Quick Guide to Home Mortgage Loans

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Many homebuyers understand that shopping for a mortgage loan can be a daunting task.

Whether you’re a novice or consider yourself a pro, there are many types of loans available. Educating yourself on the basics of the different financing available is an important step to take in the buying process. Here are a few of the basics about the types of mortgages available and a few of the pros and cons for each.

Fixed Rate vs. Adjustable Rate

The two main types of mortgages are fixed rate and adjustable rate. A fixed rate offers stability in a fixed interest rate over the term of the loan with even payments that are always the same. During the early part of the loan, the majority of each payment goes toward paying off the interest, while in the latter part of the loan payments are paying off mostly principal.

An adjustable rate mortgage (ARM) offers an adjusting interest rate that may increase or decrease within certain set periods of time. The interest rates are tied to a market index, and as the market fluctuates, so will your monthly payment. The intervals of time in which the interest rate is adjusted are specified in the contract and often have caps.

Conventional Loan vs. Government-Insured Loan

A conventional (conforming) mortgage loan is one that is not insured or guaranteed by a federal agency. It conforms to established guidelines for the size of the loan and your financial situation and often feature lower interest rates.

There are three types of government-backed loans (FHA, VA and USDA). An FHA loan is designed for first-time buyers and buyers with moderate or low income and is the most popular. The biggest benefit of an FHA loan is the low down payment and lower interest rates than standard fixed-rate loans. A VA loan is for military members and their families and requires no down payment. A USDA loan is designed for rural borrowers who meet certain income requirements.

Jumbo Loan vs. Conforming Loan

A conforming loan is one which falls within the underwriting criteria (in terms of maximum size limits) of Fannie Mae or Freddie Mac. These government-controlled agencies buy loans from the lenders who generate them and sell them to investors.

A jumbo loan exceeds the conforming guidelines set by Fannie Mae and Freddie Mac and therefore represents a higher risk for lenders due to its size. Jumbo loan borrowers generally must have excellent credit, larger down payments and pay slightly higher interest rates.

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