Loan Types Demystified
A home loan can be a complicated thing, however it’s really not. There are many different types of loans available and they vary by the terms within the note. The key terms of a loan are interest rate, amortization period and monthly payments. At California Mortgage Advisors, we appreciate that each client’s know what they want from their home loan but may not know the best way to get it. Our Mortgage Advisors are available now to discuss every aspect of selecting a mortgage. Our goal is to ensure that every client fully understands the choices available to them.
Fixed Rate vs. Adjustable Rate
As the name would imply, a fixed rate mortgage is a mortgage where the terms of the loan do not change for the entire life of the loan. This means that the monthly payment amount will remain the same for the life of the loan. This is true for all fixed rate mortgages regardless of loan length. The exact terms of the loan are determined by the lender based on numerous factors including borrower credit score and overall financial history.
An adjustable-rate mortgage, or ARM as it is commonly referred to, is a loan where the interest rate is not set for the life of the loan. An adjustable rate mortgage will traditionally begin with a set rate for a fixed period. After the fixed period, the interest rate will increase or decrease periodically based on factors agreed upon by the lender and the borrower prior to closing the loan.
Neither type of loan is strictly better or worse than the other. They both serve a function within the real estate market. CMA’s Mortgage Advisors are trained to assist borrowers in evaluating their mortgage needs on an individual basis to select the mortgage that works best for them.
Government Loan vs. Conventional Loan
Government loan refers to any of the various loan programs in which the federal government assumes responsibility for insuring, guaranteeing or backing the loan in the event of a borrower default. These include Federal Housing Administration (FHA) Loans, Veterans Affairs (VA) Loans, and the United States Department of Agriculture (USDA) Loans.
This type of loan is designed to assist a variety of buyers with varying credit scores and liquid assets. FHA loans have relaxed requirements when it comes to down payment size, offering loans with as little as 3.5% down. The tradeoff is that the borrower will be required to carry mortgage insurance. This can lead to increased closing costs and an increased monthly payment.
This type of loan is only available through the United States Department of Veteran Affairs to members of the United States Armed Forces and their family members. Borrowers are often able to obtain complete financing through this loan program that enables them to purchase a home with no down payment.
The United States Department of Agriculture provides home loans to residents of rural areas, which may be struggling to obtain financing through traditional means. Managed by the Rural Housing Service, these types of loans have specific geographic and financial eligibility requirements based on state and relative property location. The strict nature of these requirements leads to many borrowers being ineligible for this type of loan.
A conventional loan is not guaranteed or backed by any governmental agency. As such, it has stricter credit and down payment requirements than a comparable government secured loan. The advantage is in that they also require less in the way of paperwork or additional fees. Rates and terms are determined by market conditions and credit strength of a borrower.
Jumbo vs. Conforming
The final category in which loans may be different from one another is with regards to the overall size of the loan. Conforming loans typically go up to $417,000 and in some high cost areas the loan amounts will go as high as $625,500. Conforming loans are supported by Fannie Mae and Freddie Mac. Jumbo loans, on the other hand, are loans that fall outside of the conforming loan limits established by Fannie Mae and Freddie Mac. This means that they are considered a riskier investment than conforming loans. This leads to stricter lending requirements when it comes to borrower credit score, financial status, and down payment size.
If you have any questions on the different types of loans, please feel free to contact us. Our Mortgage Advisors are available at (800) 927-6560 to answer your questions or click here to contact us online.