All About Home Loans
What are the different types of Mortgage Loans available to Home Buyers?
This is one of the most common questions I receive. This page offers some basic information about types of loans available. You can follow the links for more information. You can send me questions at firstname.lastname@example.org or call me at 931-216-5237.
There are many different types of mortgage loans available. I have tried to make it easy to understand. Many people overthink the process, which causes undue stress.
Fixed vs. Adjustable Rate
Your first choice is whether you want a fixed-rate or an adjustable-rate mortgage loan. Most loans fit in to one of these categories.
Fixed-Rate Mortgage Loans have the same Interest Rate for the life of the loan. Your monthly principal and interest payment will never change. However, if you have an escrow account for your property taxes and insurance, those figures can change your monthly payment. If your taxes or insurance go up, your monthly escrow portion of your monthly payment will go up.
Adjustable-Rate Mortgage Loans (ARMS) have an interest rate that will change or "adjust" from time to time. Typically, the rate on an ARM will change every year after an initial period of remaining fixed. This is referred to as a "hybrid" product. A hybrid means it starts with a fixed period then switches to an ARM. a 5/1 ARM loan means it carries a fixed rate for the first 5 years, then adjusts every year.
PROS and CONS
$ The interest rate stays the same for the life of the loan.
$ The payment amount also remains the same, from month to month.
$ The ratio of principal and interest will vary slightly from month to month (though the payment amount remains fixed).
$ Offers the benefit of predictability, since the rate never changes.
$ Most common type of mortgage is the 30-year fixed loan.
$ Generally the best option for people who plan to stay in a home (and keep the same mortgage) for many years.
$ The interest rate will change at pre-determined intervals, over the life of the loan.
$ Unpredictable, because you never know how the rate will adjust. You only know when.
$ ARM loans have an interest rate cap that limits how much the rate can change from one month to the next, and over the life of the loan.
$ May have a fixed rate for the first few years, after which the rate begins adjusting (a.k.a. "hybrid" loan).
$ Common examples of the hybrid loan are the 3/1 ARM and the 5/1 ARM. The first $ number represents the fixed-rate period. The second number indicates the frequency of adjustment (in years), after the fixed period.
$ Interest rate during the initial fixed period is generally lower than the average rate for fixed-rate mortgages -- but it will eventually adjust.
$ Best used when the homeowner only plans to stay in the home for a few years.
Government-Insured vs. Conventional Loans
A conventional home loan is one that is not insured or guaranteed by the federal government in any way. This distinguishes it from the three government-backed mortgage types explained below (FHA, VA and USDA).
Government-insured home loans include the following:
FHA Home Loans
The Federal Housing Administration (FHA) mortgage insurance program is managed by the Department of Housing and Urban Development (HUD), which is a department of the federal government. FHA loans are available to all types of borrowers, not just first-time buyers. The government insures the lender against losses that might result from borrower default. Advantage: This program allows you to make a down payment as low as 3.5% of the purchase price. Disadvantage: You'll have to pay for mortgage insurance, which will increase the size of your monthly payments. FHA Loan Limit in Montgomery County is $314,827 for 2019.
FHA Home Loans
FHA Home Loans From NewAmerican Funding
Buying Your First Home with a FHA Home Loan
VA Home Loans
The U.S. Department of Veterans Affairs (VA) offers a loan program to military service members and their families. Similar to the FHA program, these types of mortgages are guaranteed by the federal government. This means the VA will reimburse the lender for any losses that may result from borrower default. The primary advantage of this program (and it's a big one) is that borrowers can receive 100% financing for the purchase of a home. That means no down payment whatsoever. Also, if you are a disabled Veteran, you do not pay a funding fee. The VA Loan Limit in Tennessee is $484,350 for 2019.
U.S. Department of Veteran Affairs Website
VA Home Loans
VA Certificate of Eligibility Your Lender Can Get This Very Quickly
VA Loan Limits
VA Funding Fee Chart
USDA / RHS Loans
The United States Department of Agriculture (USDA) offers a loan program for rural borrowers who meet certain income requirements. The program is managed by the Rural Housing Service (RHS), which is part of the Department of Agriculture. This type of mortgage loan is offered to "rural residents who have a steady, low or modest income, and yet are unable to obtain adequate housing through conventional financing." Income must be no higher than 115% of the adjusted area median income [AMI]. The AMI varies by county. See the link below for details.
USDA Home Loan Program
USDA Property Eligibility Search
USDA Income Eligibility
USDA Income Limits
Jumbo vs. Conforming Loan
There is another distinction that needs to be made, and it's based on the size of the loan. Depending on the amount you are trying to borrow, you might fall into either the Jumbo or Conforming category.
A Conforming loan is one that meets the underwriting guidelines of Fannie Mae or Freddie Mac, particularly where size is concerned. Fannie and Freddie are the two government-controlled corporations that purchase and sell mortgage-backed securities (MBS). Simply put, they buy loans from the lenders who generate them, and then sell them to investors via Wall Street. A Conforming Loan falls within their maximum size limits, and otherwise "conforms" to pre-established criteria. The Conforming Loan Limit in Tennessee for 2019 is $484,350.
A Jumbo Loan, on the other hand, exceeds the conforming loan limits established by Fannie Mae and Freddie Mac. This type of mortgage represents a higher risk for the lender, mainly due to its size. As a result, jumbo borrowers typically must have excellent credit and larger down payments, when compared to conforming loans. Interest rates are generally higher with the jumbo products, as well.