What Different Types of Mortgages Are Out There??

If you're planning on buying a home in the near future, you have probably been lost down a path of what feels like never ending research, and are well aware there are many different types of home loans available to you.  Just as homes come in different styles and price ranges, so do the ways you can finance them.  But what exactly are these different loan programs, and how do you understand which type of mortgage suits you??

Fixed-Rate vs. Adjustable-Rate Mortgage (ARM)

When deciding on a loan type, one factor to consider is the type of interest rate you are comfortable with: fixed-rate or adjustable-rate. Here's a look at each of these loan types, with pros and cons to consider.

Most every type of home loan program will offer the option of a fixed-rate or an adjustable-rate mortgage. A fixed-rate mortgage will have the same interest rate for the life of the loan. An adjustable rate loan, also called an ARM, will carry an initial fixed interest rate for a limited period as per terms of the loan,  and then the rate will increase annually.

Fixed-Rate Mortgage

The fixed-rate mortgage is the most common term home owners select. This is the traditional workhorse mortgage. It gets paid off over a set amount of time (10, 15, 20 or 30 years) at a specific interest rate. A 30-year fixed is the most common.  As market rates rise and fall, your interest rate won't budge.

Why would you want a fixed-rate loan? One word: security. You won't have to worry about a rising interest rate. Your monthly payments may fluctuate a bit with property tax and insurance rates, but they'll be fairly stable. If rates drop significantly, you can always refinance. The shorter the loan term, the lower the interest rate. For example, a 15-year fixed will have a lower interest rate than a 30-year fixed.

Why wouldn't you want a fixed rate? If you plan on moving in five or even 10 years, you might find that a lower adjustable rate better suits your needs. It's the conservative choice for the long term, which means you will pay for the security it promises.

Adjustable-Rate Mortgage

You'll get a lower initial interest rate compared to a fixed-rate mortgage, but it won't necessarily stay there. The interest rate fluctuates with an indexed rate plus a set margin. But don't worry - you won't be faced with huge monthly fluctuations. Adjustment intervals are predetermined and there are minimum and maximum rate caps to limit the size of the adjustment.

Why would you want an ARM? Lower rates are an immediate appeal. If you are not planning on staying in your home for long, or if you plan to refinance in the near term, an ARM is something you might consider.

Why wouldn't you want an ARM? You have to assume worst-case scenario here. Rates may increase after the adjustment period. If you don't think you'll save enough upfront to offset the future rate increase, or if you don't want to risk having to refinance, think twice.

What should I look for? Look carefully at the frequency of adjustments. You'll get a lower starting rate with more frequent adjustments but also more uncertainty. Check the payments at the upper limit of your cap and make sure you can afford them. Relying on a refinance to bail you out is a big risk.

Here are the types of ARMs offered:

• check3/1 ARM: Your interest rate is set for 3 years then adjusts annually for 27 years.
• check5/1 ARM: Your interest rate is set for 5 years then adjusts annually  for 25 years.
• check7/1 ARM: Your interest rate is set for 7 years then adjusts annually for 23 years.
• check10/1 ARM: Your interest rate is set for 10 years then adjusts annually for 20 years.

Government Backed Loan

During the Great Depression, in 1934, The Federal Housing Administration was created to make getting approved for a home loan easier.  While the Government does not offer the loans directly,  they insure the loan in the event the borrower defaults on the mortgage. This makes the mortgage loan less risky for lenders allowing them to lower their loan requirements.  It is also important to note that Government backed loans are for homeowners who intend to occupy the property as their primary residence only

FHA

FHA home loans are one of the most popular types of home loans among first-time home buyers  due to the lowest credit score requirements of any mortgage type, and low down payment requirement.   Another great benefit of FHA home loans is that the down payment can be a gift from a family member or friend. . One of the only downsides of FHA loans is the mortgage insurance premium (MIP) that is required by FHA.  The FHA MIP fee typically 0.85% of the loan amount annually, which is paid monthly and included in your mortgage payment.  You can review the the FHA MIP Chart here.

VA

If you're a Veteran, then you may qualify for a VA home loan.  Your lender can assist in ordering your certificate of eligibility, to determine how much you can borrow with no money required for down payment. VA loans offer a wealth of benefits to those who qualify; on top of getting 100% financing, VA loans don't require mortgage insurance. No PMI means huge monthly savings!

