Selecting the right mortgage loan for your financial goals may seem to be overly complicated, but with a little advanced homework, you’ll be much more prepared. Below are some great starter basics to understanding home loans.
Fixed-rate versus ARM—With a fixed-rate loan, the interest rate stays the same throughout the life of the loan. The borrower can count on having the same payment each month, making it easier to budget. An adjustable-rate mortgage (ARM) has a lower introductory interest rate than a fixed-rate loan for the first three, five, seven or 10 years. After that, the interest rate on the ARM (and the resulting payments) adjusts annually for the remainder of the 30-year term. Many borrowers start with an ARM in order to obtain the lower rate and later refinance into a fixed-rate loan.
Jumbo Loan— A jumbo loan exceeds the traditional loan limits that Fannie Mae and Freddie Mac have established—currently set at $417,000 (except for Hawaii and Alaska where the limit is $625,500). However, there are certain real estate markets that have been federally designated as “high-priced markets” where the traditional loan limits may vary. If you’re looking to buy a big home, this might be the avenue to take.
Loan Term—The two most common loan terms are 15 and 30-year mortgages. The 15-year loan enables homeowners to pay off their mortgage faster, but requires higher monthly payments. In addition to providing more time to pay off your mortgage, the 30-year loan monthly payments are generally more affordable. First-time borrowers typically prefer a 30-year loan.
Specialty Loan Programs
There are specific loan programs that might be appropriate for your particular situation. For example:
FHA Programs—With an FHA loan, a first-time homebuyer’s down payment can be as low as 3.5 percent of the purchase price.
FHA also offers the Home Equity Conversion (reverse) Mortgage (HECM) for homeowners 62 years and older, an energy efficient mortgage, and special programs for manufactured housing and mobile homes.
In addition, if you’re planning to purchase a home that needs renovation, the FHA 203(k) Home Improvement loan enables borrowers to obtain one mortgage loan to finance both the purchase and upgrade of the home, rather than two separate loans.
USDA Loan—Guaranteed by the U.S. Department of Agriculture, this loan provides 100 percent financing for a home purchase or refinance in a USDA-designated rural area. This can vary from state to state, but is generally defined as a property located in a rural area, open country, or a community with less than 25,000 residents. Eligibility for this program is determined by the specific property and the prospective borrower’s financial history.
VA Loans—Made by a private lender but backed by the Department of Veterans Affairs, a VA loan is available to those who have served or are presently serving in the U.S. military (and some surviving spouses) for the purchase of a primary residence. A VA loan typically requires no down payment or mortgage insurance premiums, the interest rate is negotiable, and the borrower can finance the funding fee. The VA also offers the Interest Rate Reduction Refinance Loan (
Downpayment Assistance—There are also down payment assistance programs that have been developed for borrowers who need extra help upfront. They are typically offered by counties, cities and jurisdictional housing authorities.
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