Types Of Mortgage Loans
Several different mortgage loans are available for home buyers.
But how would you know which one is right for you? Here’s a simple review of the different types of available mortgage loans and their differences.
Types of mortgage loans
Fixed vs adjustable rates
As a home buyer, one of the first decision you’ll have to make is whether you want a fixed rate or an adjustable rate mortgage loan. All loans fits into these two categories or a third on known as hybrid – a combination of both categories.
Fixed rate
This mortgage loan have the same interest rate throughout the repayment term. So the amount of the monthly payment remains the same, every month and every year. The interest rates also remain the same.
Adjustable rate mortgage loans (ARM)
This mortgage loans interests rates change over time or adjust from time to time. Normally, the rate on an ARM will adjust every year after an earlier period of remaining fixed. It is also known as a hybrid product. So a hybrid ARM loan is one that begins with a fixed interest rates before becoming an adjustable interest rates.
Conventional home loan
This mortgage loan is not insured or guaranteed by the federal government in any way. This makes it different from other government supported loans such as FHA, VA, and USDA.
FHA Loans
The Federal Housing Administration (FHA) mortgage insurance program is overseen by the Department of Housing and Urban Development (HUD). The HUD is a federal government department. The FHA program allows borrowers to make a down payment that is as low as 3.5% of the entire home cost.
VA Loans
This loan is open to military service members and their families. Known as the U.S. Department of Veterans Affairs (VA) loan, this program is similar to the FHA program. This type of mortgage loan is backed by the federal government. This implies that the VA will pay back the lender for any loses that is caused by the borrower default. The best part of this program is that borrower can buy a home without no down payment – that’s 100% financing of the home.
USDA / RHS Loans
This mortgage option is provided by the United States Department of Agriculture (USDA). The program is meant for lower borrowers who meet specified requirements. The program is overseen by the Rural Housing Service (RHS), a part of the Department of Agriculture.
This mortgage loan is open to rural residents with a steady, low or modest income but can’t afford mortgage loans via conventional financing.
Conforming loan
This mortgage loan is one that adheres to the underwriting guidelines Fannie Mae or Freddie Mac, mostly when size is involved. Both of them are the two government-controlled corporations that buy and sell mortgage-backed securities (MBS). In essence, both of them buy loans from the lenders who creates them and sell the loans to investors through Wall Street.
Jumbo loan
Jumbo loans are different from conforming loans. In fact, jumbo loan limits exceeds the ones by Fannie Mae and Freddie Mac. So jumbo loan mortgage indicates a higher risk for the lender, mostly because of its size.
As such, Jumbo borrowers are often required to have excellent credits and capable of a larger down payments, compared to conforming loans. Also, interest rates are higher with Jumbo.