Many individuals find it quite confusing when they start looking for a home loan because there are so many different types of mortgage loans to choose from. Before making a final decision every potential home buyer should thoroughly understand the pros and cons of the different mortgage programs offered by the various lenders. The following information will provide every reader with a basic understanding of the various types of mortgage loans that are currently available throughout the country.
Conventional Mortgage Loans
These types of mortgage loans are offered by numerous non-government sponsored lenders. The various types of loans that comprise Conventional Mortgage Loans are as follows.
• Fixed-Rate Loans are usually available for 10, 15, 20, 30 or 40 years. The payments of a fixed-rate loan remains the same for the duration of the loan. It should be noted that loan payments may vary throughout the years due to changes in insurance premiums and your local taxes.
• Adjustable-Rate Loans are commonly referred to as ARMs. Unlike fixed-rate loans, the interest rate of an ARM may change occasionally. These changes are generally made in response to a change in the Treasury Bill rate or in the prime lending rate. These types of mortgages usually provide a better rate of interest than fixed-rate loans. Please remember that these types of loans can provide future financial risks for the mortgage holder. If you want to eliminate all future risk, stick with a fixed-rate loan.
• Combination Loans are commonly referred to as Hybrid Loans. This type of loan is basically a combination of a fixed-rate loan and an adjustable-rate loan. For example, lets discuss the composition of a 5-1 hybrid adjustable-rate mortgage. During the first five years of the mortgage, the mortgage holder actually has a fixed-rate loan with equal monthly payments. After the initial five years, the interest rate will begin to adjust based on the index that is specified in the mortgage contract. Chances are that the interest rate will be higher in the sixth year which will cause an increase in the amount of future monthly payments.
• Balloon Mortgage Loans are also known as a non-amortizing mortgages. This type of mortgage does not repay the total amount borrowed by the maturity date of the loan. This type of loan is more attractive than a fixed-rate loan since the monthly payments can be considerably less. The mortgage holder will be required to make a single lump-sum payment on the maturity date of the loan to pay the balanced owed.
There are two basic type of balloon mortgages. The first is an interest-only loan in which the monthly payments are based on the amount of interest that would be due on the loan. The other type of balloon mortgage is called a rollover mortgage. This is a short-term mortgage that must be refinanced at the end of the years specified. This term is usually three to five years.
A balloon mortgage is frequently used by new home buyers who expect their income to increase by the time the balloon payment is due; or by individuals who plan to sell their home and pay off their mortgage in a short period of time.
• Jumbo Mortgage Loans exceed the Freddie Mac and the Fannie Mae conventional loan limit of $417,000 which was established in 2010. Since jumbo loans provide more risk for a lender, a higher interest rate will usually be charged. The interest rate may fluctuate from 0.25% to 1.75% which was at a high in 2007. If the mortgage holder defaults on their loan, the lender may have a difficult time selling the property due to the value of the property involved. Quite often, a lender will require two different appraisals before processing a loan application for a jumbo loan.
• Constructions Loans are typically referred to as Interim Loans. These loans are used during the construction of a new home. The loan is secured by the property under construction. The owner receives predetermined payments from the lender during the various stages of construction to pay contractors and/or building materials.
Usually the mortgage holder will apply for two different loans on the same property by the time they move into their new home. The first loan will be of a short duration which will pay for the construction costs involved in building the new home. There are no payments due during the construction of the property. The amount of this loan is usually due at time of completion. The second loan will actually pay off the first loan and can be set up using any conventional loan that is acceptable by the lender.
• Reverse Mortgages can provide a source of income, or lump-sum payments to the mortgage holder. Another option will simply establish a line of credit for the mortgage holder that will increase over time, if not used. These types of mortgages are designed for older individuals. The amount received does not have to be paid back until the borrower passes away. The estate is then responsible for the repayment of the mortgage loan. Generally speaking, the heirs would place the property up for sale and the outstanding loan would be paid from the proceeds of the sale.
FHA Mortgage Loans
FHA loans are only issued by federally qualified lenders. These loans are insured by the United States Federal Housing Authority, which is a division of the United States Department of Housing and Urban Development (HUD). You will find a link below for HUD’s website that contains a wealth of information for any home buyer. The following information provides the general characteristics of a FHA loan.
• FHA provides lower down-payment requirements.
• FHA loans are easier to qualify for than a conventional loan.
• FHA loans can be used to purchase a property for a Single Family or a property for an Owner-Occupied Duplex.
• FHA loans can be used to purchase a Double-Wide or Triple-Wide Mobile Home, as well as a Modular Home.
• FHA loans cannot exceed the loan limits established by state and county. To provide some insight into the prevailing loan limits, I am providing the limits that are currently in effect in the State of Louisiana.
