Types Of Mortgage Loans
All mortgage plans can be divided into categories in two different ways. Firstly, conventional and government loans. Secondly, all the various mortgage programs may be classified as fixed rate loans, adjustable rate loans and their combinations.
Conventional and Government Loans
Any mortgage loan other than an FHA, VA or an RHS loan is conventional one.
FHA Loans
The Federal Housing Administration (FHA), which is part of the U.S. Dept. of Housing and Urban Development (HUD), administers various mortgage loan programs. FHA loans have lower down payment requirements and are easier to qualify than conventional loans. FHA loans cannot exceed the statutory limit.
If you are looking for an FHA home loan right now, please feel free to request personalized rate quotes from HUD-approved mortgage lenders via our website.
VA loans
VA loans are guaranteed by U.S. Dept. of Veterans Affairs. The guaranty allows veterans and service persons to obtain home loans with favorable loan terms, usually without a down payment. In addition, it is easier to qualify for a VA loan than a conventional loan. Lenders generally limit the maximum VA loan to $203,000. The U.S. Department of Veterans Affairs does not make loans, it guarantees loans made by lenders. VA determines your eligibility and, if you are qualified, VA will issue you a certificate of eligibility to be used in applying for a VA loan.
VA-guaranteed loans are obtained by making application to private lending institutions. If you are interesting in obtaining a VA-guaranteed loan you can try our VA loan request form.
RHS Loan Programs
The Rural Housing Service (RHS) of the U.S. Dept. of Agriculture guarantees loans for rural residents with minimal closing costs and no downpayment. Ginnie Mae which is part of HUD guarantees securities backed by pools of mortgage loans insured by these three federal agencies - FHA, or VA, or RHS. Securities are sold through financial institutions that trade government securities.
Conforming Loans
Conventional loans may be conforming and non-conforming. Conforming loans have terms and conditions that follow the guidelines set forth by Fannie Mae and Freddie Mac. These two stockholder-owned corporations purchase mortgage loans complying with the guidelines from mortgage lending institutions, packages the mortgages into securities and sell the securities to investors. By doing so, Fannie Mae and Freddie Mac, like Ginnie Mae, provide a continuous flow of affordable funds for home financing that results in the availability of mortgage credit for Americans.
Fannie Mae and Freddie Mac guidelines establish the maximum loan amount, borrower credit and income requirements, down payment, and suitable properties. Fannie Mae and Freddie Mac announces new loan limits every year.
The 2009 conforming loan limits:
Maximum Original Principal Balance |
||||
Units |
Contiguous States, District of Columbia, and Puerto Rico |
Alaska, Guam, Hawaii, and the U.S. Virgin Islands |
||
|
General |
High-Cost* |
General |
High-Cost* |
1 |
$417,000 |
$625,500 |
$625,500 |
$938,250 |
2 |
$533,850 |
$800,775 |
$800,775 |
$1,201,150 |
3 |
$645,300 |
$967,950 |
$967,950 |
$1,451,925 |
| 4 | $801,950 |
$1,202,925 |
$1,202,925 |
$1,804,375 |
The maximum loan amount is 50 percent higher in Alaska, Guam, Hawaii, and the Virgin Islands. Properties with five or more units are considered commercial properties and are handled under different rules.
The 2007 loan limit for second mortgages is $208,500 (in Alaska, Guam, Hawaii, and the Virgin Islands, the maximum second loan amount is $312,750). The sum of the original loan amounts of the first and second mortgages cannot exceed $417,000 (or $625,500 in Alaska, Guam, Hawaii, and the Virgin Islands).
Historical Loan Limits:
Loan Limits for: |
2006/2007 |
2005 |
2004 |
One-family |
$417,000 |
$359,650 |
$333,700 |
Two-family |
$533,850 |
$460,400 |
$427,150 |
Three-family |
$645,300 |
$556,500 |
$516,300 |
Four-family |
$801,950 |
$691,600 |
$641,650 |
Jumbo Loans
Loans above the maximum loan amount established by Fannie Mae and Freddie Mac are known as 'jumbo' loans. Because jumbo loans are bought and sold on a much smaller scale, they often have a little higher interest rate than conforming, but the spread between the two varies with the economy.
