Different Types of Mortgage Loans
Fixed Rate Mortgage Loans
These loan products are amortized over various year terms, from 10 years to up to 40 years. The loan is locked in and fixed, therefore meaning that monthly payments and the interest rate do not change over the entire length of the loan. Here are some pros and cons to each of the following fixed mortgage loan products:
15-Year Mortgage Loan: This loan product is ideal and common for the consumer close to retirement. The loan usually runs at a lower interest rate, in which early payment pay a larger portion towards the loan principal, in turn building equity at a faster rate.
20-Year Mortgage Loan: The interest rate on this type of loan is typically much lower than that of a 30 year loan, you can save a considerable amount of interest cost since the loan is paid off 10 years early. Remember to expect that the monthly payments with these loans shorter than the 30-year will typically be higher.
30-Year Mortgage Loan: This loan product is the most common in the industry. Since the payment of the loan will remain the same throughout the life of the loan, monthly payments will eventually become a smaller portion of the loan holders expense due to inflation and increases of cost of living. In about the first 20 years of the loan, more interest will be paid than the principal. This in turn means larger tax deductions, since 100% of the interest off the loan is commonly tax-deductible.
If you currently have a fixed rate loan, and industry rates happen to drop lower than your current rate, experts suggest that it is wise to refinance if you are able to obtain that lower interest rate. Find out more information on how you can refinance your loan.
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Adjustable Rate Mortgages – ARMs
These loan products are mean that the interest rate and the monthly payment remains the same for a fixed amount of time, usually between 1,3,5,7, or 10 years. After these fixed terms expire, the interest rate can then fluctuate up or down(usually up) at fixed time intervals This means that if you had a 5 year adjustable, after that 5 years are up, then the interest can change and rise every year. Before you start thinking on high the interest rate can get, there usually is a cap that determines the highest rate the interest can go.
The reason home buyers lean towards the adjustable rate mortgage loans is because they can get a lower rate than a fixed loan, then simply refinance once the fixed term expires. These products are attractive because they offer a lower initial interest rate than a fixed mortgage loan, and the lower interest could qualify the applicant for a larger loan.
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Fixed Rate Mortgages vs. ARM
The difference between the two is that fixed rate mortgage loans are more stable and predictable than ARMs, since the monthly payment and interest is never going to change. With adjustable rate mortgages, monthly payments are much lower than the fixed mortgages, which can make owning a home more affordable has well as the potential to qualify for a larger loan. ARMs are also attractive to those who only plan to hold on to a property or home for only a short amount of time before selling it on the market.
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Balloon Loans
This loan product offers a lower interest rate for a period of 5 to 10 years. At the end of the loan term, a lump sum payment of the remaining balance must be paid or the borrower must refinance. These loan products are good for the consumer who plan to sell in about 5-10 years or already know they are going to refinance within the loan term.
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Conforming and Jumbo Loans
This type of loan product refers to loan amounts that conform to government service standards as determined by Freddie Mac or Fannie Mae. These loans range between the amount of up to $227,000. Even though not all loans that are conforming loans are serviced by these two major government agencies, the industry has used the term to define loan amounts that fall within this range.
A jumbo loan, also known as a non-conforming loan, refers to loan products in which loan amounts exceed the standard of the conforming loan, which is $227,000.
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Government Loans
Government loans are products that are guaranteed by the federal government. Currently, there are three government agencies that offer mortgage loan products:
FHA Loans: Federal House Administration loan, which are loan offered to homebuyers and typically require only 3 to 5 percent as a down payment for the loan. There are maximum caps to how much a borrower can take out which depends on the average cost of living within a specific region. The borrower also does not have to have A paper credit to qualify. However, the borrowers DTI(debt-to-income) ration cannot exceed 50% and the homes that are selling in within the listed region cannot sell for more than $180,000.
VA loans: Also known as the U.S. Department of Veteran Affairs, this loan product is offered to military personnel or veterans. The borrower can take out a loan of up to $200,000 with no down payment required, and the closing costs could be covered by the selling party.
RHS Loans: These loan products, also know as Rural Housing Services, offer low interest loans to people with moderate to low incomes who reside in small towns and rural areas.
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Affordable Housing Loans
These loan products are designed to service those who have moderate to low household incomes. In order to determine the qualifications of the borrower, the borrower is compared to the median income in the area they reside in, as their total household income cannot exceed the calculated median income.
Fannie 97: Offers loans to individuals with enough household income to meet the monthly payment requirements, but do not have the sufficient amount of funds to make the initial down payment for the purchase. The offered loan is either for a 25 or 30 year length term.
3/2 Option: For this loan product, a five percent down payment is typically required in order to purchase a home. With this option, the borrower is allowed to put down 3 percent, as the government agency may cover the rest of the 2 percent.
Fannie Mae's Community Home Buyer's Program: This loan program offers loans to those who cannot meet the criteria to qualify for a traditional mortgage loan, yet has a good credit history.
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