Types of Loans
What types of loans are available?
Whether you are looking for a first mortgage to purchase a home or trying to refinance an existing mortgage, it is helpful to understand more about how the general loan classifications.
Mortgage loans are categorized as either fixed rate mortgages (FRM), adjustable rate mortgages (ARM) or some combination of the two. This classification is based on the type of interest rate structure governing the loan. The most common mortgage terms are 30 or 15 year loans (also, 25, 20 and 10). Generally, a short term loan will have less interest and higher payments - a long term loan, more interest and lower payments. A 15 year mortgage may have less than half the interest costs of a 30 year mortgage.
Characteristics of a fixed rate mortgage:
- The interest rate is fixed for the life of the loan (whether interest rates go up or down)
- Payments generally stay the same each month
Characteristics of an adjustable rate mortgage:
- The interest rate is adjusted periodically by adding a margin to an index specified by the mortgage (a 1-year ARM adjusts annually)
- Payments generally fluctuate along with the interest adjustment
- ARM's have limits on the amount of interest adjustment that can be made in given periods and across the life of the loan
Characteristics of a hybrid loan:
- The interest rate follows some set plan for adjustment, using a combination of fixed and adjusting interest rates
- Options are designed to meet a wider variety of needs
- Qualifying standards are often more liberal than traditional loans
Mortgage loans are also categorized as government loans or conventional loans. Government loans are FHA, VA and RHS loans; all other loans are conventional.
Conventional loans are classified as conforming or non-conforming.
Loans that adhere to the guidelines set forth by Fannie Mae (from FNMA: Federal National Mortgage Association) and Freddie Mac (from FHLMC: Federal Home Lone Mortgage Corp ) , two corporations that purchase, package and sell loans that meet their conditions as securities to investors. These are referred to as A paper loans. Conforming loans must meet certain guidelines regarding down payment, loan limits, borrower qualifying criteria and appropriate properties.
Contrary to convertible ARMs, fixed-period ARMs begin with a fixed rate that extends for a specified fixed period. At the end of that period, the interest rate (with certain caps) adjusts annually. The interest rates are lower than a standard 30-year mortgage as the lenders risk is lower since they are not locked in so long.
Zero Down Mortgage
Qualification for a zero down mortgage is based on your ability to make your monthly payments. However, the loan will be larger than a typical mortgage and the interest rates higher. Not all lenders will make zero down mortgages; you may have to shop around. However, FHA loans have extremely small down payment requirements, coming close to a zero down mortgage.
The Federal Housing Administration (FHA) does not make the loans; it provides mortgage insurance which protects the lender. Although FHA loans have statutory limits, the qualifications are generally more liberal than those for conventional loans. They have lower down payment requirements (only 3 percent down), lower monthly insurance premiums, and often, lower closing costs which can also be financed. FHA loans are intended to aid eligible families with low-to-moderate incomes who do not qualify for conventional loans.
Like the FHA loans, VA loans are only guaranteed by the U.S. Department of Veteran Affairs; lenders make the loans to eligible veterans for the purchase, construction, or energy-saving improvement (approved by the lender and VA) of a home. VA loans also have easier eligibility requirements than conventional loans, often lower closing costs, and more liberal terms (usually no down payment is required*) including negotiable interest rates. If you are eligible, the VA will issue a certificate of eligibility that you take to the lender when making application for your loan. Lenders generally place a maximum limit on VA loans.
*A down payment is required if the borrower does not have full VA Entitlement, or if the loan amount is greater than $453,100. VA loans subject to individual VA Entitlement amounts and eligibility, qualifying factors such as income and credit standards, and property limits.
RHS loans, guaranteed by Rural Housing Services under U.S. Department of Agriculture*, much like the other government loans, also contain easier terms (such as no down payment and low closing costs.) RHS loans are available to rural residents with low-to-moderate incomes that are without adequate housing and unable to obtain credit elsewhere. RHS loans are for construction or repair of new or existing homes.
*USDA Guaranteed Rural Housing loans subject to program stipulations and applicable state income and property limits.
Reverse Mortgage Loans
A reverse mortgage is designed to help home owners who are 62 and over utilize a portion of their equity without having to sell their house or make mortgage payments, but still required to pay taxes, insurance, and maintain the home. The borrower can receive loan proceeds through a lump sum payment, monthly payments or a line-of-credit. The loan proceeds are not taxable, and generally will not affect your Social Security or Medicare.* The loan does not have to be paid until the homeowner sells the property, moves or passes away.**
*This advertisement is not tax or financial planning advice. Please consult a tax advisor or financial planner for your specific situation. **There are some circumstances that will cause the loan to mature and the balance to become due and payable. Borrower is still responsible for paying property taxes, insurance and maintenance. Credit is subject to age, property and some limited debt qualifications. Program rates, fees, terms and conditions are not available in all states and subject to change.
Fairway Independent Mortgage Corp.
131 Wendover Drive,
Kingsport, TN 37663
Toll Free: 866.929.0222
Licensed in Tennessee by the Department of Financial Institutions #109192 & in Virginia by the Virginia State Corporation Commission, MC-4040, NMLS ID #2289
Roger Hutchins, Manager, 423-292-2415, firstname.lastname@example.org, NMLS#157105
Copyright ©2018 Fairway Independent Mortgage Corporation. NMLS#2289. 4750 S. Biltmore Lane, Madison, WI 53718, 1-877-699-0353. Fairway is not affiliated with any government agencies. These materials are not from VA, HUD or FHA, and were not approved by VA, HUD or FHA, or any other government agency. All rights reserved. Reverse mortgage borrowers are required to obtain an eligibility certificate by receiving counseling sessions with a HUD-approved agency. The youngest borrower must be at least 62 years old. Monthly reverse mortgage advances may affect eligibility for some other programs. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates and programs are subject to change without notice. All products are subject to credit and property approval. Other restrictions and limitations may apply.