What Are the Different Types of Home Loans?

  • October 22, 2014

There are many different types of mortgages, each designed to meet a specific financing need based on the home buyer’s goals and financial situation. What are the differences—and how do you know which mortgage is right for you? At CMG Financial, we’re committed to helping you make the right choice. So when you’re ready to buy, we’ll be ready to help.
 
To get started, here’s a brief overview of some of the most common mortgage options that home buyers have today. To make it simple, we’ve organized these options around three questions:
 
1.     Fixed or adjustable rate?
2.     Government-insured or conventional loan?
3.     Jumbo or conforming loan?
 
 
Fixed or adjustable rate?
 
One of your first decisions is to determine whether you want a fixed or adjustable rate home loan:
 
·       Fixed rate: You have the same interest rate and monthly payment amount over the entire loan term, such as 15 or 30 years. You’ll have the confidence of knowing that, no matter what happens to interest rates in general, yours will never increase. Your monthly budget will be easier to plan because your principal and interest payments will always be the same.  About three out of four home buyers choose this option, and 30 years is the most popular repayment term.
 
·       Adjustable rate: Also called an “ARM,” these loans have an interest rate that is subject to change after a predetermined period, such as three or five years. After that, your rate adjusts every year to reflect current market conditions. This means your monthly principal and interest payment could change significantly. One advantage of an ARM is that the initial interest rate is usually lower than what a fixed rate mortgage offers, so you could potentially qualify for a larger loan amount.
 
 
Government-insured or conventional loan?
 
One of the major differences between the two is the size of the required down payment:
 
·       Conventional loan:  This type of loan is not insured or guaranteed by the federal government. These loans typically require a 20% down payment.
 
·       Government-insured loans: FHA and VA feature lower down payments than conventional loans. An FDA (Federal Housing Administration) loan requires just 3.5% of the purchase price, while a VA (Veteran’s Administration) loan features no down payment at all. Rural borrowers who meet certain income requirements might also consider a USDA (US Department of Agriculture) loan.
 
 
Jumbo vs. conforming loan?
 
Another important difference to consider is the size of the loan you want:
 
·       Conforming loan: “Conforming” means that the mortgage meets the loan size and other underwriting requirements of Fannie Mae or Freddie Mac, which are two government-sponsored enterprises that buy mortgages.
 
·       Jumbo loan: As the name implies, “jumbo” loans exceed the maximum, conforming loan sizes established by Fannie Mae and Freddie Mac. Typically, these loans have higher interest rates than conforming loans.
 
There are other types of mortgages as well, such as “interest-only” loans in which you pay only interest over a specified term, such as five or seven years. After that, your options include refinancing, paying off the loan in one lump sum or beginning to make principal payments.
 
At CMG Financial, we have a unique mortgage option called the All-in-One™, which empowers borrowers to potentially pay off their loans much faster (and at a lower cost) than they would with a traditional loan. All-in-One™ does it by tying your loan balance to your bank deposits. The more you keep on deposit, the lower the mortgage balance used to calculate your monthly interest—which can save you a significant amount of money. 

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