The Basic Mortgage Types
When buying a new home, not only do you have to find that perfect home, you also need to find that perfect mortgage loan. Many people use the internet to learn about loan options, terms, rates, and cost options. It can easily become overwhelming. It helps to have some basic understanding of loans, so when your Loan Officers discusses options, you can help us choose the right loan for you and your family.
FIXED OR ADJUSTABLE MORTGAGE
Fixed-rate mortgages (FRM): Straight forward, as you pay the exact same monthly payment for the entire loan term. Taxes and insurance changes might change your monthly payment, but the loan itself doesn’t change. Common fixed rate loan amortization terms are 30, 25, 20, 15, and 10-year terms, with 30-years being the most common.
Adjustable-rate mortgages (ARMs): With adjustable rate mortgages, you start out with a fixed period, after which the loans interest rate may adjust up or down depending on what is going on in the interest rate market. Typical fixed rate period are 3, 5, 7, or 10-years. When the fixed rate period ends, you enter into the adjusable rate period, which will carry you through the remaining term of the loan. There are caps to the yearly adjustments, and lifetime adjustments to the rate, so be sure to discuss with your Loan Officer these caps. Finally, there is an index, and a margin. The index is what the ‘index’ the future adjustments are made based on, while the margin is what is always added to the index to come up with your new rate
Adjustable loans have gotten a bad reputation, but they really shouldn’t. They are a great tool for the right person. Popular reasons to take an adjustable loan are:
- lower payments versus fixed (at least initially)
- more affordable today
- you plan on moving within the fixed period, or soon thereafter
Standard conventional loan: The plain Jane of the mortgage world. Nothing fancy, tried and true. Down payments starting at 5% down.
VA Home Loan for active or former U.S. Military personal has no down payment requirement up to the local conforming loan limit. Above the local limit, a small down payment is required. VA loans also do not have monthly mortgage insurance, making them one of the best loan options available.
The USDA Rural Housing loan is also no down payment, but is available to anyone. Their are income and location guidelines (house must be rural for example).
First Time Home Buyer Loans: These options typically allow for smaller down payments, like just 3% down, and generally also offer reduced mortgage insurance. A first time home buyer is defined as someone who has not owned a home in the past 3-years. Typically you must attend a first time home buyer education class to get these loans.
FHA Loans are a long-time favorite, as they typically allow for lower credit scores, and have only a 3.50% down payment requirement.
Down Payment Assistance Loans fit a popular situation, where the home buyer has OK enough credit, and can afford a house payment, but they just never seem to be able to save enough for a standard down payment. You usually need to put a little of your own money for a down payment (typically $1,000), and you get an assistance loan to cover the rest of the standard down payment. Home buyer education classes, and household income limits apply.
As one can imagine, there are many variations to these basic programs, and this article only focuses on purchase loans. refinance loans can be different.
My best advice is to not try to figure it out yourself, rather simply complete an application with a local experienced Loan officer, who can review the file to look at all options, to zero in on what loan is best for you.
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