Understanding Home Loan Types
When it comes home loans, there are many types to choose from. Figuring out which loan is best for your new property purchase can be confusing. So here are some of the most popular home loan types.
Conforming Loan: When a loan conforms to the guidelines of FNMA/FHLMC (Fannie Mae/Freddie Mac) in both terms that may be purchased by FNMA or FHLMC it is conforming (currently up to $612,950 in San Diego county). Loans that do not match these guidelines are obviously non-conforming loans. If the loan does not conform due to its amount, it is a Jumbo Loan. Conforming loans may have either fixed interest rates or adjustable interest rates.
- Conventional Mortgage Loan: When the loan amount is within the FNMA/FHLMC guidelines, and the federal government does not insure or guarantee the lender payment through the FHA or VA, the loan is conventional). They can have either fixed interest rates or adjustable interest rates.
- FHA Insured Loan: Loans insured by the Federal Housing Administration. Borrowers must meet specific criteria to qualify. FHA loans often require lower down payments of normally 3.5% and will go up to $612,950 in the amount borrowed.
- VA Loan: A VA loan is a mortgage loan offered to American Military and veterans guaranteed by the Department of Veterans Affairs (VA), typically at preferred interest rates with little or no down payment required.
Reverse Annuity Mortgage or reverse mortgage is a special type of mortgage created for retirees on fixed incomes. They use the loan to generate income from the equity in their homes (and thus adding it to their principal balance). They continue to live in the home but ownership goes to the lender when the last borrower moves from the home.
Mortgage Rate Terms
- Fixed-Rate Mortgage: A loan secured by real estate that has a fixed interest rate and payment amount for the term of the loan (usually 15 or 30 years) is a fixed rate mortgage.
- Adjustable Rate Mortgage also called ARM or variable rate mortgage: ARMs have interest rates that can vary or adjust at pre-determined yearly intervals. The starting rate and payment is lower, allowing borrowers to qualify more easily. The adjustment basis is an index, often the LIBOR (London Interbank Offered Rate), or on the prime rate—the lowest rate of interest banks will offer their most credit-worthy customers.
- Fully Amortizing Mortgage: A fully amortizing mortgage is a mortgage with scheduled uniform payments that will fully pay-off the loan over the term of the mortgage. At the beginning of the loan term, most of the loan payments go towards interest payments. As time goes on, more of the payment amount goes towards paying off the principle balance.
- Balloon Mortgage: This was most popular before the housing collapse of 2006. Balloon mortgage have short terms (only a few years) with fixed principal and interest payments at a reduced rate that do not fully amortize (or pay off) the loan. At the end of the term, the entire balance of the mortgage is due in a single payment. Balloon mortgages offer lower payments during the term, because the big lump sum is due at then end. A balloon is useful for buyers that hope to sell within the term or expect to be able to pay the full amount or qualify for a better loan by that time.
- Graduated Payment Mortgage (GPM): A graduated payment mortgage has payments that are lower in the early years but increase on a scheduled basis until they reach a level of amortization and the borrower can (hopefully) afford to make larger payments.
- Bridge Loan: When a buyer is also selling and the purchase of the new property depends on the equity in the old property, a bridge loan allows the purchase to complete before the sale is complete. Once the older property sells, the borrower must repay the bridge loan.
- Construction Loan: Short-term loans to funds construction or improvements are construction loans. Typically, the construction loan is repaid with the mortgage.
- Home Equity Loan: A home equity loan (or a home equity line of credit) is a loan made against the equity in a home. The borrower may utilize some or all of the loan and pays interest only on the portion used.
- Nonrecourse Note: A nonrecourse note is a type of note in which the borrower has no personal liability for payment.
- Open-end Mortgage: An open-end mortgage is a mortgage that may be refinanced without rewriting the actual mortgage contract.
- Refinancing: Refinancing are the proceeds of a new loan used to pay off an existing mortgage on the same property. This is often done by a homeowner to lower their interest rate and monthly payments.
Any good lender will help walk you through the complicated mortgage world and fit you into a loan program the best fits your needs!
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