Types of Mortgage Loans

Mortgage loans come in all shapes and sizes, with many different terms and conditions. Buyers who understand the types of mortgage loans available and which ones are best for their specific needs have a definite edge over buyers who go into home shopping without doing this research first.

A good resource that describes the basic types of mortgage loans and their terms and conditions can be found at http://mortgage-x.com/library/loans.htm.

Mortgage loans can be back by the Federal Housing Administration or the Veterans Administration. These loans are called FHA and VA loans, and are typically easier to qualify for than conventional mortgages and require less of a down payment.

The Rural Housing Service of the US Department of Agriculture is another government agency that backs low-cost loans with no down payments for buyers who want to purchase property in certain rural areas and meet certain conditions.

In addition to federally backed mortgages like FHA, VA, and RHS loans, many states and local communities offer low-cost mortgages with minimal or no down payments for buyers who meet certain income limits or are willing to live in depressed areas and rehabilitate their properties. To find out if such loans are available in your specific area, contact any licensed realtor.

Conventional mortgage loans can be conforming or non-conforming. Conforming loans follow the terms and conditions set forth by Fannie Mae and Freddie Mac guidelines, two huge corporations that purchase mortgage loans and sell them as securities to investors.

The 2008 conforming loan limit on a single-family dwelling is $417,000. In other words, $417,000 is the maximum amount you can borrow to purchase a single family home if your loan is backed by Fannie Mae or Freddie Mac, which most conventional loans are.

Conventional mortgage loans over $417,000 (for a single-family dwelling) are called non-conforming Jumbo loans. Jumbo loans tend to have a little bit higher interest rate, and may be somewhat more difficult to obtain, or, in times of tight credit, very difficult to obtain.

Within conventional mortgage financing you can find fixed or adjustable rates with various term lengths. The most common fixed rate terns are 10, 15, 20, 25, 30, and 40 years, with 15 and 30 year options being by far the most popular. The shorter the term on a fixed rate mortgage, the better (in general) the interest rate will be. Many people take out 30 year fixed rate mortgages and then refinance to 15 years after they have lived in the home for a few years.

Adjustable rate mortgages are conventional mortgages with interest rates that fluctuate over the life of the loan. Currently, adjustable rate mortgages are popularly sold as 30 year mortgages with a low fixed rate for the first 2 to 5 years, and then a variable rate that resets each year. Sometimes the initial five year period is interest-only, making the early payments artificially low, and later payments then reset each year for the rest of the mortgage.

When considering an adjustable rate mortgage it is very important to understand the terms and conditions and read everything very carefully, asking plenty of questions and possibly even hiring an attorney to review the loan documents before signing. Many people get into trouble with adjustable rate mortgages because they are confident they can refinance once the fixed rate portion is over, and then they find that market conditions have changed and they are stuck with a rate they can’t afford.

When considering an adjustable rate mortgage look for a cap on the interest from year to year and also a cap on increases over the life of the loan. If the cap is very high, or if there is no cap, you might want to consider other financing. Also, keep in mind that mortgages always come with closing costs that can be quite expensive, so factor this in to any decisions you make in which refinancing later is an important part of your plans.

Finally, many other more creative options for mortgage financing are available, but probably not as easily available as they were before the recent sub-prime mortgage meltdown. Before considering any creative options such as interest-only mortgages or reverse mortgages, it is best to consult a mortgage attorney or other trustworthy expert to insure the loan isn’t predatory or just a really bad idea.