Advantages

• You will have low or no monthly payments during the initial period.
• Possibility of deferring the final payment for years.
• Early purchase of a home with more affordable payments.
• You will be able to focus on other objectives such as savings or improving credit.
• There is no penalty for early payment, allowing additional payments.

Disadvantages

• Requires a large payment at the end, which can result in loss of property if it cannot be met.
• You may need another loan to cover the final payment, increasing your debt.
• Many lenders do not offer balloon mortgages due to the high risk.
• Because of the risk, rates are generally higher than on other loans.
• You may lack enough home equity to refinance at the end of the term.

Who Is This Loan Ideal For?

These loans are best suited for those individuals with stable financial resources that allow them to make a large payment at the end of the loan term.

US Government-insured mortgages

The US government does not make mortgage loans, but it does support 3 types of mortgages to make homeownership more accessible. These are:

FHA Loans

They are backed by the Federal Housing Administration (FHA) and can be available with low credit scores, from 580 with a 3.5% down payment or from 500 with a 10% down payment.

However, they require PMI to protect lenders against defaults.

VA Loans

They are awarded by the Department of Veterans Affairs (VA) and are available to eligible members of the US military and their spouses. 

Additionally, there is no minimum down payment, mortgage insurance or credit score, although a financing fee is charged at closing.

USDA Loans

Backed by the US Department of Agriculture (USDA), they help low- and moderate-income borrowers purchase homes in eligible rural areas.

These loans have no credit score or down payment requirements, but do charge certain guarantee fees.

Advantages

• More flexible credit guidelines.
• Lower down payment requirements.
• Greater accessibility for borrowers who would not otherwise qualify.

Disadvantages

• Additional cost for FHA mortgage insurance.
• VA funding rate.
• USDA Guarantee Fees.
• Limited to borrowers who purchase a home within FHA loan limits, in rural areas, or are members of the military.

Who Might Be Interested?

If your credit or down payment doesn’t allow you to qualify for a conventional loan, an FHA loan could be an attractive alternative. 

Likewise, if you are buying a home in a rural area or are eligible for a VA or USDA loan, you may find it easier to qualify for these options.

Other Types Of Mortgage Loans In The United States

Beyond these popular loans in New Jersey, there are other types of mortgage loans in the United States that you might be interested in:

Construction Loan

Construction loans finance the construction of a residence, from the purchase of the land to the completion of the structure. 

The most common types include the stand-alone, short-term loan and the permanent construction loan, which converts to a mortgage upon completion of the work. 

Borrowers typically take out a separate mortgage to pay off a separate construction loan. These loans can cover costs such as:

• Purchase of land,
• Labour, 
• Construction materials, and 
• Permits required for construction.

Piggyback loans

Also known as an 80/10/10 loan or combined mortgage, it involves obtaining 2 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 initial payment. 

These percentages are designed to help borrowers avoid paying mortgage insurance. 

Both loans combined require 2 sets of NJ home closing costs and 2 accrual interest loans.

“Portfolio” Mortgages

A portfolio loan is a mortgage that the lender originates and holds in its portfolio rather than selling it into the secondary mortgage market.

This gives the lender control over the approval standards and conditions of the loan. Thanks to this, they do not need to comply with the FHFA requirements used by Freddie Mac and Fannie Mae.

Renovation Loan

A home renovation loan is a financing option that provides funds to improve, remodel, and repair a home. 

This may be similar to a conventional loan, but is often structured as a secured debt, using the home itself as collateral.

Non-Qualifying Loans

Non-qualifying mortgages are those that do not meet the standards set by the Consumer Financial Protection Bureau. 

Therefore, they offer more flexible credit and income requirements, which can be attractive to borrowers with unique circumstances or inconsistent income. 

Physician loan

Physician mortgage loans are a private financing option that offer flexible terms compared to conventional loans. 

They are designed for medical professionals who face difficulty qualifying for a typical mortgage due to their medical and student debt.

