Mortgage Loans 101
Once the excitement of buying a new home wears off, it can get a bit overwhelming as you try to figure out the financial side of this big life decision. The good news? Once you get the general lingo down, choosing a mortgage loan isn’t all that bad. Do a little homework and nail down your budget and down payment amount, then you’ll have a much better idea of what loan will work best for your needs.
1. Conventional mortgages
A conventional mortgage loan is a home loan that is not insured by the federal government. There are two different types of conventional loans: conforming and non-conforming.
First, a conforming loan is simply a loan amount that falls within the maximum limits set by Fannie Mae or Freddie Mac, two government agencies that back most U.S. mortgages. Now, the second type of conventional mortgage, a non-conforming loan, is a loan that does not meet those guidelines set by the government.
“Generally, lenders will require you to pay private mortgage insurance on many conventional loans when you put down less than 20% of the home’s purchase price.” [BankRate.com]
2. Jumbo mortgages
Fit with a perfect name, jumbo loans are conventional loans with non-conforming loan limits, meaning the home’s price exceeds federal loan amount limits. Jumbo loans are more common in higher-end areas and generally require more in-depth documentation to qualify since the home you are attempting to purchase is more than the federal price ceiling.
3. Government-insured mortgage
As you may know, the government isn’t a mortgage lender, but it does play a role in helping Americans become homeowners. There are three government agencies that back home loans: FHA loans, USDA loans, and VA loans.
Federal Housing Administration (FHA) backed loans help make homeownership possible for those who don’t have a large down payment saved up along with a less than ideal credit history. To qualify, borrowers need a minimum FICO score of 580 to get the FHA’s minimum 3.5% financing.
U.S. Department of Agriculture (USDA) loans help moderate to low income borrowers buy homes in rural areas. To qualify, you must purchase a home in a USDA-eligible area and meet certain income limits. For some USDA loans, it is not required for borrowers to provide a down payment if they have a low income.
U.S. Department of Veterans Affairs (VA) loans provide flexible, low-interest mortgages for members of the U.S military (active duty and veterans) and their families. A big benefit of VA loans is that they don’t require a down payment or PMI, and closing costs are usually capped and may be paid by the seller. Unfortunately, a funding fee is charged on VA loans as a percentage of the loan amount to help offset the costs of the program for taxpayers.
4. Fixed-rate mortgages
The main benefit of fixed-rate mortgages is that they keep the same interest rate over the life of your loan, which means your mortgage payment will stay the same each month. This makes it easier for you to plan out your monthly budget and ensure that you can afford your home.
“There are [still] varying risks involved for both borrowers and lenders in fixed-rate mortgage loans. These risks are usually centered around the interest rate environment. In a time of rising rates, a fixed-rate mortgage will have a lower risk for a borrower and higher risk for a lender.” [Investopedia.com]
- 5. Adjustable-rate mortgages
Opposite of fixed-rate loans, adjustable-rate mortgages have fluctuating interest rates that can go up or down depending on the condition of the market. Adjustable-rate mortgages typically have a fixed interest rate for the first few years before the loan resets to a variable interest rate. This loan type can be very beneficial for those first few years as you may experience a low-interest rate, but it’s risky since that rate could just as easily rise to an uncomfortable amount.
Now that you’ve got the lingo down, it’s time to take a look at your budget and current needs to decide which loan will work best for you. Everyone is different and may not benefit from the same loan that you will, so pay attention to your situation and continue to do your homework before taking those next steps. If you’re ready to start the home buying process, our agents are ready to join your team! Contact us today to get the process started.