TYPES OF MORTGAGES

CONVENTIONAL MORTGAGE

This is a mortgage that is provided by a bank or a credit union as opposed to the federal government. If the mortgage conforms to the guidelines set by Fannie Mae or Freddie Mac then it is considered conforming. If not the nit is considered non-conforming. The lender may require you to pay private mortgage insurance for a period of time if you put down less than 20% and/or if your credit is not good enough. The advantage of this type of loan is that it can be used for a primary home or for investment property. The closings costs may be lower and a lower down payment is required.

JUMBO MORTGAGE

This is a mortgage whose limits exceed what has been established by Fannie Mae and Freddie Mac. This is a high risk loan for the lender because of the large amount borrowed. A jumbo mortgage requires that the borrower have a high credit score and a large down payment.

GOVERNMENT INSURED MORTGAGES

FHA loans: These loans are backed by the Federal Housing Authority (FHA). These loans are helpful for people who don’t have a large down payment or perfect credit. FHA loans require that the borrower pay a mortgage insurance preimum upfront and then on a yearly basis if the borrower put down less than a 10% down payment.

VA loans: These loans are only available to active duty veterans and their families. VA loans do not require a down payment or mortgage insurance. Closing costs are usually limited. There may be a funding fee, but it along with the closings costs can usually be rolled into the loan.

FIXED RATE MORTGAGES

Fixed rate means that the interest rate stays the same through the life of the loan. The monthly payment will not change throughout the life of the loan. This makes it easier for the borrower to budget other expenses. One potential disadvantage is that the interest rates are typically higher than adjustable rate loans, which in turn makes it harder to build equity in the home.

ADJUSTABLE RATE MORTGAGES

These types of mortgages have fluctuating interest rates that go up or down depending on the market. There may be an initial fixed rate for the first few years before the loan transitions to an adjustable rate. If the interest rate isn’t capped at a certain limit then you could potentially end up in financial trouble.