There’s always a lot of confusion around the types of loans offered when buying your home. We have tried to simplify things a bit and have included a brief on each below.
Fixed + Adjustable Rates
You will have the opportunity to secure either a fixed rate or an adjustable rate mortgage. A fixed rate has the same rate for the entire term (usually 30 years.) An adjustable rate mortgage, also known as an ARM will change. This can happen every year. An example of one type for ARM is the 5/1. Meaning it has the same rate for the first 5 years and is then changes every year after that.
Both of these types have their pros and cons. The benefit of the ARM is that you traditionally start off at a lower rate. The security of a fixed loan that never changes can also be seen as a benefit, so it really depends on your individual goals and timeline.
Another factor in the loan system is whether it is Government-Insured versus a Conventional Loan. A conventional loan is one that is not insured or guaranteed by the federal government in any way.
There are three government-backed mortgage loans, which we have outlined —
- FHA Loans
Managed by the Department of Housing and Urban Development, FHA loans are available to all types of borrowers. The government insures the lender against losses that might result from borrower default. Advantage: This program allows you to make a down payment as low as 3.5% of the purchase price. Disadvantage: You’ll have to pay for mortgage insurance, which will increase the size of your monthly payments.
- VA Loans
The U.S. Department of Veterans Affairs offers a loan program to military service members and their families. Similar to the FHA program, these types of mortgages are guaranteed by the federal government. Advantage: borrowers can receive 100% financing for the purchase of a home.
- USDA / RHS Loans
The United States Department of Agriculture offers a loan program for rural borrowers who meet certain income requirements. The program is managed by the Rural Housing Service, part of the Department of Agriculture. This type of mortgage loan is offered to “rural residents who have a steady, low or modest income, and yet are unable to obtain adequate housing through conventional financing.”
The last factor is whether or not you loan is a Jumbo versus Conforming loan. A conforming loan is one that meets the underwriting guidelines of Fannie Mae or Freddie Mac, relative to the size of the loan. Fannie and Freddie are two gov’t controlled corporations that purchase and sell mortgage-backed securities. A jumbo loan exceeds the conforming loan size limits. This type of mortgage represents a higher risk for the lender, mainly due to its size. There are higher bars the borrower must hit in order to secure this type of loan…
That is a wrap for now. If you have any questions relative to financing, email our preferred lender, Erin Sadlier at Guaranteed Rate.