It’s important to know about the many mortgage types prospective home buyers have to choose from before you hit the street this spring. Fixed-rate mortgages versus adjustable-rate mortgages, government-backed versus conventional loans—there are mortgage types to fit every situation. But, which is right for you? Here’s a handy list we think will help.
Mortgage Types: Fixed-Rate or Adjustable Rate?
A flat-rate mortgage means the interest rate you start with will remain the same throughout the life of the loan. This is a good option for buyers who plan to stay in their home for five years or more and are looking for a predictable monthly payment.
Adjustable-Rate Mortgages (ARM)
As its name suggests, with an adjustable-rate mortgage, the interest rate varies based on the long-term interest rates as set by the Federal Reserve Bank. An ARM begins with an “initial rate period” which is lower than the current prime rate. These so-called “teaser” offers can last anywhere from five to 10 years before they begin to rise in line with market rates. ARMs can be ideal for buyers expecting an increase in their income or those planning to live in the home for five years or less. Homeowners almost always have the option of refinancing to a flat-rate mortgage.
Mortgage Types: Government-Backed or Conventional?
Conventional, also referred to as private loans, are ideal for borrowers with good to excellent credit who have the cash on-hand needed to make the required down payment 20%. Lower down payment options are available when securing PMI with the loan. Home buyers may borrow up to $453,100 with a minimum credit score of 620. Eligible properties include owner occupied, second home, and investment properties. Both flat and adjustable-rate conventional loans are available.
Mortgage loans backed by the Federal government present less risk to lenders. Because the loans are guaranteed, the lender has greater flexibility when it comes to credit scores and down payment requirements. Types of government-backed loans include:
- FHA — Backed by the Federal Housing Association, FHA loans are ideal for the first-time home buyer who may have a lower credit score and lack the full 20% down payment. Buyers may borrow up to their county loan limit, which may exceed the conventional limit of $453,100. FHA loans often allow for down payments as low as 3.5%. As with conventional loans, FHA offers a better interest rate for borrowers with higher credit scores. Both flat and adjustable-rate FHA loans are available.
- FHA 203(k) — The FHA 203(k) is designed for those home buyers in the market for a “fixer upper.” A borrower can obtain an additional $35,000 or more in financing to pay for eligible repairs and rehabilitation to a single-family home prior to moving in. Some restrictions apply. Both flat and adjustable-rate FHA 203(k) loans are available.
- VA Loan — Backed by the Department of Veterans Affairs, VA loans up to $453,100 or more are available to veterans, surviving spouses, and those currently serving in in our nation’s military. VA loans have some of the best features and benefits for borrowers available. They include a loan-to-value (LTV) up to 100%. There is no income and asset documentation or Private Mortgage Insurance (PMI) required, and the necessary VA Funding Fee may be financed into the loan. These loans allow veterans to buy a home with little or no down payment, depending on their eligible entitlement. Criteria for Certificate of Eligibility (COE) include honorable discharge following 90 consecutive days served during wartime, 181 days to two years during peacetime, or a minimum of 6 years in the National Guard or Reserves. Surviving spouses of a service member who died in the line of duty or as the result of a service-related injury and never remarried are also eligible. Both flat and adjustable rate VA loans are available.
- USDA — Backed by the US Department of Agriculture, this federally insured loan is ideal for low and middle-income borrowers looking to purchase a primary residence in a small community or other USDA designated rural area. Borrowers are not restricted to first-time homebuyers. A USDA loan requires no money down, little or no mortgage insurance and offers flexible credit terms. Closing costs can be paid by the seller or rolled into the loan. With USDA loans, 100% of the purchase price can be financed, as well as the 1.0% Guarantee Fee charged to offset operating costs of the program. USDA are flat-rate mortgages only. USDA adjustable-rate mortgages are not available.
Other Mortgage Types
A jumbo loan is for those borrowers seeking to purchase a home anywhere from $453,100 up to $3 million. Generally, the minimum credit score is around 680-700 and a down payment of 20% is required, but numerous programs are available that allow for lower scores and less of a down payment. Home buyer debt-to-income ratio should not exceed 43%. Eligible properties include primary residence, condos, planned unit development, and leaseholds. Both flat and adjustable-rate jumbo loans are available.
The mortgage you ultimately choose should match your lifestyle and financial needs. Contact Embrace Home Loans and we’ll help you find the ideal mortgage for your unique situation.