A brief overview of mortgage loan types.
When you’re ready to purchase or refinance, a variety of loans are available. It’s important to select a loan that’s perfectly tailored to your circumstances and goals.
Home Affordable Refinance Program (HARP)
The Home Affordable Refinance Program (HARP) is designed to assist homeowners with good credit standing, to refinance their mortgages – even if they owe more than the home’s current value.
Thirty-Year Fixed Rate Mortgage
The traditional 30-year fixed-rate mortgage has a constant interest rate and monthly payments that never change. This may be a good choice if you plan to stay in your home for seven years or longer. If you plan to move within seven years, then adjustable-rate loans are usually cheaper. As a rule of thumb, it may be harder to qualify for fixed-rate loans than for adjustable rate loans. When interest rates are low, fixed-rate loans are generally not that much more expensive than adjustable-rate mortgages and may be a better deal in the long run, because you can lock in the rate for the life of your loan.
Fifteen-Year Fixed Rate Mortgage
This loan is fully amortized over a 15-year period and features constant monthly payments. It offers all the advantages of the 30-year loan, plus a lower interest rate—and you’ll own your home twice as fast. The disadvantage is that, with a 15-year loan, you commit to a higher monthly payment. Many borrowers opt for a 30-year fixed-rate loan and voluntarily make larger payments that will pay off their loan in 15 years. This approach is often safer than committing to a higher monthly payment, since the difference in interest rates isn’t that great.
Hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM)
These increasingly popular ARMS—also called 3/1, 5/1 or 7/1—can offer the best of both worlds: lower interest rates (like ARMs) and a fixed payment for a longer period of time than most adjustable rate loans. For example, a “5/1 loan” has a fixed monthly payment and interest for the first five years and then turns into a traditional adjustable-rate loan, based on then-current rates for the remaining 25 years. It’s a good choice for people who expect to move (or refinance) before or shortly after the adjustment occurs.
When it comes to ARMs there’s a basic rule to remember…the longer you ask the lender to charge you a specific rate, the more expensive the loan.
Adjustable-rate mortgages (ARMs) have a variable interest rate and monthly payments that are recalculated on a regular basis to reflect changes in the market interest rate.
The initial rate on an ARM is fixed for a specified period. The shorter the initial fixed period, the lower the initial rate can be. The lower rate reflects the fact that the lender assumes less risk of potential increases in the market interest rate, and the borrower isn’t paying for interest rate protection that he or she doesn’t need. This translates into a lower monthly payment than for a similar-term fixed-rate mortgage.
2/1 Buy Down Mortgage
The 2/1 Buy-Down Mortgage allows the borrower to qualify at below market rates so they can borrow more. The initial starting interest rate increases by 1% at the end of the first year and adjusts again by another 1% at the end of the second year. It then remains at a fixed interest rate for the remainder of the loan term. Borrowers often refinance at the end of the second year to obtain the best long-term rates. However, keeping the loan in place even for three full years or more will keep their average interest rate in line with the original market conditions.
This loan has a rate that is recalculated once a year.
With this loan, the interest rate is recalculated every month. Compared to other options, the rate is usually lower on this ARM because the lender is only committing to a rate for a month at a time, so his vulnerability is significantly reduced.
The Federal Housing Administration (FHA) offers FHA-backed loans that are designed to provide lower down payments and greater flexibility in lending guidelines. Available for single- and multi-family homes, FHA loan financing options include traditional fixed-rate products, adjustable-rate mortgages and temporary interest rate buy-downs.
The U.S. Department of Veterans Affairs (VA) offers VA-backed loans to veterans, active-duty personnel, reservists/National Guard members and some surviving spouses. When the loan is approved, the VA will guarantee part of it. The amount of the VA’s guarantee usually depends on the size of the loan.
A conforming mortgage loan, often called a conventional loan, is a mortgage that is equal to or less than the loan limit set annually by Fannie Mae or Freddie Mac, the government-sponsored agencies that purchase the bulk of U.S. residential mortgages from banks and other lenders. The current conforming loan limit for a single-family home or condominium in most areas of the country is $417,000, with higher limits allowed for designated high-priced markets.
Jumbo mortgage loans, often called nonconforming loans, are designed for homebuyers who need to finance especially large purchases. A loan is considered jumbo if it exceeds the conforming loan limit, which in most areas of the country is $417,000, as defined annually by the government-sponsored agencies Fannie Mae and Freddie Mac. A variety of jumbo loan options are available, such as 30-year fixed mortgages, adjustable-rate mortgages, VA loans and FHA loans.
A reverse mortgage enables homeowners age 62 and older to convert part of the equity in their primary residence into tax-free* cash without having to sell their home or give up title.
* We recommend that you speak to a qualified tax advisor.