There are many different types of loans available to assist people in buying homes.
The following information is included for general informational purposes only. Much loan information is regional specific, varying from location to location. Ask your lender about specific information as it applies to your situation. If you have yet to select a lender, your real estate agent can point you in the right direction.
Determining your wants and needs is the first step to identifying the right loan for you. Is it important to you to have your payments remain the same every month, or are you more concerned with having a lower initial interest rate? There are pros and cons to each of these types of loans.
With a fixed rate loan, your principle and interest portion of your monthly payment stays the same every month, despite fluctuations in the market. This allows you to easily calculate your monthly expenses without worrying about fluctuating loan payments. It is important to note that taxes and insurance rates do fluctuate
A variable mortgage, sometimes called an adjustable rate mortgage (ARM) can be procured with a lower initial interest rate than a fixed rate mortgage. This type of loan can be attractive to homebuyers that plan to move in a few years and are not concerned about possible interest rate increases. People who are confident that their income will increase faster than potential increases in the market rate also like to take advantage of this type of loan.
This type of loan’s interest rate is adjusted periodically to keep in line with changing market rates. If interest rates increase, so do monthly payments. Conversely, payments drop when interest rates decrease.
Remember to contact your real estate professional for information prior to deciding on the best loan for you.
Jumbo, or non-conforming, loans are designed for homebuyers who need larger loan amounts than allowed for in conventional loans.
Conventional lenders typically insist that the borrower puts down more than 20% on jumbo loans. Interest rates on jumbo loans generally run higher than conforming loans.
First Time Homebuyers
Many first time homebuyers can benefit from FHA and VA government loans or other programs based on location or income. Often, these mortgages require less income to qualify than conventional financing. There may even be some down payment assistance.
Speak to your lender to determine if you meet the qualification criteria for this type of loan.
Alternative Financing: 80/10/10
Many buyers are unable to put down 20% of the purchase price of a property. Using conventional financing, buyers would have to pay Private Mortgage Insurance (PMI) without a 20% down payment. This increases the monthly mortgage payment and can also reduce the amount a homebuyer can qualify for.
There are ways to avoid paying PMI without putting the 20% down payment required by lenders. A popular way to avoid paying PMI is the program affectionately known as 80/10/10.
With this program, the buyer will get a first loan for 80%, putting 10% down of their own funds. The additional 10% will be carried back in a second loan by either the lender or the seller, thus avoiding PMI.
The first loan is at market rates. The second loan, or “carryback,” will be at a slightly higher rate. With the blending of the two rates, the monthly payment can still be a more attractive option than a loan with PMI.
Other combinations of loans are also available to avoid PMI, such as an 80-5-15. Consult with your loan professional to determine the best mortgage for you.