SCUDO’s Guide to Mortgage Loans! Learn About Your Options Here:
Considering financing for your new home is the best starting place on your search. We always recommend Buyers get pre-approved before they begin their search so they can have a better idea of what homes are in their price range, what actual amount they’ll have to pay out of pocket for their new home, and whether or not they’re really ready to buy. As they say, “cash is king” in any market, especially real estate- but for the average home buyer, this isn’t an option.
The different types of loans available in the market for home buyers have their own pros and cons. Therefore choosing might become a difficult task keeping in mind the requirements that one has. To answer these common questions we have gathered valuable information about the different types of loans. If you’re preparing to apply for a mortgage, we hope you’ll find this information helpful!
You may be considering whether or not a fixed rate is suitable for you, whereas an adjustable rate for mortgage loan can save you an impressive amount of money, but has risk. All other types of loans come under these two categories. The main difference between the two lies in the fact that the two differ in the interest rate charged on the principal amount. The average loan term ranges from 15, 20, to 30 years.
Fixed Rate Loans
In fixed rate mortgage loans, the interest rate remains the same for the complete payback time. It is the same reason why the monthly installment stays the same in this type of mortgage loan. The payment amount doesn’t change. It also stays the same for the long term loans. So for this type of loan, interest rate and monthly payment are constant for the complete term. It is at the beginning of taking mortgage loan that you are informed about the fixed amount that one has to pay.
Adjustable Rate Loans
The Adjustable rate mortgage loans have an interest rate that changes over time. It is adjusted according to the balance amount left to pay back. However it remains the same for a period of time and changes afterwards. In this type of mortgage loan, change is the only constant. In a typical Adjustable rate mortgage loan the changes in interest takes effect periodically.
A hybrid type of Adjustable rate mortgage loan is the one that offers a fixed rate initially and then changes the interest with time. A 5 by 1 adjustable rate mortgage loan is a fixed rate interest for a period of five years. After the initial five years have completed, the interest adjusts every year i.e. on an annual basis.
There some positive and negative aspects of taking up these loans. To put it straight, both the mortgage loans are prone to have these aspects present and it depends upon the requirements of the buyer. The adjustable rate mortgage is initially low and is uncertain whether it will increase or not.
The monthly installments can increase with time if the balance amount does not decrease. The main areas of concern are the increasing rate of interest which can contribute to increase in debt. On the positive side if one pays the installments regularly then one ends up paying comparatively less.
Government based loans
Within these two categories (Fixed rate & ARM) there are other options available too. Government insured home options available are FHA or VA. FHA loans are Federal Housing Administration mortgage loans that come under the management of the HUD i.e. Department of Housing and Urban Development (it further comes under the federal government).
On the positive side, FHA offers loan on a down payment of 3.5% of the total amount. However on the other side one has to pay the mortgage insurance (to decrease risk to the Government for lending with such a low amount of down payment) which increases the size of monthly payments involved.
VA loans are offered by the U.S. department of Veterans Affairs for military services family members in general. These are also promised by the federal government. VA insures that in case of any losses occurring in loan it pays the borrower back. That is one way of saying that the borrower will get the complete financing of the home without any down payment.
RHS OR USDA Loans
The Rural Housing Service comes under the US Department of Agriculture which offers mortgage loan to rural buyers who are eligible under income category.
Conventional Home Loans
These loans being offered by the federal government are not insured in nature and that is what makes these loans different from the USDA, FHA and VA categories. Down payment amounts can be based on income, credit, and other factors. Typically ranging from 5%-20%. The interest rates on conventional loans have been historically low for several years now, but recently increased to 4.125% on a standard 30-year loan. Interest rates may also be affected by credit & income.
The conforming loan is defined under the requirements of the guidelines issued by either ‘Freddie Mac’ or ‘Fannie Mae’ whenever size of the loan is taken into consideration.
Jumbo loans refer to large amount loans that do not come under the limits of conforming loans. For these loans the limit has already been set by ‘Fannie Mae’ and ‘Freddie Mac’. The borrowers of jumbo loan must have excellent credit score and repayment history if any.
This is a brief overview about each loan option, but for more in-depth information specific to your current situation, SCUDO would be happy to refer you to one of our rockstar Lenders! Contact us today to learn more!