Choose the Type of Mortgage that Best Suits Your Needs as a Home Buyer
A general overview of the types of mortgages and loan programs available to borrowers looking to buy a home.
The type of mortgage a borrower chooses is vital to the homeownership experience. Always ask your mortgage lender plenty of questions and make sure you fully understand the loan before making any commitment. Remember, the information below is just an overview of the types of mortgage loans available in 2016. To get a more detailed information on all the loans types and loan programs available to potential home buyers, talk to your mortgage lender.
Fixed-Rate Mortgages vs Adjustable-Rate Mortgages
Home buyers with a fixed-rate mortgage (FRM) pay the same interest rate for the entire mortgage term. Borrowers often opt for a fixed-rate mortgage to lock in low-interest rates when they plan to live in the home they are purchasing for a long time. The downside to an FRM is that they can be more expensive than adjustable-rate mortgages, and you will have to refinance to take advantage of a drop in interest rates.
An adjustable-rate mortgage (ARM) is a mortgage with an interest rate which is not fixed for the entire life of the loan. With an ARM, the borrower’s rate is fixed for a period in the beginning, but after that, it may change based on movements in an interest rate index. Borrowers may choose an adjustable-rate mortgage because of the lower initial payments compared to an FRM. An ARM, however, can be risky if rates climb rapidly after the “initial rate period.”
Conventional Loans and Government-Backed Loans
All mortgage loans are either fixed-rate or adjustable-rate loans. Once you decide on the type of rate, you’ll have a choice of borrowing money for your home purchase using two classifications of loans – a conventional loan or a government-backed loan. Let’s take a look at these two mortgage classifications.
The government does not insure a conventional home loan. This means that your lender takes on the risk of losing money in the event that you default on the mortgage. This risk is why conventional loans often require a borrower to come up with a down payment of 20% or greater or purchase private mortgage insurance (PMI).
The U.S. government insures Government-backed home loans. You do not borrow money from the government to buy a home. Instead, the government reduces the risk for the lender by promising to repay some or all of the money to the lender if you default on your loan. FHA, VA, and USDA are all types of government-backed loans.
Why would a borrower choose either a conventional or government-backed loan? Government-backed loans have lower down payment and credit score requirements when compared to conventional loans. That greater flexibility for home buyers, however, comes with a price as government-backed home loans have a higher interest rate than conventional loans and annual premiums for the life of the loan for borrowers with low down payment loans.
Conforming Loans vs. Non-Conforming Loans
The last two types of mortgage loans we will discuss are conforming loans and non-conforming loans. A conforming loan meets the underwriting guidelines set forth by Fannie Mae or Freddie Mac. The loan amount is one of the main guidelines that determines whether or not a loan is conforming or non-conforming.
In the United States in 2016, mortgage loans for single-family homes that are conforming have a maximum size of $417,00. Non-conforming loans of amounts over $417,000 are often referred to as Jumbo loans. There are other guidelines to consider as well (e.g., debt-to-income ratio, low credit score, etc.) when it comes to classifying loans as conforming or non-conforming. The main drawback of non-conforming loans for borrowers is that these loans carry a larger mortgage interest rate.
As mentioned previously, the above information is a general overview of the types of mortgages available to borrowers looking to buy a home in North Carolina and other locations in the United States. Within these broad categories, there are numerous options for borrowing money to buy your next home. Take time to interview a few lenders to find the right fit for you and start exploring your options for the type of mortgage that suits your needs best.
Have any questions about buying a home in North Carolina. Contact us today, and we’ll be glad to answer your questions and help you find and buy your dream home.