You may be a new home buyer, an owner that would like refinance your home, or you are seeking some financial solutions. Regardless of your goal, there is a variety of loans for you to consider that will provide the benefits you are seeking. Each loan is comprised of its own specific features and terms.
There are two main types of mortgages: Fixed Rate and Adjustable Rate (ARM)
A fixed rate mortgage has an interest rate that is fixed for the entire length of the mortgage term. Some of the typical programs are the 15 year and 30 year terms, with the 30 year term being the most common type of mortgage that people apply for.
Benefits: Payment is consistent for mortgage term so there is no need to worry about rising interest rates. If rates decrease, you can refinance into a lower rate.
Is it for you? If you plan to live in your house for more than 5 or 10 years, you want a relatively consistent monthly mortgage payment or you want to be able to budget effectively for long term.
An adjustable rate mortgage is fixed initially for a set period of time and then adjusts periodically according to a specific index and margin. The interest rate change will be determined by the market conditions at time of adjustment.
Benefits: Initial interest rate is typically lower, offering lower monthly payments. You may end up with a lower monthly payment if rates drop.
Is it for you? If you have plans to move within the next 5 years or you plan on using the payment savings to pay down principal.
A conventional mortgage refers to a loan that is not insured or guaranteed by the federal government. There are two programs available: conforming and jumbo.
Popular Loan Programs
A conforming mortgage adheres to the guidelines set by Fannie Mae and Freddie Mac. It may have either a fixed or adjustable rate. The maximum limit for a conforming loan depends on the county and state you live in. In most states, the limit is $417,000 for a single family home. Areas that are specified to have a higher cost of living have a higher limit of $625,500.
Benefits: For loans with 20% down payment/equity, mortgage insurance is not required. For loans with an LTV higher than 80%, the mortgage insurance premium is cheaper than FHA.
Jumbo loan amounts exceed the conforming limit on loans set by Fannie Mae and Freddie Mac. If you’re looking to buy an expensive home and need a large loan amount, a jumbo loan could be the right option for you. To qualify, requirements for the borrower will be different compared to requirements of other loan types. Usually jumbo loans require a lower debt-to-income ratio, a higher credit score, and higher emergency funds.
Benefits: Rates on jumbo loans are still at an all-time low; in fact they are sometimes lower than rates on conventional loans.
The FHA (Federal Housing Administration) loan is one of several government-insured loans. FHA doesn’t lend money directly to home buyers; they insure lenders against losses that may occur from client default. Because of this, lenders have less strict requirements for borrowers. Traditionally, FHA loans have been a popular choice for first time home buyers.
Benefits: More relaxed credit requirements than conforming loans and minimum down payment required is 3.5%.