Types of Home Loans
The type of loan you decide upon is one of the most important decisions you will
make in purchasing your home. You should pay careful attention to the particulars
of each loan type. If you have any question about a loan you're considering, you
shouldn't hesitate to ask your lender.
Fannie Mae and Freddie Mac
In 1938 the US government created The National Mortgage Association, more commonly
known as Fannie Mae, and later in 1970 created the Federal Home Loan Mortgage
Corporation, more commonly known as Freddie Mac. The purpose of Fannie Mae and
Freddie Mac is to buy mortgages from lenders and sell them to investors; this
allows lenders to make more loans. Fannie Mae and Freddie Mac both have certain
guidelines about what kinds of loans they will buy from lenders. If a loan does
not follow these guidelines then a lender will charge you more interest, and
may require a larger down payment since it will be harder for them to sell the mortgage.
Jumbo vs Conforming
A conforming loan is one that conforms to the guidelines laid out by Fannie Mae
and Freddie Mac. A loan that does not follow the guidelines is known as a
jumbo loan. Jumbo loans are significantly more expensive than conforming loans.
The main guideline in judging if the loan is considered a jumbo loan is the
loan amount. Fannie Mae and Freddie Mac assign a maximum loan limit, beyond
which the loan is considered jumbo. The maximum loan limits for the continental
U.S. as of 2008 is shown below, note that the loan limits will likely be higher
for Alaska, Hawaii, and the Virgin Islands.
|Conforming Loan Amounts for Continental U.S. (2008)|
|Number of Units||Conforming Limit|
If your borrowing amount is over the conforming limits then you can increase your
down payment, just enough so that the loan amount falls within the conforming
bracket. However, if you do decide to take out a jumbo loan, expect that the interest
will usually be at least 3/8 to 1/2 a percentage point higher than a conforming loan.
Types of Loans
fixed rate mortgage
maintains a consistent interest rate throughout the lifetime of
the loan. Once you obtain the loan from the lender, the interest rate, and your
monthly payment won't change. In contrast to a fixed rate mortgage, you can also
adjustable rate mortgage.
An adjustable rate mortgage's interest rate
changes over the life of the loan, based on how interest rates are doing in the
general economy. Since the interest rate of an adjustable rate mortgage changes,
so will your monthly payment, so there is some amount of risk involved. However
adjustable rate mortgages can save you money in a time of low interest rates.
Another classification of loans are
hybrid home loans.
As its name suggests,
they are a combination of a fixed rate mortgage and an adjustable rate mortgage.
A hybrid loans have a time period that it is fixed rate mortgage, and then switches
to an adjustable rate mortgage.
In addition to the most common fixed rate and adjustable rate loans, there are
additional types of financing as well. Among these is the
80-10-10 mortgage loan
which could allow you to save on having to pay private mortgage insurance. Another
type of loan is a
home equity loan
, which can be useful, if you have paid off part
of the loan and want to access the equity in your home. Individuals with above average credit may qualify for a
125 percent home equity loan.
This type of loan will allow you to borrow 125 percent the value of your home. If you plan on refinancing your home or selling it in the near
future, you can consider getting a
balloon home loan.
The decision on the type of loan is an important one. Loan terms are generally 15-30
years so it is critical to make sure you haven't overlooked anything. Some types of
loans especially those which are less common have pitfalls that can hurt you if
you're not prepared. Although it is important to choose your loan carefully, if
you find yourself with a bad costly loan, then it may be possible to refinance and
get a more favorable loan.
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