October 13, 2018A mortgage loan, sometimes called a mortgage, is a loan secured by using an existing property as collateral to get another loan. Mortgage borrowers can be individuals who are mortgaging their home, or they might be businesses mortgaging commercial property. Either way, the lender will put a lien on the property as collateral for the loan. Understanding the different types of mortgage loans and how they can work best for you can be difficult, so here is a short guide to the various types of mortgage loans available to you through Choice One Mortgage.
Different Types of Mortgage Loans
Adjustable Rate MortgageAn adjustable rate mortgage (ARM) is a mortgage that has a variable interest, meaning that the interest rate might vary over the loan term. This usually happens in response to changes in the prime rate or Treasury Bill rate. The purpose of the interest rate adjustment is primarily to bring the interest rate on the mortgage in line with market rates. With this type of loan, mortgage holders are protected by a ceiling on the maximum interest rate. These rates can be reset annually. ARMs often start with better rates than fixed rate mortgages, which compensates the borrower for the risk of future interest rate fluctuations.
Conventional LoansA conventional loan is a mortgage that meets bank-funding criteria set by Fannie Mae (FNMA) and Freddie Mac (FHLMC). These stock-holding companies buy mortgage loans from lending institutions and secure them for resale to the investment community. All year round, Fannie Mae and Freddie Mac are working to establish limits on what constitutes a conforming loan in a mean home price. Buying back mortgage loans lets these agencies provide a continuous flow of affordable funding to banks that reinvest money into additional mortgage loans. Fannie Mae and Freddie Mac exclusively buy conforming loans to repackage into the secondary market and effectively decrease the demand for non-conforming loans. Conventional loans often have higher minimum credit scores that can make it more difficult to qualify for than loan programs run by the government. The good news is, interest rates are typically lower.
FHA LoansFHA mortgage loans can only be issued by federally qualified lenders certified by the U.S. Federal Housing Authority, which is a division of the U.S. Department of Housing and Urban Development. An FHA loan can be ideal for first-time home buyers for several reasons. They are easier to qualify for than a conventional loan, they typically have lower down payment requirements, and these loans can't exceed statutory loan limits.
Fixed Rate MortgageUnlike the adjustable rate mortgage, the interest does not change with a fixed rate mortgage during the life of the loan. This means the monthly payment on the loan will always be the same. Payments for this type of loan are calculated so the loan is paid in full at the end of the term. There are advantages and disadvantages to this type of loan. Lower monthly payments than a 15-year fixed rate mortgage, fixed interest rate, and a payment that stays the same for 30 years are some of the selling points of the loan. Drawback include a higher interest rate than a 15-year fixed rate mortgage and an interest rate that stays the same even when interest rates go down.
Jumbo LoansJumbo Loans are loans that exceed the maximum loan amounts established by Fannie Mae and Freddie Mac conventional loan limits. Rates on jumbo loans are usually higher than conforming loans. Jumbo loans typically require a higher down payment than other types of loans.
Reverse Mortgage LoansA reverse mortgage is a loan for seniors 62 or older. HECM reverse mortgage loans are insured by the Federal Housing Administration (FHA) and let homeowners convert their home equity into cash with no monthly mortgage payments. Benefits of this type of loan include tax-free funds for as long as you live in the home, no loan repayment as long as you live in the home, with the exception of taxes and insurance, no restriction on how you use the funds, and no risk of default on your home if you meet the terms of the loan.
VA LoansA VA loan is a loan that offer long-term financing to American veterans. They are issued by federally qualified lenders and are guaranteed by the U.S. Veterans Administration. The VA determines eligibility and issues a certificate to qualifying applicants to submit to their mortgage lender of choice. VA loans are typically easier to qualify for than traditional loans.
How to Find the Right Mortgage Loan for YouWith so many loan types available, finding the tight loan type for you can be a challenge. There are several factors that determine the type of loan you need. Personal preference, in some cases, can be a determining factor in choosing the loan right for you. Whether or not you meet the requirements of specific types of loans is another factor that will determine your loan choice. The key to finding a mortgage loan is working with a lender that knows how to work with you.