Common Mortgage Loan Types
Conventional Mortgage Loan
FHA Mortgage Loan
USDA Rural Housing Loan
Adjustable Rate Mortgage (ARM)
203k Rehab Loan
Government-Insured vs. Conventional Loans
A conventional home loan is one that is not insured or guaranteed by the federal government in any way. A FHA, VA, USDA loans are guaranteed by the federal government insured. On a these loan you’ll have to pay for mortgage insurance, which will increase the size of your monthly payments unlike the conventional home loan.
Fixed vs. Adjustable Rate
Fixed-rate mortgage loans have the same interest rate for the entire repayment term. Because of this, the size of your monthly payment will stay the same, month after month, and year after year. It will never change. This is true even for long-term financing options, such as the 30-year fixed-rate loan. It has the same interest rate, and the same monthly payment, for the entire term.
Adjustable-rate mortgage loans (ARMs) have an interest rate that will change or “adjust” from time to time. Typically, the rate on an ARM will change every year after an initial period of remaining fixed. A hybrid ARM loan is one that starts off with a fixed or unchanging interest rate, before switching over to an adjustable rate.
Rule of thumb would be if you plan to stay in your home for many years you might be better off with a fixed rate. If you plan not to keep loan long term maybe an adjustable loan would be best. Adjustable loan usually offer lower rate in the initial years before they adjust.
Jumbo vs. Conforming Loan
A conforming loan is one that meets the underwriting guidelines of Fannie Mae or Freddie Mac, particularly where size is concerned. Fannie and Freddie are the two government-controlled corporations that purchase and sell mortgage-backed securities (MBS). Simply put, they buy loans from the lenders who generate them, and then sell them to investors via Wall Street. A conforming loan falls within their maximum size limits, and otherwise “conforms” to pre-established criteria.
A jumbo loan, on the other hand, exceeds the conforming loan limits established by Fannie Mae and Freddie Mac. This type of mortgage represents a higher risk for the lender, mainly due to its size. As a result, jumbo borrowers typically must have excellent credit and larger down payments, when compared to conforming loans. Interest rates are generally higher with the jumbo products, as well.