If you are looking for a jumbo loan and need more information or advice, we invite you to take advantage of our database of the most competitive lenders available.
B/C Loans
Loans that do not meet the borrower credit requirements of Fannie Mae and Freddie Mac are called 'B', 'C' and 'D' paper loans vs. 'A' paper conforming loans. B/C loans are offered to borrowers that may have recently filed for bankruptcy, foreclosure, or have had late payments on their credit reports. Their purpose is to offer temporary financing to these applicants until they can qualify for conforming "A" financing. The interest rates and programs vary, based upon many factors of the borrower's financial situation and credit history.
Examples:
- 3/27 ARM Loan
- 2/28 ARM Loan
Fixed Rate Mortgages
With fixed rate mortgage (FRM) loan the interest rate and your mortgage monthly payments remain fixed for the period of the loan. Fixed-rate mortgages are available for 40, 30, 25, 20, 15 years and 10 years. Generally, the shorter the term of a loan, the lower the interest rate you could get.
The most popular mortgage terms are 30 and 15 years. With the traditional 30-year fixed rate mortgage your monthly payments are lower than they would be on a shorter term loan. But if you can afford higher monthly payments a 15-year fixed-rate mortgage allows you to repay your loan twice as faster and save more than half the total interest costs of a 30-year loan, as illustrated on our graph:
 |
|
15-Year Fixed Loan Amount: $200,000.00 Interest Rate: 5.75% Monthly Payment: $1,660.82 Total Interest Paid: $98,947.43 |
30 Year Fixed Loan Amount: $200,000.00 Interest Rate: 6.25% Monthly Payment: $1,231.43 Total Interest Paid: $243,316.39 |
The payments on fixed rate fully amortizing loans are calculated so that at the end of the term the mortgage loan is paid in full. During the early amortization period, a large percentage of the monthly payment is used for paying the interest. As the loan is paid down, more of the monthly payment is applied to principal, as illustrated on our graph:
 |
|
15-Year Fixed Loan Amount: $200,000.00 Interest Rate: 5.75% Monthly Payment: $1,660.82 Total Interest Paid: $98,947.43 |
30 Year Fixed Loan Amount: $200,000.00 Interest Rate: 6.25% Monthly Payment: $1,231.43 Total Interest Paid: $243,316.39 |
With bi-weekly mortgage plan you pay half of the monthly mortgage payment every 2 weeks. It allows you to repay a loan much faster. For example, a 30 year loan can be paid off within 18 to 19 years.
Balloon loans
Balloon loans are short-term fixed rate loans that have fixed monthly payments based usually upon a 30-year fully amortizing schedule and a lump sum payment at the end of its term. Usually they have terms of 3, 5, and 7 years.
The advantage of this type of loan is that the interest rate on balloon loans is generally lower than 30- and 15- year mortgages resulting in lower monthly payments. The disadvantage is that at the end of the term you will have to come up with a lump sum to pay off your lender, either through a refinance or from your own savings.
Balloon loans with refinancing option allow borrowers to convert the mortgage at the end of the balloon period to a fixed rate loan -- based upon the outstanding principal balance -- if certain conditions are met. If you refinance the loan at maturity you need not be requalified, nor the property reapproved. The interest rate on the new loan is a current rate at the time of conversion. There might be a minimal processing fee to obtain the new loan. The most popular terms are 5/25 Balloon, and 7/23 Balloon.
Adjustable Rate Mortgages
Variable or adjustable loan is loan whose interest rate, and accordingly monthly payments, fluctuate over the period of the loan. With this type of mortgage, periodic adjustments based on changes in a defined index are made to the interest rate. The index for your particular loan is established at the time of application.