USDA

The U.S. Department of Agriculture doesn't just offer food and nutrition services, they also offer mortgages in rural areas of the country. USDA loans offer a no down payment mortgage, and have low mortgage insurance fees. When you think of the word rural, farms and ranches are probably one of the first things that come to mind, however, the USDA eligibility map shows that over 95% of the U.S. is eligible. USDA home loans do require a 640 credit score or higher to qualify, and carry income limits in some areas, which you can look up here.

FHA 203K

FHA 203(k) loans are a type of home renovation loan. They will fund the purchase of a home and pay for repairs or renovations on the property. FHA loans require the property to be in livable condition, not in need of repairs,  but with a 203k loan you can buy a "fixer upper" home in need of repairs and obtain the cash to make those repairs. 203k home loans follow the same guideline requirements as the FHA does, and also they require a 3.5% down payment. However, the credit requirements for 203k loans are higher than FHA. Most lenders require at least a 640 credit score.

Conforming Home Loan

Conventional loans are also known as conforming loans because they meet the guidelines of Fannie Mae and Freddie Mac. These guidelines include credit, income, assets requirements and loan amount. Currently the limit in most parts of the country is $453,100, but in certain designated high-price markets it can be much higher. Wondering if you're in a high-cost county? Here is the entire list of conforming loan limits for high-cost counties in certain states.  Conforming loans require a down payment range from as low as 3%, with certain credit requirements, and all the way up to 20%.  Another benefit of conventional loans, is mortgage insurance is not required if at least 20% is put down. PMI automatically cancels once the loan to value reaches 78%.

Non-Conforming Home Loans

A non-conforming loan is a loan that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac. The conforming loan limit is $453,100 in most areas of the U.S.

Jumbo

If you need to obtain a loan that exceeds the conventional loan limit in your area, you will need to get a jumbo loan.  Because of the higher loan amount, jumbo loans do have stricter qualify guidelines, as compared to a conventional loan,  and most lenders require a credit score of at least a 680.  Jumbo loans also require a higher down payment, usually between 15%-20% is the minimum down payment required.

Portfolio

Portfolio mortgages are loans which are originated by a lender and then held and serviced (kept in portfolio) for the life of the loan. This makes them very different from most mortgages explained above. To sell loans in the secondary market, financing must meet certain standards. FHA, VA, and Conforming (conventional) mortgages all come with their own, different set of guidelines. Those guidelines are in place to protect investors who buy these loans, and the government agencies that back them.

However, if a lender keeps the mortgage and does not sell it, the loan does not need to meet the standards that the secondary market demands. Loans kept on the books - in the lender's portfolio - can be underwritten to just about any standard, because the lender assumes all the risk.

Refinance Loans

Refinancing is the replacement of an existing debt obligation with another debt obligation under different terms.   Debt swapping, if you will.

Rate and Term Refinance

The rate and term refinance is is the most common type of refinance, where the original loan is paid off and replaced with a fresh loan with a new rate and set of terms.

For example, you may refinance your adjustable-rate mortgage and opt for a 30-year fixed instead to take advantage of the stability, or refinance out of an FHA loan into a conventional loan to drop  the monthly mortgage insurance.

This type of refinance is perfect for those simply looking to lower their rate and/or change loan programs.

Cash Out Refinance 

If you're in need of cash, a cash-out refinance might be just the ticket.

A cash-out refinance is the process  of refinancing your mortgage and obtaining cash using the equity in your home. You are permitted to cash out up to  80% of the value of your home.  Many choose to utilize the cash to consolidate and pay off other debts, make home improvements, free up cash for emergency expenses, ect…

Streamline or IRRRL Refinance 

A streamline refinance refers to the refinance of an existing gov-insured mortgage, requiring limited borrower credit documentation and underwriting. The process is “streamlined”  and requires much less paperwork then a traditional refinance.  FHA offers a Streamline refinance, and VA offers what is called the Interest Rate Reduction Refinance Loan,  or IRRRL.

HARP

This next refinance option was born out of the ongoing mortgage crisis.

The Home Affordable Refinance Program allows struggling borrowers to refinance up to 125% of the value of their home, helping "underwater" homeowners take advantage of the low interest rates on offer.  You may be eligible to refinance without paying down principal, and without having to pay mortgage insurance.

The mortgage must have been originated on or before May 31st, 2009, the mortgage must be current, secured by a 1-4 unit owner-occupied home, and guaranteed by either Fannie Mae or Freddie Mac.  You may also check eligibility here.