Types of Mortgages for Homebuyers
Are you buying a home in Temecula or Murrieta? These are exciting times for you. As thrilling as it is to go home shopping, however, don’t forget that you first need to look into the most essential part of home buying – the financing.
Homebuyers have less mortgage choices today compared to the days before the recession. Lenders have learned their lesson and are now more prudent in granting home loans. However, you’ll find that you still have quite a number of options to choose from.
The right type of mortgage will depend on your present and prospective financial situation. How much are you earning now and how much do you think will you be making in the future? Consider your present and future expenses, as well, and always make sure you’ll still have enough to build your savings.
With that in mind, here’s a quick look at the most basic types of mortgage in the market today.
Conforming and non-conforming loans
Conforming loans are those that follow the guidelines set by the GSEs, Fannie Mae and Freddie Mac, including loan limits, down payment rates, interest rates, and loan duration.
Non-conforming loans are those that do not adhere to the GSEs’ guidelines, particularly on loan limits. A popular type of non-conforming loan is the jumbo loan, which involves an amount exceeding the GSE’s conforming limits.
Basic types of loans
Conforming loans are often referred to as “vanilla loans” because they’re the most common and widely-used types of loan. Lenders offer numerous loan packages to appeal to a wide range of borrowers, but these are typically grounded on the following basic loan types:
- Fixed rate mortgage
In this type of loan, the interest rate and loan amortization is fixed throughout the life of the loan. It’s considered the most stable and the least risky of all loan types because you’ll be making the same monthly payments until the loan is paid off. A fixed rate mortgage is ideal if you plan to stay in the home for more than five years and if the prevailing interest rate is low.
The most popular fixed rate mortgage program is the 30-year term mortgage, which simply means the loan is amortized over 30 years. Other options include the 10-year, 15-year, and 20-year programs.
- Adjustable rate mortgage
In an adjustable rate mortgage, the interest rate could change from year to year, depending on a given index plus a certain spread known as the ARM margin. Typically, the interest rate is fixed within a predetermined number of years, then becomes variable thereafter. The fluctuation, however, is limited by a cap, which allows you to calculate the highest monthly payment you may have to pay.
An adjustable rate mortgage is advisable if you don’t see yourself living in the home for more than five years or if you’re planning on refinancing in the near future. This type of loan may also be more suited if you expect a future increase in your earnings.
A mortgage may also be either conventional or government-sponsored. The main difference between the two is that a government-sponsored loan is insured by the government and may be obtained only by those who meet given criteria.
Government-sponsored loans include:
- FHA (Federal Housing Administration) loan – This type of mortgage is designed for buyers who cannot make a large down payment or have a low credit score
- VA (Veterans Administration) loan – This is available to military personnel, including veterans and those on active service
Need assistance in finding the right financing for a new home in Temecula or Murietta? We can help. Our wide network includes mortgage experts who can provide you with the guidance you need. Call us at 951.719.0355 or send Marcel an email at [email protected].