What types of loans are available?
Whether you are looking for a first mortgage, adding a second mortgage or trying to refinance an existing mortgage, it is helpful to understand more about general loan classifications.
Mortgage loans are categorized as either fixed rate mortgages (FRM), adjustable rate mortgages (ARM) or some combination (hybrid) of the two. This classification is based on the type of interest rate structure governing the loan. The most common mortgage terms are 30 or 15 year loans (also, 25, 20 and 10). Generally, a short term loan will have less interest and higher payments – a long term loan, more interest and lower payments. A 15 year mortgage may have less than half the interest costs of a 30 year mortgage.
Characteristics of a fixed rate mortgage:
The interest rate is fixed for the life of the loan (whether interest rates go up or down)
Payments generally stay the same each month
Characteristics of an adjustable rate mortgage:
The interest rate is adjusted periodically by adding a margin to an index specified by the mortgage (a 1-year ARM adjusts annually)
Payments generally fluctuate along with the interest adjustment
ARM’s have limits on the amount of interest adjustment that can be made in given periods and across the life of the loan
Characteristics of a hybrid loan:
The interest rate follows some set plan for adjustment, using a combination of fixed and adjusting interest rates
Options are designed to meet a wider variety of needs. Qualifying standards are often more liberal than traditional loans
Mortgage loans are also categorized as government loans or conventional loans. Government loans are FHA, VA and RHS loans; all other loans are conventional.
The Federal Housing Administration (FHA) does not make the loans; it provides mortgage insurance which protects the lender. Although FHA loans have statutory limits, the qualifications are generally more liberal than those for conventional loans. They have lower down payment requirements (only 3 percent down), lower monthly insurance premiums, and often, lower closing costs which can also be financed. FHA loans are intended to aid eligible families with low-to-moderate incomes who do not qualify for conventional loans.
Like the FHA loans, VA loans are only guaranteed by the U.S. Department of Veteran Affairs; lenders make the loans to eligible veterans for the purchase, construction, or energy-saving improvement (approved by the lender and VA) of a home. VA loans also have easier eligibility requirements than conventional loans, often lower closing costs, and more liberal terms (usually no down payment is required) including negotiable interest rates. If you are eligible, the VA will issue a certificate of eligibility that you take to the lender when making application for your loan. Lenders generally place a maximum limit on VA loans.
RHS loans, guaranteed by Rural Housing Services under U.S. Department of Agriculture, much like the other government loans, also contain easier terms (such as no down payment and low closing costs.) RHS loans are available to rural residents with low-to-moderate incomes that are without adequate housing and unable to obtain credit elsewhere. RHS loans are for construction or repair of new or existing homes.
Conventional loans are classified as conforming or non-conforming.
Loans that adhere to the guidelines set forth by Fannie Mae (from FNMA: Federal National Mortgage Association) and Freddie Mac (from FHLMC: Federal Home Lone Mortgage Corp ) , two corporations that purchase, package and sell loans that meet their conditions as securities to investors. These are referred to as “A” paper loans. Conforming loans must meet certain guidelines regarding down payment, loan limits, borrower qualifying criteria and appropriate properties.
A buydown loans is a fixed rate mortgage that allows the borrower to pay points to lower the interest rate. The option may include a reduction for the life of the loan or only for a specified few years at the beginning of the loan. Some options will even finance the discount points. A buydown option lowers the payment amount and opens the possibility of qualifying for a higher priced home.
A reverse mortgage is designed to help elderly home owners benefit from their equity without having to sell their house or make payments. The loan is funded through a lump sum payment, monthly payments or a line-of-credit. The money received from the loan is not taxable nor is it considered in determining Social Security or Medicare benefits. The loan does not have to be paid until the homeowner sells the property, moves or passes away. The elderly home owner is secure in the home even if the loan term ends or the loan grows beyond the value of the property.