Reverse Mortgages

Reverse mortgages are a unique financial product designed for homeowners age 62 and older who want to convert part of their home’s equity into cash.

These homeowners can borrow against the equity in their home and receive the money in the form of a lump sum, fixed monthly payments, or a line of credit. The entire loan balance is paid off when the borrower dies, moves, or sells the home.

Other Options To Consider

• Refinancing with cash-out.
• Loans for newly built homes.
• Low down payment options.

Who Qualifies For An FHA Loan?

If you are a first-time home buye , you may qualify for an FHA loan, as it is one of the most popular types of loans. 

Typically, most applicants must meet these requirements to qualify:

• Maintain a credit score, although not necessarily high.
• Find a home that is within the limits established by FHA loans.
• Get the mortgage through an FHA-approved lender.

To apply for an FHA loan you must:

1. Go to the Department of Housing and Urban Development (HUD) website.
2. Find an FHA-approved bank or lender .
3. Find and consult with a HUD housing counselor.

Requirements To Obtain A Mortgage Loan In The United States

Some factors that can influence mortgage types may be:

• Down payment: The size of your deposit can affect the interest rate offered by lenders.
• Monthly mortgage payment: Lenders look at your income and assets to determine your ability to repay the loan. When calculating your monthly budget, consider principal and interest payments, taxes, and other associated costs.
• Credit score: Your credit history plays a critical role in determining the interest rate on your loan.

On our blog you can learn all the requirements to apply for a mortgage in New Jersey or learn more about mortgage loans for the self-employed. 

How Does A Home Mortgage Work In The United States?

A mortgage is a special type of loan used to purchase real estate, such as a single-family home, duplex, condominium, or other property. 

The property acts as collateral for the loan, and the borrower agrees to repay the lender over a specified time. Generally, the borrower makes monthly payments for this. 

How To Compare The Different Types Of Mortgage Loans In The United States?

In the past, banks and credit unions were the main sources of mortgages, but now there are other lenders.  

Therefore, to compare the mortgage loans offered, we recommend using online mortgage calculators to compare estimated monthly payments, 

This will help you determine how much you can afford. In addition to knowing the principal and interest, property taxes and insurance premiums. 

How Many Mortgages Can My House Have?

Lenders typically provide a first mortgage before considering a second, known as a home equity loan. 

There is no set limit to the number of secondary loans that can be obtained, as long as equity, DTI, and credit score requirements are met.

Frequently Asked Questions About Home Loan Types In New Jersey, United States

What Is The Most Popular Type Of Mortgage?

Among the most popular types of mortgages are conventional and government-backed loans. That is, FHA, VA and USDA.

What Is The Easiest Type Of Mortgage To Get?

Generally, FHA loans tend to be the “easiest” to get, as they are intended for individuals with low income or difficult credit history.

What Type Of Mortgage Has The Lowest Rate?

Typically, VA and FHA loans tend to have low interest rates. 

Can I Change From One Type Of Mortgage To Another?

To change the type of mortgage you have, you will need to refinance, as there is no impediment to refinancing into a different type of mortgage. 

For example, many individuals switch from FHA loans to conventional loans to eliminate mortgage insurance, or from an adjustable rate loan (ARM) to a fixed rate loan.

What Is A Second Mortgage?

A second mortgage allows you to borrow against the equity in your property, but is subordinate to the first mortgage in the event of a foreclosure. 

Some common examples are home equity loans and home equity lines of credit (HELOCs). 

While the former involves fixed payments, the latter operates as a revolving line of credit with variable rates, similar to a credit card.

If you find yourself in this scenario, do not hesitate to contact our NJ foreclosure defense attorney.

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

With the help of our NJ real estate attorney you will be able to clear up any doubts, questions or concerns you may have. That said, at Curbelo Law you are covered by more than 10 years of experience in the real estate area.

You can contact us by phone, email, or by scheduling an appointment at our office in Ridgewood, New Jersey. 

Schedule a private consultation today regarding your case and we will be with you throughout this process.