Just a few years ago, there were literally hundreds of mortgage loan programs available to consumers. Over the years however, the mortgage landscape has changed substantially. With little exception, the majority of mortgage lenders are offering comparable loan products.
Mortgage plans can be divided into categories in two different ways. First – fixed versus adjustable rates. Second – conforming (conventional), non-conforming and government loans.
FIXED RATE MORTGAGE
A fixed-rate mortgage has an interest rate that won’t go up or down over the life of the loan. It’s the best security against rising mortgage rates and higher payments.
Fixed rate mortgages are the most popular, representing over 75% of all home loans. If you know you don’t plan on moving or refinancing in the next few years, a fixed rate mortgage may be your best bet.
You have choices for the term of a fixed-rate mortgage including 10, 15, 20 and 30-year options.
Fixed-rate loans are great for offering peace of mind, knowing your rate will never change. With fixed mortgage rates currently at historic lows, your mortgage payment starts low and stays low.
ADJUSTABLE RATE MORTGAGE
An adjustable rate mortgage (ARM) has an introductory interest rate that is set for a period of time and then adjusts annually thereafter for the remaining term of the loan. After the initial set period of time, the interest rate will change, as will the monthly payment. The monthly change to the rate is typically subject to a cap.
The initial interest rate for an adjustable rate mortgage is typically lower than a fixed rate. A lower rate means a lower payment. For those planning to stay in their home for a shorter period of time, an ARM may be advantageous as the lower payment can mean significant savings prior to selling your home.
Conventional loans are generally offered by a bank and are not guaranteed or insured by the federal government. Due to the lack of government backing, conventional mortgages tend to be a slightly higher risk. As such, the qualifying criterion for conventional loans will typically be more strict. Conventional loans follow guidelines set in place by Government Sponsored Enterprises (GSE) such as Fannie Mae and Freddie Mac.
A common myth regarding conventional loans is that 20% (down payment or equity position) is required – not so. As a matter of fact, there are conventional loans available to buyers with just 3% down.
Another way to better understand conventional loans is to understand what it means for a loan to be non-conventional. Non-conventional loans are generally government sponsored loans. The most common non-conventional loans are government-sponsored loans such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA).
Need more information on comparing FHA loans vs conventional loans?
FHA loans are currently one of the fastest growing loan programs on the market. One of the more common misconceptions regarding FHA loans is that FHA lends money. The Federal Housing Administration (FHA) doesn’t actually lend any money. FHA insures the loans that lenders can offer, backing the loans in the event of borrower default.
The biggest benefit for an FHA loan is typically the small down payment requirement (or small equity requirement for refinance loans). Especially when purchasing a home in a struggling economy, FHA’s low down payment requirements can be very appealing. Just 3.5% of the purchase price is all FHA requires.
In addition to a low down payment, FHA underwriting tends to be more lenient than conventional underwriting, along with less stringent credit requirements. Another major appeal that comes with FHA loans is that FHA rates are actually lower than conventional rates, at least in today’s market.
Traditionally, FHA loans were meant to assist military families returning from war, the elderly, handicapped, or lower-income families. Today however, FHA loans are the most popular loan programs available, accounting for roughly 30% of the overall mortgage market.
Much like FHA, the U.S. Department of Veteran Affairs (VA) does not actually lend money. VA guarantees (or backs) loans offered by lenders. Qualified military veterans can purchase a primary residence with no money down. VA loans are one of only a handful of “zero money down” loans available in today’s mortgage market.
VA mortgage loans are arguably the best home loans available for qualified veterans who wish to buy a home with little or no money down.
VA refinance loans are a great option but there are more restrictions under the VA Home Loan Program, unless the borrower is refinancing from one VA loan to another (IRRRL).
Service eligibility and entitlement guidelines can make VA loans very tricky. Veterans will want to do their research and possibly even check with the VA before applying for a loan. Veterans will also want to be sure the loan officer with whom they’re working has experience with VA loans.
Formerly known as Rural Housing Administration (RHA) loans, the Rural Housing Service (RHS) is overseen by the U.S. Department of Agriculture, or USDA. This type of mortgage loan is reserved for people who live in rural parts of the country, and usually have income restrictions as well.
USDA loans are designed to encourage people to buy property and settle in rural areas. Many USDA loans may offer up to 100% financing of a home’s purchase price. USDA loans will often have more flexible credit requirements but are still structured like traditional mortgages.
Although USDA loans are one of the few remaining zero down payment loans available, one of the trade offs for this come in the form of funding fees. Currently, USDA charges both an up front funding fee and an annual funding fee (paid in monthly increments, similar to mortgage insurance).
Jumbo mortgages are loans that are in excess of conforming loan limits. Every year the Federal Housing Administration sets the limits for conforming loans. Most areas in the U.S. as of 2015, have a conforming loan limit of $417,000. There are exceptions to the rule for major metropolitan cities such as New York and San Francisco.
Jumbo mortgage loans will have higher interest rates than conventional mortgages. Jumbo mortgages will have tougher underwriting guidelines, which also translates to a larger down payment requirement than conventional mortgages.
It’s important to know the different loan options available so you can choose the right loan that will best suit your specific needs. The right loan can mean the difference in saving tens of thousands of dollars.
Unfortunately there isn’t one simple rule to follow that will help you make the right choice for your mortgage. Making the right choice depends on a number of factors.
For a better understanding of the factors, contact a trusted mortgage professional. If you don’t have a trusted mortgage professional, or if you need more information on which loan program is best for you, call or email me today.
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