Types of Mortgages
What are the different types of mortgage loans available to home buyers? This page covers the basics about the types of loans available.
If you already understand the basic types of home loans, and are looking for real estate agent then visit us at Agent by Offer to receive offers to get the best commission rates nationwide. Otherwise, keep reading below to learn about the different financing options available
Option 1: Fixed vs. Adjustable Rate
Deciding whether you want a fixed-rate or an adjustable-rate mortgage loan is one of the first things you will need to consider when you are searching for home loans. All loans are either fixed rate, adjustable rate, a combination of both like “hybrid. or two categories, or a combination "hybrid" category.
- Fixed-rate mortgage loans provide the borrower with the same interest rate for the entirety of the loan repayment. This means that your monthly payment will stay the same and can be easily budgeted for every month. This is the easiest option to understand. Whether you have a 30-year term or 15-year term all payments will remain the same.
- Adjustable-rate mortgage loans, also referred to as “ARMs” use an interest rate that changes or adjust over any given period of time. Typically, the rate on an ARM will change every year after an initial period of remaining fixed. This is what makes a "hybrid" rate loan. A hybrid ARM loan is one that starts off with a fixed or unchanging interest rate, before switching over to an adjustable rate. For instance, 5/1 ARM loans carry a fixed rate of interest for the first five years and then begins to adjust annually.
As you might imagine, both of these types of mortgages have certain pros and cons associated with them. The ARM loan starts off with a lower rate than the fixed type of loan, but it can be unpredictable depending on the market. With an adjustable mortgage product, the rate and monthly payments can rise over time making it more difficult to pay or budget future payments. Fixed loans provide a major benefit with the same payment over and over again. No changes whether the market is good or bad. When it comes to certainty, there comes a price with it. You will likely have a higher interest rate compared to an ARM. Like anything you should consider a risk to reward analysis when considering a ARM.
Option 2: Government-Insured vs. Conventional Loans
Anther choice you will have to make will be to use a government insured loan or a conventional loan.
A conventional home loan is one that is not insured or guaranteed by the federal government. The three government guarantors are The Federal Housing Administration (FHA), Veterans Affairs (VA) and the United States Department of Agriculture (USDA). Each on of the following have their own set of requirements in order to qualify. Also, only certain lenders provide government -insured loans.
Government-insured home loans include:
The Federal Housing Administration (FHA) mortgage insurance program is managed by the Department of Housing and Urban Development (HUD), which is a department of the federal government. FHA loans are available to all types of borrowers, not just first-time buyers. The government insures the lender against losses that might result from borrower default. Advantage: This program allows you to make a down payment as low as 3.5% of the purchase price. Disadvantage: You'll have to pay for mortgage insurance, which will increase the size of your monthly payments.
The U.S. Department of Veterans Affairs (VA) offers a loan program to military service members and their families. These types of home loans are guaranteed by the federal government. This means the VA will reimburse the lender for any losses that may result from borrower default. The primary advantage of this program (and it's a big one) is that borrowers can receive 100% financing for the purchase of a home. That means no down payment. That means zero dollars towards the purchase price of the home for a down payment. This is a favorite with military service members. One myth is that you can only have one VA loan. This is incorrect. You can utilize a VA loan on two different homes if you meet the requirements.
USDA / RHS Loans
The United States Department of Agriculture (USDA) offers a loan program for rural borrowers who meet certain income requirements. The program is managed by the Rural Housing Service (RHS), which is part of the Department of Agriculture. This type of mortgage loan is offered to "rural residents who have a steady, low or modest income, and yet are unable to obtain adequate housing through conventional financing." Income must be no higher than 115% of the adjusted area median income [AMI]. The AMI varies by county.
Option 3: Jumbo vs. Conforming Loan
The size of the loan can make another decision necessary. Depending on the amount you are trying to borrow, you may need a jumbo loan or conforming loan. What is the difference between jumbo loans and conforming loans? Here you go:
- A conforming loan meet the underwriting guidelines of Fannie Mae or Freddie Mac, specifically when it comes to the amount you want to borrow. Fannie and Freddie are the two government-controlled corporations that purchase and sell mortgage-backed securities (MBS). What does that mean? In a nutshell, they buy loans from the lenders who created home loans to people and then sell them to investors on Wall Street. A conforming loan falls within their maximum size limits, and otherwise "conforms" to pre-established criteria.
- A jumbo loan, on the other hand, exceeds the conforming loan limits established by Fannie Mae and Freddie Mac. This type of mortgage represents a higher risk for the lender, mainly due to its size. As a result, jumbo borrowers typically must have excellent credit and larger down payments, when compared to conforming loans. Interest rates are generally higher with the jumbo products, as well.
All information provided is a sample of a larger picture. If you have more questions concerning anything concerning home loans, we recommend you do more research before committing. Understanding home loans is just as important as find the right home or real estate agent. If your ready to find a real estate agent let Agent by Offer help you receive offers from agents nationwide. Visit us at https://www.AgentbyOffer.com