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Mortgage Loan Types Explained

Mortgage loan types currently available for you?

Mortgage Loan Types

types of mortgage loans

  1. Fixed rate mortgage loan types.

Fixed rate mortgage loans have the same interest rate for the entire repayment period. With the monthly principal portion being also constant you will pay the same amount of money month after month, year after year.

2. Adjustable rate mortgage loan types

Adjustable rate mortgage (ARM) loans, as the name says have an interest that will change in time following a certain schedule, usually after a period with a fixed interest rate. For example, a one year ARM is an adjustable rate mortgage in which the rates change every year on the anniversary of the loan and cannot be changed between the two anniversaries. A 10/1 ARM has a fixed interest rate for the first ten years of the loan. After this period of stability, the interest rate adjusts each year for the remainder of the loan, usually at anniversaries. A 2-Step Mortgage rate is an ARM that has one interest rate for part of the mortgage and another rate for the remaining part. When performing changes, they take into consideration the market rates. In 5/1 and ARMs and in 5/5 ones the interest rate doesn’t change in the first 5 years and then changes each year respectively every 5 years. The same description for the 3/1 and ARMs and in 3/3 the only difference being the step of 3 years instead of 5.  
  1. Conventional Loans vs. Government-Insured (FHA) mortgage loan types

Other choices are also available for you. You can choose a conventional loan or besides that, you can take advantage of the government-insured loans. A lender grants a conventional loan without insurance or guarantee by the federal government.  Therefore the risk stays with the lender. There are three government-backed mortgage types: The Federal Housing Administration (FHA) mortgage insurance program, the U.S. Department of Veterans Affairs (VA) loan program and the United States Department of Agriculture (USDA) loan program for rural borrowers. FHA Loans are available to all types of borrowers, not just first-time buyers. Under this program, the government insures the lender against possible losses resulting from borrower default. This type of loan has very small down payments, going down to 3.5% of the purchase price but your monthly payments will be higher for you will have to cover the mortgage insurance. VA Loans are for military service members and their families. The federal government guarantees mortgages under this program.  An extra advantage is the fact that no down payments are necessary if eligibility requirements are met. USDA / RHS Loans has a loan program for rural residents with a steady but low or modest income, and who are unable to obtain adequate housing via conventional financing. Borrowers’ Income must be below 115% of the adjusted area median income [AMI], an indicator that varies by county. Note: you can combine the two different major options presented above.  Fixed rate loans, adjustable rate loans, conventional loans and government insured or guaranteed loans.  
  1. Conforming Loans vs. Jumbo Loans mortgage loan types
Loans fall into two basic categories.  Conforming loans and jumbo loans. Conforming loans meet Fannie Mae or Freddie Mac underwriting guidelines regarding loan size.   Fannie Mae or Freddie Mac are both government-sponsored enterprises allowed to transact mortgage-backed securities (MBS). A jumbo loan exceeds the conforming size limits set by Fannie Mae and Freddie Mac.  Therefore they cannot be “sold” by the lenders who originate them to the above-mentioned corporations. Such loans represent an increased risk for the lender.  Thereby granting such loans only to borrowers with an excellent credit score & able to come up with a larger than usual down payment.  
  1. Assumable mortgages vs. Conventional mortgage loan types
As explained above, in a conventional loan, the borrower applies for a loan.  The lender will approve their mortgage loan type if he/she qualifies.  The alternative to this regular loan is the assumable mortgage.  This happens when you take over an existing mortgage from the seller if the lender approves. The assumable mortgages can be very appealing.  Especially when interest rates increase since the original mortgage for the seller.      
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