There are many different types of mortgages available to home buyers.
With such terms as “adjustable rate mortgages,” FHA, VA, USDA and jumbo or conforming loans, it can be confusing for new home buyers to choose a mortgage.
To help determine what type of mortgage is best for you, here’s a closer look at different types of mortgage loans:
Fixed rate mortgage loans are exactly what they sound like: the interest rate is fixed for the entire life of the loan, locking a borrower into a set interest rate. The length of fixed rate loans can vary, but two of the most common timeframes are 15 years and 30 years.
One advantage of this type of loan is that the monthly payment is fixed for the entire term, which can make budgeting predictable and therefore easier. However, one downside is that if you take out a loan when interest rates are high, you’re locked into that higher rate for the entire term of the loan. If you have high fixed rate loans in a low interest rate environment, you may be able to refinance.
Adjustable rate mortgage
ARM loans have an interest rate that changes throughout the life of the loan as interest rates fluctuate. ARMs generally have an initial fixed-rate period of between 5 and 10 years, in which the interest rate is fixed. After the fixed-rate period, the rate switches to variable. The variable rate is typically set based on a benchmark index rate that varies based on market conditions. During the fixed-rate period, the interest rate is usually lower than the interest rate on a traditional fixed-rate loan.
Federal Housing Administration (FHA) loans
FHA loans are mortgage insured by the Federal Housing Administration.
FHA loans are not directly issued from the government; certain lenders can issue FHA loans on behalf of the government and the Federal Housing Administration insures the loans.
With flexible lending standards, qualifying for an FHA loan is often less difficult than qualifying for a conventional mortgage. As such, FHA mortgages can be a great choice for borrowers with less than stellar credit score or a high debt-to-income ratio. However, homebuyers with an FHA loan typically are required to take out mortgage insurance.
Veterans Administration (VA) loans
A VA loan is a zero-down loan offered to qualifying veterans, active military and military families. The VA guarantees the loan for the lender and the loan comes with benefits not seen with any other loan type. In most cases, you pay nothing down and you will never have to pay mortgage insurance. If you qualify for a VA loan, this is almost always the best choice. Veterans, active-duty service members, and surviving spouses are eligible for VA mortgage loans.
USDA loans are backed by the United States Department of Agriculture and are designed to help low-or moderate-income people buy, repair or renovate a home in rural areas. Some suburban areas qualify, too. If you are eligible for a USDA loan, you can purchase a home with no down payment and get below-market mortgage rates.
Jumbo loan or conforming loan
The last thing to consider is whether you want a jumbo loan or conforming loan.
A conforming loan is any home loan that follows Fannie Mae and Freddie Mac’s conforming guidelines. These guidelines include credit, income, assets requirements and loan amount. Currently the limit in most parts of the country is $417,000, but in certain designated high-price markets it can be as high as $938,250. Loans that exceed this amount are called jumbo loans. They’re also referred to as non-conforming mortgages.
Why would you want a jumbo loan? The easiest answer is because it allows you to buy a higher-priced home, if you can afford it. But these loans have flexibility that conforming loans don’t have, such as not always requiring mortgage insurance when the down payment is less than 20 percent.
Why wouldn’t you want a jumbo loan? Compared to conforming loans, interest rates will be higher. And they often require higher down payments and excellent credit, which can make them more difficult to qualify for.
Each homebuyer is unique, so taking the time to fully understand the process of selecting the right mortgage is a critical first step.
To learn more about how to select the right mortgage, call a bank lender and go over the best option for you with a qualified professional.
© Copyright, 2018, Johnson Newspaper Corporation, Patricia and Alan Cole