Tuesday, February 7, 2012

Types Of Mortgages

Find a mortgage type that works best for you
There are two categories of mortgages: conventional and governmental.

Governmental loans are mortgage programs sponsored by a government agency. These include the Federal Housing Administration (FHA), the Veteran's Administration (VA) for veterans, and the Rural Housing Service (RHS) or Farmers Home Administration (FmHA) for those living in rural areas. These loans work best for homebuyers with low or moderate incomes, because they require low down payments and have less stringent qualifying guidelines. None of these agencies actually loan you the money; they only guarantee loans granted by lenders who participate in the program.

Conventional loans are loans that are not guaranteed by the government.

There are various types of mortgages:

A Fixed Rate Mortgage (FRM) is a mortgage with an unchanging interest rate. This is a lovely option for people who think they'll own their homes for a long period of time, or those don't like change and who prefer an unvarying monthly payment. Lenders charge higher interest rates for these loans because the money is loaned for a longer time and is more of a risk to the lender.

The opposite of a fixed rate mortgage is the Adjustable Rate Mortgage (ARM). An ARM has an adjustable interest interest rate that changes over the life of the loan. The benefit -- ARMs usually offer a "teaser" interest rate that is exceptionally low for the first year or so of the loan, and even after that ARM rates are typically lower than those on fixed mortgages. Why? Because ARMs are "capped," often at around 2 percent per year and 6 percent over the course of the loan. Still, ARMs can be risky -- especially when you look at how high interest rates can go (topping 18% in the 1980s). If you get a 30-year fixed rate mortgage at, say, 5 percent interest, it stays at 5 percent for 30 years. If you get a 15-year ARM at 4 percent and interest rates jump to 12 percent a few years later, you'll be paying 3 percent more in interest, even with a cap of, say, 4 percent.

Jumbo loans are loans that exceed conforming loan amounts specified by Fannie Mae and Freddie Mac. Currently, jumbo loans on single-family homes exceed $417,000 ($625,500 in Alaska and Hawaii). Interest rates are generally higher on jumbo loans due to the larger risk of default involved.

Some lenders offer alternative financing for buyers with weak credit histories, previous bankruptcy, or unique financial situations. For instance, No Documentation Loans, are designed for homebuyers who are self-employed, work off commission, or have sources of income that are difficult to document.

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