Are you new to the refinancing game? If so, understanding the types of mortgage loans and available programs is a solid starting point for saving money. Until you choose a mortgage program it’s next to impossible to make an apples-to-apples comparison of refinance rates and fees across different lenders. Here are the basic types of mortgage loans you need to know to make an informed decision for your next home loan.
Types of Mortgage Loans You Need to Know
The most common of the different types of mortgage loans is the conventional, 30-year fixed rate home loan. This is the mortgage your parents had. Once you’ve got one the terms, interest rate and payment won’t change until the day you pay it off.
The 30-year fixed rate home loan is the most common and the least risky of all the types of mortgage loans. It is also one of the more expensive refinancing options. Before getting to the other types of mortgage loans we need to talk about conforming vs. non-conforming.
Conforming vs. Non-Conforming Mortgage Loans
You’ll see the terms “conforming” and “conventional” thrown around a lot, almost interchangeably.
What are conforming mortgage loans? Conforming refers to the dollar amount you’re financing in the eyes of Fannie Mae and Freddie Mac. The conforming loan limit is set each year by these quasi-government agencies, Fannie Mae & Freddie Mac are tasked with helping American homeowners by limiting risk for mortgage lenders.
Fannie Mae and Freddie Mac do this by guaranteeing mortgage loans against default and ensuring lenders have funds available for home loans. If your mortgage is over the conforming loan limit it is essentially too big for Fannie Mae and Freddie Mac to cover and is called non-conforming.
In 2013 the conforming loan limit is $417,000. If your home loan is over the conforming loan limit it is considered a jumbo mortgage loan. (Another one of the types of mortgage loans)
Adjustable Rate Mortgage Loans
If your goal for refinancing your mortgage is to get the lowest payment possible one of the types of mortgage loans you’ll want to consider is the Adjustable Rate Mortgage (ARM). These home loans have more risk than their fixed rate counterparts because if interest rates go up when your home loan resets the payment will also increase.
You’ll see Adjustable Rate Mortgage loans designated 5/1, 7/1, or 10/1. The first number represents the fixed rate period of the ARM. The 5/1 ARM for example is fixed for the first five years. The second number is the amount of time your ARM resets. The 5/1 ARM is fixed for the first five years but resets once every year after that.
Adjustable Rate Mortgage loans are a popular choice for real estate investors that are able to leverage the lower fixed-rate period and sell before the ARM resets. When your ARM resets your mortgage servicer will recalculate your payment based on whatever index your ARM is tied, frequently the LIBOR index.
Thanks to the uncertain nature of Adjustable Rate Mortgage loans the risk is higher; however, you will generally have lower payments by choosing an ARM.
Mortgage Loan Term Length
When discussing the types of mortgage loans it’s important to understand how term length works. The term length of your home loan is the amount of time you have to repay the debt. Along with your interest rate term length determines your monthly payment amount.
You can use a simple mortgage calculator like the one below to see how mortgage term affects your payments. Generally, the longer your term the lower your payments are because they’re spread out over more time. Conversely, the shorter your term length the higher your payments will be; however, the advantage of shorter terms is that you’re building equity at a faster rate.
Simple Mortgage Calculator
Mortgage amortization describes the process of paying down your home loan. Your home loan is front-loaded with interest meaning in the early years the majority of your payment goes to pay the lender’s finance charges. Over time this gradually reverses with more of your payment going to build equity in your home.
Government Refinance Programs
When discussing the types of mortgage loans there are a variety of government refinance programs that you need to know about. These programs are administered by the FHA, VA, and USDA. If you already have a home loan backed by one of these agencies and are considering refinancing, each agency offers streamline refinance loans. The FHA streamline refinance for example offers reduced paperwork and faster processing than a traditional refinance loan.
Types of Government Refinance Programs
- FHA Home Loans
- VA Home Loans
- USDA Home Loans
- Home Affordable Refinance Program (HARP 2.0)
FHA home loans are insured by the Federal Housing Administration against default. These home loans are a popular choice for individuals with credit challenges as the qualifications are easier. The downside of an FHA mortgage is that you’re required to pay for mortgage insurance which can add hundreds of dollars to your monthly payment.
If you served in the military the VA home loan is simply the best deal going. VA home loans offer lower interest rates and unlike FHA backed loans do not require mortgage insurance. The VA offers a streamline refinance program called an Interest Rate Reduction Refinance Loan (IRRRL).
The USDA programs exist to promote home ownership in rural areas. USDA home loans have easy qualifications; however, like FHA home loans they require mortgage insurance.
The Home Affordable Refinance Program, also called HARP 2.0, allows underwater homeowners that have previously been unable to refinance to qualify. In order to qualify for this program you must not have late payments for the last year and your mortgage must be backed by Fannie Mae or Freddie Mac.
You can learn more about government refinance programs by contacting the Homeowners Hope Hotline at 1-888-995-HOPE (4673).
No-Doc & Low-Doc Mortgage Loans
There are still a great number of homeowners searching for no-doc or low-doc mortgage loans. Before the housing bubble burst lenders offered no-doc mortgage loans. These were also called stated-income home loans because you simply “stated” your income and assets, scout’s honor.
Granted you still needed a spectacular credit rating to qualify for no-doc and low-doc mortgage loans; however, these loans simply don’t exist anymore.
Choose a Mortgage Program & Stick With It
We’ve covered the basic types of mortgage loans that you need to know about. The first step when shopping for the best deal on your next home loan is to choose a mortgage program and stick with it.
If you want a 30-year fixed rate mortgage don’t let a fast-talking loan officer confuse you by quoting interest rates and fees from a 15-year ARM.
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