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Types of mortgage loans
The type of loan that is best for you
depends on:
-
Your current
financial situation and how you expect your finances to change.
-
How long you
intend to keep your house.
- How comfortable you are with your mortgage
payment changing.
For example, a 15-year
fixed-rate mortgage can save you many thousands of dollars in interest
payments over the life of the loan, but your monthly payments will be
higher. An adjustable rate mortgage may get you started with a lower
monthly payment than a fixed-rate mortgage but your payments could
get higher when the interest rate changes.
Usually adjustable mortgage rate (ARM) loans have the lowest
introductory interest rates, followed by hybrid loans, and then
traditional fixed-rate mortgage loans. Each type of loan is described
below.
1.
Fixed-rate mortgage loans
The interest rate remains
fixed for the life of the loan. Therefore, the payments remain the same
for the life of the loan and are structured to repay the loan at the
end of the loan term. The most common fixed-rate loans are 15 year and
30 year mortgages.
2. Adjustable-rate
mortgage (ARM) loans
Interest rate on the adjustable rate mortgage loans vary over the life
of the loan. However, the rate at which the interest may rise on these
loans is usually limited ( for example, not more than 2% per year).
Similarly, the maximum interest rate during the life of the loan is
capped ( for example not more than 6 percent ). These loans generally
begin with an interest rate that is 2-3 % below a comparable
fixed rate mortgage, and could allow you to buy a more expensive home.
3. Hybrid mortgage loans
A hybrid loan generally starts as a fixed-rate loan for a certain
period of time, after which it becomes an adjustable-rate loan.
Another type of hybrid loans starts as a fixed-interest loan for a
period of time, and then changes to a fixed-interest loan with a
different rate.
4. Balloon loans
Most balloon mortgage loans
mature in 5 to 7 years, after which the remaining principal balance
must be paid in full. Many companies offer other options such as a
conversion feature at the end of the term. For example, the loan may
be converted to a 30-year fixed loan. Similar to hybrid loans,
balloon loans may be beneficial to homeowners who plan to stay in
their house for only a short period of time.
5.Confirming
loans
A confirming loan is a
loan that has a maximum dollar cap for the loan amount of currently
set at $240,001.
6.FHA loans
Federal Housing Administration loan. Often
times, the required down payment, and other related up-front costs of
an FHA loan is below other confirming loans in the market, making FHA
loans especially more attractive for the first time home buyers. FHA
loans also have a maximum dollar amount cap, which is
currently set at $208,800 for a single-family residence.
7.VA loans
Guaranteed by the Veterans Administration
agency for all US servicemen, retired and / or active.
Eligible borrower in not required to come
up with any down payment. Usually ,not many direct lenders offer VA
loans. The best source of VA loans is indirect lenders.
8.Conventional loans
Secured
by government sponsored entities or GSE's such as Fannie Mae and
Freddie Mac, or by private investors for loan amounts higher than
limits set by the GSE'S. Conventional loans can be made to purchase
or refinance homes with first and second mortgages on single family
to four family homes.
2004 Conventional
loan limits
First Mortgages
One family
loans: $333,700
Two family
loans: $427,150
Three
family loans: $515,300
Four family
loans: $641,650
9.Jumbo loans
Loans which are larger than the limits set
by Fannie Mae and Freddie Mac are called jumbo loans. Because jumbo
loans are not funded by these government sponsored entities, they
usually carry a higher interest rate and some additional
underwriting requirements. A strategy to lower your overall interest
payments if your purchase or refinance balance is above $333,700 is
to use a combination of both first and second trust money, referred
to as an 80/10/10, 80/15/5 or 80/20.
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