Mortgage Loan Options: What You Need to Know
TL;DR - Know what principal, interest, loan term, and interest rate mean. Then choose from the best unconventional and conventional mortgage loan options.
So, you need a mortgage loan? Then you’ve come to the right place.
It can sometimes seem like mortgages are something to fear.
You don’t want to get locked into a bad one. But what does a good one even look like?
The thing is, it depends on you…
Yes, you.
Every person is different and that’s why there are so many loan options available.
To help you understand them, we’ve compiled a list of the top mortgage loans to consider. Let’s check them out!
Mortgage Loan Options
The Backbone of Mortgage Loans
Before we get into the different loans you can choose from, let’s clarify the meaning of two words: principal and interest.
Principal is the amount of money you owe the bank for loaning you the cash to buy your property.
Let’s say you buy a $100,000 home and put 20% down. You use $20,000 of your own money to buy the home and the bank covers the other $80,000 (or 80%). This means that your principal would be $80,000.
Interest is the rate at which you’re borrowing money from the bank. This is how the bank gets paid for loaning you money.
If you have a high credit score, you’re considered lower risk and will pay a lower interest rate. On the flip side, you’ll pay a higher interest rate if you have a low credit score – the bank sees you as a higher risk to miss payments.
Principal and interest are super important when talking about mortgages because they form the backbone of a loan. You’ll mainly be paying off your principal and interest as you make your monthly mortgage payments.
Loan Term and Interest Rate
Your principal and interest are decided almost exclusively by the length of your loan term and the interest rate of your loan.
A loan term is how long you have until your loan is paid off. You can choose between a shorter or longer-term for your loan.
Shorter Loan Term
Higher monthly payments
Lower interest rates
You pay less overall
Longer Loan Term
Lower monthly payments
Higher interest rates
You pay more overall
Shorter loan terms are beneficial if you have the money to pay for a higher monthly payment. Longer loan terms are helpful if you can only afford a lower monthly payment.
Interest rates can either be fixed or adjustable.
Fixed Interest Rates
Low risk, consistent
Higher interest rate
Will never change
Adjustable Interest Rates
High risk, inconsistent
Lower initial interest rate
Can increase or decrease based on the market
Fixed interest rates are good for if you want a solid monthly payment that will never change. Adjustable interest rates are good if you’re going to use the loan for 5 years and then refinance. Or if you’re confident that interest rates won’t increase.
So as you can see, loan terms and interest rates play heavily into what your mortgage loan will look like.
Of course there are other factors that come into play, such as credit score and the amount of capital you’ve saved up.
Consider all of these as you’re preparing to take out a mortgage loan.
Mortgage Loan Options
Now we get to the fun part! Checking out the main loan options available to you.
Mortgage loans can be split into two camps: unconventional and conventional.
Unconventional Mortgage Loans
What makes unconventional loans special is that they’re backed by the government.
These types of loans are especially helpful for people who otherwise wouldn’t be able to afford the high down payment of a conventional loan.
There are a few unconventional loans that are really popular with investors.
FHA Loan
Maybe that early example of a 20% down payment shocked you and made you wonder if real estate investing is for you. If so, then an FHA loan is for you.
FHA loans are super affordable! How affordable?
How about as low as a 3.5% down payment on a property, as long as you live in that property? Awesome, we know.
The price you pay for that low down payment is a higher, front-loaded interest rate and MIP.
MIP is basically insurance that you pay to the bank on top of your monthly mortgage payment.
While you pay more overall for an FHA loan, it could be worth it to buy your dream home or your first investment property affordably.
VA Loan
This type of loan is strictly for members of the military and veterans. But if you are a service member, you’re going to love this loan.
You won’t be paying a 20% down payment. Or a 10%. Not even a 3.5%. VA loans allow you to buy a home with a whopping 0% down!
While you will have to pay a funding fee for this loan, it can be rolled into the loan or paid for upfront.
On top of the non-existent down payment, VA loans get some of the lowest interest rates on the market. Oh yeah, you don’t have to pay for mortgage insurance either.
If you’re a veteran, getting a VA loan is a no-brainer!
USDA Loan
Like VA loans, USDA loans allow you to purchase a property for 0% down.
To qualify for this loan, you’re required to purchase a home in a USDA-eligible area. These areas tend to be rural, so if you’re buying in a city then this loan probably isn’t for you.
Unlike VA loans, USDA loans come with major drawbacks.
For your low down payment, you’ll be paying expensive mortgage insurance, prepayment penalties (for when you want to refinance), and a bunch of other fees.
If you’re buying real estate in a rural area and are aware of the penalties involved with a USDA loan, the low down payment might be worth it for you.
One thing to keep in mind with these types of loans, however, is that you are required to live in the property. So these types of loans really only apply well for investors who buy a duplex, triplex, or quadplex. This is a widely used investment strategy.
So yeah…
Buy a small multi-family with these great loan products and rent out the other units. After you have lived in the unit for the minimum amount of time, you can move out, rinse and repeat!
Conventional Mortgage Loans
Backed by the banks, conventional mortgage loans have the potential to offer super competitive interest rates.
Down payments can be as low as 5%; just be sure to factor in that you’ll be paying for private mortgage insurance (PMI).
The good news is that you stop paying PMI when you’ve paid off 20% of your home’s value.
Adjustable Rates Mortgage (ARM) Loan
We touched on ARM loans earlier.
The great thing about them is that you can negotiate the down payment and interest rate down when you first purchase the home. That means you get a low down payment and low initial interest.
But since ARM loans are adjustable, that interest rate isn’t set in stone. Usually, the interest rate changes every 1,3,5, or 10 years. And whatever the market sets for interest rates are what you’ll get.
This could be beneficial if you won’t be holding onto a home for long or you believe interest rates will stay the same or decrease in the coming years.
Fixed-Rate Mortgage Loan
Simply put, a fixed-rate mortgage is one of the best mortgage loans to get if you’re going to keep a property for more than 5 years.
Once you settle on a down payment and interest rate, you’re locked in. You won’t have to worry about your interest changing ever again.
You might be paying more in interest over the short term, but the long-term consistency could be worth it.
If you’re really worried about interest, you can always opt for a shorter-term loan.
What to Check for Before Securing A Loan
So now you know what the most popular mortgage loan options are.
But before you get a loan, remind yourself to ask your loan officer for these numbers.
Down Payment
Interest Rate
Insurance Cost
Loan Term
Mortgage Insurance
Misc. Fees
Once you have these numbers, you’ll be in the perfect position to pick a mortgage loan that fits your wants and needs.
Keep in mind that loans, and lending in general, have cycles, just like the stock market or the housing market. Depending on the current market, you may or may not be able to find all of these loans.
It is important to note that, as of this writing, any one individual is limited to 10 of the above loan types in their name. If you wanted to own your primary residence, own 9 rental properties, and wanted to buy a 10th investment property, you would have to start looking for commercial loans which we will get into in another post.
Happy investing!
How We Can Help You
Does investing in real estate sound intriguing to you? Would you like to learn more? We’d love to be of value!
At Undoor, we pride ourselves on teaching new and experienced investors how to maximize their gains with minimal stress. Our goal is to help you fall in love with real estate and real estate investing. What we’re most passionate about is maximizing investment gains for people like you.
Do you want to get key insights and advice that’ll help you get ahead of the game? Don’t hesitate to contact us for any and all real estate wants or needs.
