Let's face it: As exciting as it can be to invest in a new home, it can also be extremely nerve-wrecking and stressful. Perhaps one of the biggest stressors during the process is deciding on what type of home loan to get.
That's why we thought it would be helpful to break down the different types of mortgages you can get as a home buyer.
Hopefully, this will make the process of securing a loan that much easier.
First, Know The Difference Between Fixed and Adjustable Rates
One of the first decisions you'll have to make as a borrower is whether you want a fixed-rate or an adjustable-rate mortgage loan.
All loans fit into one of these categories and some are even a hybrid of the two.
The primary difference is this: Fixed rate mortgage types have the same interest rate for the entire repayment term. Thus, your monthly payment will stay the same from month to month and year to year. This is even true if you get a long-term financing option, such as a 30-year fixed-rate mortgage. The main benefit of this type of loan is that you'll know exactly what you're paying each month, and there won't be any big surprises.
Meanwhile, an adjustable-rate mortgage loan has an interest rate that will — you guessed it — adjust over time. Generally speaking, the rate will change after a certain period of time remaining fixed. Thus, sometimes ARMs (as they're called) are referred to as hybrid loans because they'll start off with a fixed interest rate before switching over to an adjustable rate. A benefit of this type of loan is that it will usually start off with a lower rate than a fixed loan type. A drawback is that there's uncertainty with how the adjustments will pan out later.
Second, Understand The Difference Between Government-Insured and Conventional Loans
Now that you've decided whether you're getting a fixed or adjustable-rate type of mortgage, you'll want to decide whether you want a government-insured home loan (such as an FHA or VA) or a conventional type of loan. Here's the difference:
A conventional home loan is not insured or guaranteed by the federal government in any way. This makes it unique from government insured loans, which are divided into three main categories: FHA, VA, and USDA.
FHA loans come through the Federal Housing Administration (FHA) mortgage insurance program, which is managed by the Department of Housing and Urban Development (HUD).
These loans are available to all types of borrowers. As part of this loan, the government insures the lender against losses that might result from borrower default. The upside to using an FHA loan is that you can make a down payment as low as 3.5%. The downside is that you'll have to pay mortgage insurance, which will increase your monthly payments.
A VA loan comes through the U.S. Department of Veterans Affairs (VA). This is offered to military service members and their families. These loans are also guaranteed by the federal government. The biggest advantage to this program is that borrowers can receive 100% financing for the purchase of a home. Thus, you won't have to make any down payment whatsoever.
USDA/RHS Loans come through the United States Department of Agriculture (USDA). It's offered for rural borrowers who meet certain income requirements. Income must be no higher than 115% of the adjusted area median income.
It should be noted that buyers do have the option of combining different mortgage types. For instance, you might choose an FHA loan with a fixed interest rate, or a conventional home loan with an adjustable rate.
Finally, Know The Difference Between Jumbo and Conforming Loan
This final criteria is based on the size of the loan. Depending on how much you borrow, you will either fall in the jumbo or conforming category.
A conforming loan meets the underwriting guidelines of Fannie Mae or Freddie Mac, particularly where size is concerned. These two entities are the two government-controlled corporations that purchase and sell mortgage-backed securities (MBS). In other words, they buy loans from the lenders who create them. Then, they sell them to investors on Wall Street.
In this sense, a conforming loan "conforms" to pre-established criteria.
Meanwhile, a jumbo loan exceeds the conforming loan limits established by Fannie Mae and Freddie Mac. As such, it represents a higher risk for the lender because of its size. Because of this, jumbo borrowers usually need to have excellent credit and are required to make larger down payments.
Contact Us for More Insight on the Home Buying Process!
As you've probably already heard, it truly is a great time to be a home buyer in Clayton. After all, interest rates are down and home prices are down.
We also understand, however, that the home buying process can be equal parts scary and exciting. Thus, we want you to know we're always available to chat with you further about navigating the market so that you can feel good about any decision you ultimately make.
So contact us today for any questions you might have about the different loan types or anything else about the Clayton real estate market. We'd be happy to help!