Loan Types: insights for home buyers
If you’re considering buying a home, having a knowledge of basic mortgage terminology can help prepare you for meeting with a mortgage consultant. Here are insights you can use to understand basic loan types and how they affect different types of borrowers.
Fixed-rate vs. adjustable-rate mortgages
One of the first choices you’ll make when applying for a loan is if you want to have a fixed-rate mortgage or an adjustable-rate mortgage. A fixed-rate mortgage has an interest rate that does not change for the life of the loan, so it provides predictable monthly payments of principal and interest.
An adjustable-rate mortgage typically offers an initial introductory period with a low interest rate. Once this period is over, the interest rate adjusts periodically, based on the market index. The initial interest rate can sometimes be locked in for different periods, such as one, three, five, seven or ten years. Once the introductory period is over, the interest rate typically readjusts annually.
Government-backed loans vs. conventional loans
There are two primary types of government-backed loans: FHA loans and VHA loans.
FHA loans are insured by the Federal Housing Administration and are typically designed to meet the needs of first-time homebuyers with low or moderate incomes. FHA loans can be approved with a down payment as little as 3.5 percent. Because the agency is taking on more risk by insuring these loans, the borrower is expected to pay mortgage insurance and the property must be owner-occupied.
VA loans are backed by the Department of Veteran’s Affairs and they are guaranteed to qualified veterans and active-duty personnel and their spouses. VA loans can be approved with 100% financing, meaning VA borrowers are not required to put down a down payment. Unlike FHA loans, borrowers do not have to pay mortgage insurance on VA loans.
Conforming loans vs. jumbo loans
Fannie Mae and Freddie Mac are two government-owned institutions that buy and sell mortgages on the aftermarket. By selling the loans to “Fannie and Freddie,” lenders can free up their capital and return to issue more mortgages than if they had to personally back every loan that they approve.
If a loan meets the standards that Fannie and Freddie have set, then it is considered to be a “conforming loan.” More than 90 percent of loans that are issued in the U.S. are conforming loans.
One main standard for conforming loans is that the loan must be under a certain amount. While loan limits can vary by county, the conforming loan limit for all counties in Central Kentucky is currently $424,000. If a buyer asks to borrow more than $424,000 in Lexington or Central Kentucky, the loan is considered a “jumbo loan.”
Jumbo loans are considered to be riskier for the lender, so the bank will typically require a higher down payment. Additionally, the interest rate on a jumbo loan may be higher than if the same borrower applied for a conforming loan.
Need help financing a new home? Understanding the loan types is step one. Step two is getting pre-qualified or pre-approved, so you know where you stand. Reach out today to get connected with a Rector Hayden Mortgage expert who can help you, no strings attached!