Single Family... $271,050 - $287,500
2 Unit Duplex... $347,000 - $368,050
3 Unit Duplex... $419,425 - $444,900
4 Unit Duplex... $521,250 - $552,900
FHA 203k Rehabilitation Mortgage Loans
The 203k will allow an individual to either purchase a Single-Family Property or to refinance a Single-Family Residence that they currently own. The unique feature of this loan is that the borrower can make needed repairs and/or improvements at that time and include those costs in their loan. The maximum allowable for all repairs and improvements is $35,000, which must include all of the closing costs. The following list only provides a few of the various improvements that can be made when utilizing a 203k mortgage loan.
• The remodeling of kitchens and bathrooms.
• The purchase of new kitchen appliances.
• The repair or replacement of flooring and/or carpeting.
• Interior and exterior painting.
• The installation of exterior siding.
• The repair and/or the replacement of roofs, gutters and downspouts.
• The repair and/or the replacement of a septic system or a well.
• The addition and/or repair and/or replacement of porches, decks and patios.
You may want to read FHA’s 203k Rehabilitation Mortgage which is an article that I previous wrote that provides a lot of detailed information about the 203k.
VA Mortgage Loans
VA loans afford American veterans with the opportunity to secure long-term financing when purchasing a home. This mortgage program is provided by federally qualified lenders and is guaranteed by the United States Veterans Administration (VA). The VA will determine the eligibility of each applicant and will issue a certificate of eligibility to qualified applicants that may be submitted to any mortgage lender. It’s considerably easier to qualify for a VA mortgage loan than conventional loans. The following information will explain how this mortgage program works.
• A VA loan provides 100% financing without having to purchase private mortgage insurance, which is commonly referred to as PMI.
• The VA charges a funding fee of 0% to 3.3% which may be added to the mortgage loan.
• When a veteran is purchasing a home, they are able to borrow up to 100% of the actual sales price or the reasonable value of the home, whichever amount is less.
• When a veteran is refinancing a home, they are able to borrow up to 90% of the reasonable value. State law applies.
USDA Mortgage Loan Programs
The United States Department of Agriculture (USDA) offers a variety of mortgage loan programs to help low to moderate-income individuals that live in small towns or rural areas to buy a home. The Rural Housing Service (RHS) primarily helps qualified applicants who can’t secure a loan from other sources to purchase a modestly priced home, providing it will be their primary residence. The following information best describes this type of loan.
• Little or no down payment
• Nominal closing costs
State and Local Mortgage Loan Programs
The majority of states, counties and local governments offer special mortgage loan programs to qualifying low-to-moderate income families that would like to purchase their first home.
There are special loan assistance programs like Mortgage Credit Certificate, which is more commonly referred to as MCC. This program issues certificates to borrowers each year that is based on the amount of interest that they have paid on their mortgage loan. This certificate is then used as a tax credit when filing taxes. If you are ever in a position to sign-up for this program, make sure that you do. It’s like getting free money!
These particular mortgage loan programs will generally provide the following.
• A fixed-rate mortgage loan
• Lower interest rates
• Lower up-front processing fees
• Easier to qualify for a mortgage loan
Private Mortgage Insurance
It would be impossible to discuss mortgage loans without mentioning Private Mortgage Insurance, which is more commonly referred to as PMI. This form of insurance is required by lenders who provide mortgage loans to individuals that borrow more than 80% of the actual value of the property. If you secure a home loan and make a down payment of less than 20%, you will be required to buy PMI which is then included in your monthly payment.
PMI protects the lender in case the borrower defaults on the mortgage loan. Actually this allows individuals with less than a 20% down payment to purchase a home. Because of PMI, borrowers can attain home ownership with as little as a 3% to 5% down payment. If PMI was not available, families would have to wait years to accumulate the 20% down payment.
If you are currently paying PMI, you can cancel this insurance and reduce your monthly payments when the balance of your loan reaches 80% of your property’s value. That does not mean that you have to wait until you have reduced the principal of your loan by 20%. Lets suppose that you purchased a home for $100,000 and made a 10% down payment. This left a balance of $90,000 which you then financed. If the property’s value increased to $112,500, you would be able to cancel the PMI since $90,000 equals 80% of the property’s current value.
It is your total responsibility to notify the lender that you want to cancel the PMI when you have attained a 20% equity in your property. If you don’t, you will never stop paying for PMI during the entire length of your mortgage loan because you will never be offered that opportunity by the lender.
In Conclusion...
Even though this article provides extensive information, there are still a lot of various mortgage programs available that have not been mentioned. Many lenders provide specialty loans to attract borrowers. If you are going to buy a new home, make sure that you do your research prior to making a decision as to what type of mortgage loan that you will utilize.
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Contributor's Note
There are many variables that you need to take into consideration when you are considering a home loan. The best possible advice that I can give you, is to contact a well respected loan officer in your community that has an outstanding track record with his previous customers.
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appreciated
