We have gone over the basics of financing your home in previous articles, but today we cover specifically the types of loans available to you.
Fixed Rate vs. Adjustable Rate
The first type of loans we’ll look at are fixed rate and adjustable rate loans. Fixed rate loans do not change interest rates at any point, so you will always know what you will be expected to pay each month.
An adjustable rate mortgage loan (commonly known as ARM) on the other hand, will have an initial rate that after a certain amount of time will make a scheduled increase at certain intervals. The ARM mortgage is different than a balloon payment loan in that balloon payments have you pay only on the interest throughout the term of the loan, then at the very end require one large lump sum. But ARM can actually increase your monthly cost over time, or decrease. Regardless of which one, you should be prepared to make a higher monthly payment that may eventually happen with an ARM, while at your current level of income.
Jumbo vs. Conforming
Another set of loans to consider is jumbo and conforming loans. Conforming loans follow the guidelines put out by Fannie Mae and Freddie Mac. These underwriting guidelines indicate that loans must be insured by the two agencies, depending on the size of the loan, credit, assets, income, etc.
Jumbo loans are generally loans that exceed a set amount that the two aforementioned government monetary agencies will buy. It ranges between 400-600K for the limit on jumbo loans. These are only used when the house that is being purchased is above market average by quite a bit. The amount is $417,000 for the majority of the country, but not all areas have the same cost of living. In high cost areas, such as Los Angeles, San Francisco, New York City, and other similar areas, it was raised to $625,000.
There are also several government backed loans, including FHA loans, VA loans, and USDA loans. VA loans are for military veterans, and can pay for all of your home. USDA loans are for rural residents who meet various requirements, mainly related to income, and those who may make only slightly above the area median. FHA loans are for anyone, and the FHA will cover the lender’s loan in case of the borrower not meeting the terms of the loan. The main advantage is a low down-payment of 3.5%. The disadvantage is that you will need to buy mortgage insurance which may raise your monthly rate. While many of these are for very specific industries, the FHA loan is the most accessible. Because these loans are government backed, they are easier to receive because banks are far more willing to take on the associated risk.
With all loans and mortgages remember that just because you can do something does not necessarily mean that you should. As you’ve seen, there are several factors you need to consider when picking out a loan type. Some loans may not fit strictly into one of the categories discussed, but may apply to several of them. For example, a loan could be fixed rate and government backed. Keep this in mind when researching loans.
The above options will help you delve into the complicated world of real estate finance by providing some base topics with which to begin your research. If you have further questions about real estate finance or you’re ready to buy or sell a home, contact The Damron Group REALTORS® in San Marcos, TX.