Loans That Won’t Make You Groan: Loan Types 101
Understanding loan types when you’re new to the mortgage process can be a daunting task, but helping you learn what loan is right for you is exactly why we are here!
When you begin investigating mortgages, you’re faced with a lot of pesky jargon and acronyms you probably haven’t dealt with before now.
But don’t get discouraged! We’re breaking down your options to help you understand the benefits and tradeoffs of picking one over another.
In it for the long TERM-
Terms refer to 30, 15 and 10-year periods of time that your loan will last. The longer your term, the lower and more affordable your monthly payments will be, however you will end up paying more in interest over time and your home equity will be slower to build.
Keep your ARMs strong- 7/1, 5/1, 3/1
One thing you will need to decide is whether your loan will have a fixed rate or variable rate. Variable rate mortgages are also known as Adjustable Rate Mortgages or ARMs. Despite their name, ARMs start out with a fixed interest rate for a set period of time – indicated by the first number. The second number refers to how many years are between rate adjustment periods.
For example, a 5/1 ARM will have a constant interest rate for the first 5 years of the loan and will then adjust to market rates at the end of the 5th year, continuing to adjust annually thereafter.
The loan term of an ARM is 30 years, but these mortgages are rarely held for the full term before the home is sold. An ARM will typically offer you lower initial interest rates – and therefore lower monthly payments – at the outset of your loan; they tend to be best for home-buyers planning to own a home for a short period of time before selling.
Conforming or jumbo: Which one is better?
A conforming mortgage is the most common type of mortgage and is the right solution for most people. It’s called conforming because it must “conform” to certain standards established by government-backed mortgage securitizers Fannie Mae and Freddie Mac. A conforming loan must not exceed $417,000 in traditional markets or $625,500 in high-cost markets and the down payment is set at 20% or more of the total home value
Jumbo mortgages come into play in housing markets where property values are particularly high and a conforming mortgage is not large enough to cover the total loan amount. Qualifying for a jumbo loan usually requires lower debt-to-income ratios, higher credit scores, larger down payments and higher emergency saving funds than qualifying for a conforming loan.
Want a side by side comparison with a break down of the loan types available to you? Download our free Loan Types Comparison Guide!