There are many different types of home loans out there today. We will go over some of the basics to help you in researching which one may be a good option for you.
A mortgage is basically a home loan that you have agreed to pay back to a lender through financing terms both have agreed to. These loans can be obtained from several different avenues including local banks, mortgage brokers (works with a variety of different lenders), mortgage bankers which can be retail or direct (larger banks, online lenders, and credit unions), and private lenders. Each lender will have its own set of fees, terms, and eligibility requirements.
It's always a good idea to research different companies and learn about the loan programs they offer that would fit your individual financing needs and have your list of lenders narrowed down before applying to a bunch of them. Each time you fill out one of their applications, that loan originator is going to pull your credit, and it will ding your credit report negatively, so keep that in mind.
Types of Mortgages
Conventional Loans
This type of loan is not backed by the government and is a common loan for many borrowers. While it may not have some of the best interest rates compared to a government backed or government insured loan, it usually has less strict guidelines for the property to meet for approval. Conventional loans for the most part are conforming, which means they meet the basic qualifications for Fannie Mae & Freddie Mac to purchase.
Government Insured Loans
The federal government backs these loans by insuring the loaned amount if the borrower defaults. These can be FHA (Federal Housing Administration), USDA (US Department of Agriculture), or VA (US Department of Veteran Affairs).
FHA loans can come with lower interest rates and lenders can allow lower credit scores. Homes with this type of loan have a strict set of FHA requirements the appraiser will check for when they come appraise the property. If any of the red flags are present on his report, the lender may require repairs before closing can occur. There is also the probability of the extra expense of MIP (mortgage insurance premium) on your loan and monthly payments which will protect the lender if you default on payments.
USDA loans are designed for rural areas and properties should be checked to make sure they fall into one of those approved areas before applying for that type of loan. Certain maximum income amounts are required for approval, and this loan has the benefit of zero down payment.
VA loans for active members of the military, veterans, and eligible spouses. The applicant must have their COE (certificate of eligibility) which supplies proof of eligibility and an applicant's amount of entitlement available. VA loans also have a zero down option but will most likely have a funding fee which goes back into the system to help offset costs for using this program.
Jumbo Loans
Jumbo loans are needed usually when purchasing a more expensive property than what the conforming loan limits allow with Fannie Mae & Freddie Mac. They will require good credit with plenty of down payment and could have higher loan costs. While qualifying for this type of loan might be stricter the interest rates can be competitive.
Reverse Mortgage
This option is available for seniors needing money to help with healthcare of other expenses. This goes off the equity of the property and allows the owner to tap into the value of their home in the situation of needing retirement income. Important! With this type of loan, the amount you owe goes up over time as interest and fees are added to the principal, and your spouse or heirs will have to sell or repay the loan should anything happen to you.
Types of Rates
Fixed-Rate
This is where your payment will not change over the life of the loan. Principal and interest are fixed, regardless of what the economy is doing. Home insurance and taxes can obviously still change however, and those items can definitely make your monthly payment adjust up or down.
Adjustable-Rate
This rate will change depending on the current market. They are usually set at an interest rate for a period of years, but then will adjust based on the current index when time runs out on current agreement. ARMs can sometimes offer a better rate than fixed but does always leave the possibility of higher payments at the next time for renewal if the index has raised. A very important question to ask if this is an option your considering, is rate caps.
Types of Terms
Today there are all types of lengths for mortgages and each lender will have their own set of available terms for their programs. For fixed I have seen a lot of 30, 25, 20, and 15-year programs. If you are hesitant to commit to a fixed rate for 30 years, there is always the option to refinance later if the rates come down. Many ARMs I have seen have been offered at 3, 5, 7, and 10-year increments.
In the end it's going to come down to what is the best loan, rate, and term for you and your unique financial situation. Your chosen lender will be able to go over all of your options and crunch the numbers with you to assist in making the right decision.
Hi there! I am the Broker & Owner of Country Roots Realty and I love helping sellers and buyer with all of their real estate needs here in the heart of the Pineywoods of East Texas.
