The Different Types of Home Loans
These are some loans and loan terminology you should familiarize yourself with before entering into a mortgage contract. These terms are not discrete categories, and many terms overlap when it comes to the types of mortgages that are available.
Adjustable-Rate Mortgage – ARM
Adjustable-Rate Mortgage (ARM,) also known as a variable rate mortgage or a tracker mortgage. An ARM is a mortgage where the interest rate changes over time based on a specific index. Commonly, the borrower has a fixed amount of time at the start of the mortgage before the lender begins to alter the rate based on the market. Individual time frames, rates, and indexes are defined in the mortgage.
A fixed-rate mortgage is a mortgage where the interest rate on the mortgage remains the same for the entire term of the loan. This type of loan offers reliability in that the rates never change, but it also lacks flexibility. In a case where the interest rates drop, the fixed-rate mortgage would remain the same. Fixed-Rate Mortgages are sometimes colloquially referred to as “vanilla wafer” loans.
Assumable Mortgage is an arrangement where a new owner assumes a previous owner’s debt, and in doing so, avoids taking on a mortgage of their own. An assumable mortgage is attractive when interest rates are on the rise, and the transfer of debt is a means of locking in a lower interest rate. If the home’s purchase price is significantly higher than the mortgage balance, the assumable mortgage could involve a large down payment.
Balloon Payment Mortgage
A Balloon Payment Mortgage is a mortgage where the rate is low/fixed for a number of years, and then the rest of the mortgage is paid off in one single “balloon” payment. The advantage of this type of loan is that its rates are typically much lower than other loans in the years before the balloon payment is due, and the entire term of the mortgage overall is shorter than most. More common in commercial than residential real estate, the balloon payment mortgage can be difficult for those who cannot come up with large sums at once, but a faster option for those who are able to.
A Conventional Mortgage refers to any mortgage that is not insured through the federal government. Many of these types of loans could qualify as conventional. Loans that are not conventional are referred to, plainly, as Government Loans.
Conventional 97% LTV Program
Fannie Mae and Freddie Mac both offer the 97% Loan-to-Value program, which allows home buyers to purchase homes with just a 3% down payment. The 97% LTV loan makes for a valuable alternative to the FHA loan, in that the upfront fees are lower.
The 3% loan is a stable, fixed-rate loan that’s perfect for many first-time homebuyers. Its requirements include that the homebuyers have not owned a home in the last three years and that they will use the home as their primary residence; also, the loan can not exceed $424,100.
The phrase Conforming Loan refers to the size of the loan. Conforming loans fit within the underwriting guidelines of Fannie Mae and Freddie Mac. A loan that exceeds these limits is referred to as a Jumbo Loan.
FHA – Federal Housing Administration
In 1934, the Federal Housing Administration was launched to provide an alternative to private market mortgage options. The period, although more severe, was not unlike the one from which we just emerged. Bankrupt banks, foreclosed homes, general housing despair – these were typical events of the day.
Since they launched more than 80 years ago, FHA loans have consistently provided access to mortgage funding where private capital would not. HUD currently requires a 3.5% down payment for most borrowers. They also provide flexibility in how and where you obtain that 3.5%.
With the recent changes bringing FHA mortgage insurance back to more reasonable levels, FHA loans continue to be a great option for many first-time buyers.
VA – Veterans Administration Loans
A well-deserved reward for serving in our Armed Forces, VA mortgage loans have consistently been the preferred financing option for borrowers with a military background. To be eligible for a VA loan, you must have served in the U.S. Armed Forces, or have been a member of the National Guard or Reserves. In some cases, spouses of deceased veterans are also eligible. VA loans typically offer 100% financing for qualifying veterans. VA underwriting understands the challenges that families with deployed members often face. VA underwriting guidelines provide enough wiggle room to work through those issues, as long as they can be documented and explained.
USDA – US Department of Agriculture
The “Farmer’s Loan” has served America’s rural communities for decades. Funded by the United States Department of Agriculture (USDA), this rural housing incentive is a very solid mortgage product for those who qualify. USDA loans generally come at rates at or near the going market interest rate. Offering a low interest, low down payment mortgage option for low- to middle-income families, USDA mortgage loans are one of the last 100% financing mortgage products available on the market.
Mortgage insurance rates are a third of what FHA charges and significantly less than the private mortgage insurance (PMI) fees required for conventional financing. There are geographic requirements for the property itself, and a lender can definitely help you figure out if your dream home qualifies for this program. The USDA program is commonly used in towns with populations of 25,000 or less.
State and Local Assistance Programs
The majority of the programs available from state housing and finance agencies are geared to low- and middle-income buyers. However, there are also programs designed to stimulate neighborhoods and revitalize areas of your city that have the potential for growth and home value appreciation.
If you serve the community as a firefighter, policeman, social worker, or teacher, then you’ll want to look at FHA’s “Good Neighbor Next Door Program.” Good Neighbor Next Door allows for 50% off the purchase price for qualifying buyers. This would mean that your $150,000 house will cost you a mere $75,000 if you qualify.
There are several conditions for this program. Number one is that the home must be a HUD foreclosure, and located in a HUD designated “revitalization” area. You can check for available properties on HUD’s website.
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