Types of Mortgage Loans
There are two primary categories of mortgage plans - Conventional or Government. Conventional loans are those that are made without government underwriting by a bank or wholesale lender. The loan size determines whether they are considered 'conforming' (with a current limit set at $417,000), which feature lower interest rates, 'agency jumbo' or 'conforming jumbo' with an intermediate rate and 'non-conforming' (currently, any amount above $729,750 also known as 'jumbo') loans carrying higher interest rates.
Conforming loans have terms and conditions that follow the guidelines set forth by Fannie Mae and Freddie Mac. Both corporations are presently under federal conservatorship, which gives them unfettered access to global capital markets at rock-bottom costs because their borrowings are fully guaranteed by the U.S. Treasury.
Finally, these various mortgage programs may be structured as either fixed-rate loans, adjustable-rate loans or those with varying combinations.
The government also backs or insures loans primarily as FHA (a unit of the U.S. Dept. of Housing and Urban Development) and VA loans.
FHA Loans
The Federal Housing Administration (FHA), offers loans to qualifying home buyers and are becoming more and more of a mainstream option. They can feature low downpayments, typically around 3 percent (3.5 percent as of January 1, 2009) and have relatively easy requirements compared to conventional loans. FHA mortgages are subject to statutory limitations, but have no income restrictions and even those with lower credit scores may be considered. Past bankruptcy does not necessarily disqualify borrowers from using this program!
Adjustable Rate Loans
With a fixed-rate mortgage, the interest rate stays the same for the life of the loan. But with an Adjustable Rate Mortgage (ARM), the interest rate changes periodically and is typically tied to an index. There are numerous indexes such as the U.S. Treasury (T-Notes 10-yr.), Bank Prime Loan (the Prime Rate) or the London Inter-Bank Offering Rate (LIBOR) from which one will be selected at the time of application.
Generally speaking, lenders charge a lower initial interest rate for the ARM than for the fixed-rate mortgage. If you are expecting interest rates to decrease in the future, or if you are trying to maximize your purchase power today - knowing your income will rise in the future, then this loan may be right for you. It's also used when you expect to be in the home only for a short time.
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