Know Your Basics When It Comes To Mortgages

There are many different types of mortgages available to home buyers, and there are many decisions to make when deciding what type of loan is right for you. For the sake of simplicity, we have boiled it all down to the following options and categories. Mortgage_Loan_Approved1

Option 1: Fixed vs. Adjustable Rate

As a borrower, one of your first choices is whether you want a fixed-rate or an adjustable-rate mortgage loan. All loans fit into one of these two categories, or a combination hybrid category. Here’s the primary difference between the two types:

  • Fixed-rate mortgage loans have the same interest rate for the entire repayment term. Because of this, the size of your monthly payment will stay the same, month after month, and year after year. This is true even for long-term financing options, such as the 30-year fixed-rate loan. It has the same interest rate, and the same monthly payment, for the entire term.
  • Adjustable-rate mortgage loans (ARMs) have an interest rate that will change or adjust from time to time. Typically, the rate on an ARM will change every year after an initial period of remaining fixed. It is therefore referred to as a hybrid product. A hybrid ARM loan is one that starts off with a fixed or unchanging interest rate, before switching over to an adjustable rate.

Option 2: Government-Insured vs. Conventional Loans

You’ll also have to decide whether you want to use a government-insured home loan (such as FHA or VA), or a conventional type of loan. A conventional home loan is one that is not insured or guaranteed by the federal government in any way.

 

Government-insured home loans include the following:

FHA Loans
 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.
VA Loans
 The U.S. Department of Veterans Affairs (VA) offers a loan program to military service members and their families. Similar to the FHA program, these types of mortgages 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 is that borrowers can receive 100% financing for the purchase of a home. That means no down payment whatsoever.
 

Option 3: Jumbo vs. Conforming Loan

There is another distinction that needs to be made, and it’s based on the size of the loan. Depending on the amount you are trying to borrow, you might fall into either the jumbo or conforming category. Here’s the difference between these two mortgage types.

  • A conforming loan is one that meets the underwriting guidelines of Fannie Mae or Freddie Mac, particularly where size is concerned. Fannie and Freddie are the two government-controlled corporations that purchase and sell mortgage-backed securities (MBS). Simply put, they buy loans from the lenders who generate them, and then sell them to investors via 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.

Education is the key to making smart decisions, as a home buyer or mortgage shopper. Read more online at: http://www.moneysupermarket.com/mortgages/different-types-of-mortgages/

If you are ready to buy or sell property in the South Bay area, contact Bill Ruane today!

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