Mortgage and Loan Types
The following categories cover most of the borrower’s alternatives:
- Government and Conventional Loans
- Adjustable Rate Mortgages
- Fixed Rate Mortgages
Government and Conventional Loans
Federal Housing Administration (FHA) Loans
The FHA is part of the Department of Housing and Urban Development (HUD http://www.hud.gov/). The FHA has several mortgage loan programs, these loan programs have better terms than conventional loans in the following aspects: lower down payment requirements and are easier to qualify. The FHA loans are limited up to the statutory limit.
Veterans Affairs (VA) Loans
VA loans have U.S. Department of Veterans Affairs (http://www.va.gov/) guaranty. Veterans and service persons can receive favorable home loans terms, most cases are without a down payment. Qualification for VA loan is easier than conventional one. In case VA found you qualified for a loan, they will issue an eligibility certificate for you to use it while applying for a VA loan from your private lender. This certificate is a guaranty for your lender.
Rural Housing Service (RHS) Loans
Guaranteed loans for rural residents with no down payments and very low closing costs are provided by the Rural Housing Service (http://www.rurdev.usda.gov/rhs/) of the U.S. Department of Agriculture (http://www.rurdev.usda.gov/).
Conventional loans
Conventional loans are secured by government sponsored entities (GSE) like Freddie Mac (http://www.freddiemac.com/) and Fannie Mae (http://www.fanniemae.com/) Conforming loans are conventional mortgages that follow the guidelines and limits of Fannie Mae and Freddie Mac. Nonconforming loans or Jumbo loans are those that exceed the maximum permissible loan amount.
Jumbo Loan
A loan amount that is higher then the conforming limit is a Jumbo loan. Usually interest rates are higher in Jumbo loans than in conforming loans.
Adjustable Rate Mortgages (ARM)
An Adjustable Rate Mortgage is a mortgage that its rate is composed of interest rate and an index. The rate adjustment is performed every period which is defined as the adjustment period. The risk in ARM is that rates might go up and so the payments. Considering ARM when expecting the followings:
- Interest rates drop
- An increase of future income
- No plan keeping the asset more than 7 years
The rate of ARM usually is a bit lower than Fixed Rated Mortgage.
The payment rises and drops with interest rates according to the index it is linked to. The rate is determined by the chosen index and a margin. The common indexes are:
LIBOR
COFI
CMT
Fixed Rate Mortgages (FRM)
Fixed rate mortgage payments have fixed interest rate for the whole period of the loan. The longer the loan period, the interest rate be higher. The most frequent fixed rate mortgages are for 15 and 30 years.
Summary
After taking a loan or a mortgage, make sure to check every few years the possibility of refinance or remortgage. This checking might save you a lot of money.
Assaf Katzir is owner and CEO of Katzir Soze Investments Ltd
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