While there seem to be hundreds of different mortgages available, they all fall into a few basic categories. Some may fit your needs well, while other programs may be unwise or unattainable. It’s important to realize that the best product depends on where you are in your life. The best choice is the loan program that best fits your needs at the time you purchase a home.
In recent years, lenders have developed a greater variety of loan programs, mainly because they have found that homebuyers have a variety of different needs. First Time buyers, families “moving up” into larger homes as they need more space, or moving into smaller homes after children have gone on to start their own families; all have different needs. There are so many different individual loan programs available that to compare them all would be impossible. The following provides brief descriptions of the most common categories of mortgage loans.
Fixed Rate Mortgages
Fixed-rate mortgages are the most popular type of mortgage. With this mortgage, the interest rate will remain the same for the entire term of the loan. Typically, the longer the term of the mortgage, the more interest is paid over the life of the loan.
Adjustable rate mortgages all have certain similar features. They have an adjustment period, an index, a margin, and a rate cap. The adjustment period is simply how often the rate changes. Some change monthly, some change every six months, and some only adjust once a year. An Adjustable-rate mortgage (ARM) is a mortgage in which the interest changes periodically according to corresponding fluctuations in an index. All ARMs are tied to indexes. Indexes are simply an easily monitored interest rate that moves up and down over time. Adjustable rate mortgages vary and are tied to different indexes.
This is a “traditional” mortgage, not directly insured by the Federal Government. Most conventional loans under $300,700 are administered through Fannie Mae or Freddie Mac (private corporations but regulated by the government). Loans greater than this amount are called “jumbo loans” and are funded by the private investment market.
These loans are insured by (but not funded by) the Federal Housing Administration (FHA) a division of the U.S. Department of Housing and Urban Development (HUD), and designed for, in general, low- to middle-income borrowers and many first time buyers. There are, however, limits to the maximum loan amount which will vary from county to county. FHA loans have somewhat more relaxed qualifying standards and ratios than conventional loans and have the availability of both 15 and 30 year fixed as well as 1 year adjustable mortgages.
For those qualified by military service, the Veteran’s Administration (VA) insures (but does not fund) 15 and 30 year fixed as well as 1 year adjustable mortgages with lower down payment requirements and somewhat more lenient qualifying ratios.