Well known ARM indexes include:
- Constant Maturity Treasury (CMT)
- Treasury Bill (T-Bill)
- 12-Month Treasury Average (MTA or MAT)
- Certificate of Deposit Index (CODI)
- 11th District Cost of Funds Index (COFI)
- Cost of Savings Index (COSI)
- London Inter Bank Offering Rates (LIBOR)
- Certificates of Deposit (CD) Indexes
- Bank Prime Loan (Prime Rate)
- Fannie Mae's Required Net Yield (RNY)
- National Average Contract Mortgage Rate
The historical graph below can help you to get an idea of how the most often used indexes perform over interest rate cycles:
New interest rate = index + margin
The margin is fixed percentage points added to the index to compute the interest rate. The result will then be rounded to the nearest one-eighth of a percent.
Example:
The index is 5.3% and the margin is 2.5%,
then the new interest rate = 5.3% + 2.5% = 7.8%.
The nearest to 0.8% is 0.75% = 6/8%.
The result will be 7.75%.
The margins remain fixed for the term of the loan and are not impacted by the financial markets and movement of interest rates. Lenders use a variety of margins depending upon the loan program and adjustment periods.
Most ARMs have an interest rate caps to protect you from enormous increases in monthly payments. A lifetime cap limits the interest rate increase over the life of the loan. A periodic or adjustment cap limits how much your interest rate can rise at one time.
Examples:
- The initial interest rate is 4.5%, the index is 7%, and the margin is 3%,
then the new interest rate = 7% + 3% = 10%.
If the lifetime cap is 5% then
the actual new interest rate will be 4.5% + 5% = 9.5%. - The initial interest rate is 6%, the index is 5%, and the margin is 3%,
then the new interest rate = 5% + 3% = 8%.
If the periodic cap is 1% then
the actual new interest rate will be 6% + 1% = 7%.
Your mortgage disclosure will tell you the exact index to be used, whether the weekly or monthly value applies, the lead time for your index, the margin, and any caps.
Buydown Mortgage
A temporary buydown is the type of loan with an initially discounted interest rate which gradually increases to an agreed-upon fixed rate usually within one to three years. An initially discounted rate allows you to qualify for more house with the same income and gives you the advantage of lower initial monthly payments for the first years of the loan when extra money may be needed for furnishings or home improvements. To reduce your monthly payments during the first few years of a mortgage you make an initial lump sum payment to the lender. If you do not have the cash to pay for the buydown, the lender can pay this fee if you agree on a little higher interest rate.
A very popular buydown is the 2-1 buydown.
Example
If the interest rate on the note is 8% with a 2-1 buydown mortgage your initial discounted rate is 6% and you would have 6% interest rate for the first year, 7% for the second year, and 8% afterwards. You will need to prepay the difference in payments between the 6% and 8% rates the first year, and between the 7% and 8% rates the second year.
3-2-1 and 1-0 buydowns are also available, though less common. Compressed Buydown, works the same way, but with the interest rate changing every six months instead of on a yearly basis.
The lower rate may apply for the full duration of the loan or for just the first few years. A buydown may be used to qualify a borrower who would otherwise not qualify . This is because a buydown results in lower payments which are easier to qualify for.
With a variety of different loan programs available, it is important to choose the type of loan that will best suit your needs.
The right type of mortgage chiefly depends on how long you plan on staying in the house and the amount of monthly payment you can comfortably afford.
If you don't plan to stay in your house for at least 5 to 7 years, it will be reasonable to consider an Adjustable Rate Mortgage, Balloon Mortgage or Two-Step Mortgage. ARMs traditionally offer lower interest rates during the early years of the loan than fixed-rate loans. A Two-Step Mortgage will give you a lower interest rate than a 30-year mortgage for the first five or seven years. A Balloon Mortgage offers lower interest rates for shorter term financing, usually five or seven years. Because of a lower interest rate it is easy to qualify for these type of mortgages. However don't accept the ARM unless you can afford the maximum possible monthly payment.
Generally, you can start to consider 15 or 30 year fixed rate mortgages if you plan to stay in your home for more than seven years. Free personalized rate quotes for 30 Year Fixed Loans or 15 Year Fixed Loans and any other needed financing can be requested via our website.