If you haven’t bought a home in recent years, or if you’ve never had a mortgage, you may be surprised at the number of options available. A couple of decades ago there were basically three mortgage types available to a homebuyer: a fixed-rate conventional mortgage, an FHA loan or a VA loan. Not anymore.
In addition to those loans, there’s a plethora of new programs, each with features that are tailored to a certain type of buyer’s specific needs. We’ve put together this brief description of the types available so that you can get a feel for what’s out there. Please note, there will be some overlap in the types we’ve described. For instance, a jumbo loan will also be either a fixed-rate or adjustable-rate mortgage.
Having this many options may sound complex, and it could be if you had to figure it out on your own. But not to worry! Your Caliber Loan Consultant knows all about these different types of mortgages and will guide you to the one that’s is perfect for you and your particular situation.
All mortgages are based on either fixed-rate or adjustable-rate loans. Below we’ll use a standard conventional loan as our example for how these different rate structures apply, but please remember that these terms will also apply to other types of mortgages.
The most common mortgage is the conventional 30-year fixed-interest rate loan. It’s “the classic.” In the past 20 years, it's represented 70% to 90% of all mortgages.
A fixed-rate means the interest rate secured when you closed on the house will never change over time. (Unless you refinance, of course, and then you have a brand new loan.) A fixed-rate is smart if you want to lock in an interest rate and keep a consistent payment that won’t fluctuate.
As far as the “30-year term” part, that’s the length of the loan. You can also get conventional loans with 10-, 15- or 20-year terms. The 15-year fixed-rate loan is also popular and is widely used by people who want to pay off their house in half the time.
An adjustable-rate mortgage called an ARM for short, is a mortgage with an interest rate that is linked to an economic index. The interest rate and your payments are periodically adjusted up or down as the index changes.
You may see an ARM described with figures such as 1/1, 3/1, and 5/1. The first figure in each set refers to the initial period of the loan (in years), during which your interest rate will stay the same as it was on the day you signed your loan papers.
The second number is the adjustment period, showing how often adjustments can be made to the rate after the initial period has ended. The examples above are all ARMs with annual adjustments--meaning adjustments could happen every year.
One benefit of an ARM is that you can usually get a low-interest rate for the initial period of your loan. If you have an ARM that’s a 3/1, then you’ll have that low-interest rate for at least 3 years. After that, it could change and your payments are likely to increase.
You should consider an ARM if you’re planning on selling the house around the time that your initial period is ending, or if you’re expecting a substantial increase in your income in the next few years.
There are several types of ARMs. While they could be a good fit for certain borrowers, first-time buyers should be cautious. You don’t want to be surprised in a few years by an increased house payment that you can’t afford. Your Caliber loan consultant will advise you carefully on this so that you know exactly what to expect.
Interest-only loans: These have very low payments in the first few years, but the principal of the loan is not reduced during that time.
Low down payment or no down payment loans: These are an option within some loan programs. The down payment is built into the loan.
FHA loans are guaranteed by the Federal Housing Administration. Because of this backing by the government, lenders only require a 3.5% down payment. You can also use gifts from others to make this down payment, which isn’t allowed with some loans. Low credit scores are accepted for FHA loans, so people who don’t qualify for other loans may be able to get one with FHA.
The VA loan is a government loan available to veterans of the U.S. Armed Services, those currently serving in the military and, in certain cases, to spouses of deceased veterans. The requirements vary depending on years of service and other factors. One of the best benefits of a VA loan is that the borrower does not need to make a down payment. The loan is also guaranteed by the Department of Veterans Affairs, which makes approval easier.
A lot of people may not be familiar with this government-assisted program, but it’s great for those that qualify. It’s offered through the U.S. Department of Agriculture and is typically for buyers in rural areas who might not qualify for other traditional loans. In some cases, the home can even be in a suburban area or small town and still classify as “rural.” With a USDA loan, there are generally low down payments and – at times – even no down payment.
Calling a mortgage loan an "interest-only mortgage" is a little confusing because these loans are not really interest-only, in which the borrower pays only interest on the loan. Interest-only mortgages contain an option to make an interest-only payment for a limited amount of time. They are worth considering if you need the option of low payments during the first years of your mortgage.
If you already have a mortgage and you've acquired equity in it, you can borrow against it with a second mortgage. A home equity loan is a one-time loan that you make payments against like you do your first mortgage.
You use a home equity line of credit, or HELOC, like a credit card. You can borrow what you need when you need it. You pay interest on the outstanding amount you've borrowed until you repay the principal.