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Mortgage Product Types
Your
loan officer will assist you in determining which type of mortgage
loan is best for your particular situation.
To provide you with some background knowledge of the major
types of mortgages available, here's a quick summary.
Conventional
Mortgage
This
is a general term used for a mortgage which meets the maximum loan
amount guidelines and credit standards of Fannie Mae and Freddie Mac,
the large mortgage agencies which set the standards most lenders follow. Conventional loans have a maximum
loan amount of
$417,000.00
(as of January 1, 2006; this amount is
adjusted annually). Loans
can be used for purchases or refinances, and both fixed and adjustable
rate loans are available. Conventional
mortgage loans often have lower rates than other mortgage products.
Jumbo Mortgage
This
term is used to refer to mortgages which exceed the maximum loan amounts
for conventional loans. As
of January 1, 2006, a mortgage on a one-unit property which exceeds
$417,000
is considered to be a jumbo loan. Jumbo loan interest rates are generally
higher than mortgages on lower loan amounts. When practical, you may find that
breaking your mortgage transaction into a first mortgage which does
not exceed the conventional loan amount maximum, and a second mortgage
for the remaining amount needed, may be more cost-effective than a
jumbo loan. Both fixed and adjustable rate loans
are available.
FHA
Mortgage
This
is a mortgage insured by the Federal Housing Administration. Generally, FHA loans are designed
to make purchasing a home easier for first time buyers, with lower
down payments and less stringent credit requirements than conventional
loans. While the costs
of an FHA mortgage are often higher over the life of the loan than
a conventional mortgage, they are often a good option for first time
home buyers, individuals with higher debt loads, or those who have
had some credit issues in the past.
FHA loans can also be used for refinancing, with a "streamlined"
option available to certain individuals who have an existing FHA mortgage.
This "streamlined" refinance features reduced paperwork and
faster processing time. Both fixed and adjustable rate loans
are available. These
loans are subject to maximum loan amount limitations based on the
area in which you are purchasing and refinancing.
VA
Mortgage
This
is a mortgage available to current and former members of the United
States armed forces. It
allows no down payment purchase financing with easier credit requirements,
and can be an excellent option for those who qualify. VA loans can also be used to refinance,
with a " streamlined"
option available to reduce paperwork and processing time.
Subprime
Mortgage
These
are mortgages generally offered to individuals with blemished credit. While these mortgages may be appropriate
in certain situations, it is in your best interest to be certain you
will not qualify for other types of financing (such as an FHA loan)
before accepting subprime financing. Interest rates and fees are generally
substantially higher than other mortgage types. Adjustable rate loans are often
offered to make the initial payment seem lower, but rates may increase
rapidly after the first six months or the first year. Often, these loans have a substantial
prepayment penalty if the loan is paid off early or refinanced.
Fixed
Rate Mortgage
The
interest rate on a fixed rate mortgage does not change throughout
the entire term of the loan.
While your total mortgage payment may change slightly based
on changes in the property tax and homeowner's insurance components
of your mortgage payment, the principal and interest portion of your
payment remains unchanged. Your mortgage payment amount is
highly predictable with this type of loan. While rates are higher than for
adjustable rate mortgages, you may be particularly interested in a
fixed rate loan for smaller loan balances, if you plan to be in your
home for a long time without refinancing, if you are on a fixed income,
or if you are simply unwilling to tolerate the risk of your principal
and interest payment increasing.
A fixed rate mortgage can be obtained as a conventional, jumbo,
FHA, VA, or even subprime loan.
Adjustable
or Variable Rate Mortgage (ARM)
The
interest rate on an adjustable rate mortgage (ARM) can change over
time, with the principal and interest portion of your mortgage payment
fluctuating up or down in response to changes in the interest rate. The starting interest rate on an
ARM is generally lower than for a fixed rate mortgage, resulting in
lower monthly payments initially.
The interest rate on most ARMs is fixed for a certain period
of time - 1, 3, 5, 7 or even 10 years - before the rate
begins to adjust annually. An
ARM is worth considering if you have a higher loan amount, expect
to sell your home in less than 10 years, expect that your income will
increase, or expect that mortgage interest rates will fall in the
future. An ARM can be a conventional, jumbo,
FHA, or subprime loan.
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