5 TYPES OF MORTGAGE LOANS

What do I mean? 

Let’s talk about it. 

WHY MORTGAGE LOANS MATTER

If you’ve ever been to a car dealership, you’ve likely heard the salesman ask you not how much you can afford in terms of the total car but in terms of monthly payments. This situation occurs because, quite often, car salesmen act as both lenders and salesmen. Though they still have to push their plan through a bank, they understand interest rates, monthly payments, and total cost all in relation to each other. 

Unfortunately, many realtors do not understand this relationship, and mortgage loans are way trickier than car loans. 

Why? 

Well, the most expensive car, for the average person, typically hovers around $50,000 or even up to $75,000. 

Expensive homes can average upwards of $600,000, and even up to $1,000,000! And that’s just for a standard 3 or 4 bedroom home in a nice neighborhood. 

The cost of living, including housing prices, continues to rise and wages and salaries are not rising alongside them at a steady rate. 

So, in the interest of continuing to get people into homes and keeping the economy going, lenders have found tricky ways to get people the loans they need to be able to own their homes and get out of the endless rental cycle. 

And those tricky ways can have a huge impact on your home buying experience. 

If you lock in an interest rate, you’ll know what to expect. If you take out an ARM loan, you’re hedging a huge bet. If you qualify for a government insured loan, you might end up with a great deal. 

Understanding the difference between all of your mortgage loan options is key to success in your real estate ventures. 

INTEREST RATES ON THE RISE

As of March 2023, interest rates continue to rise as the Federal Reserve continues to take action to try to control inflation and bring prices down. A primary avenue to bringing inflation down, sadly, is a rise in interest rates. 

Housing costs have not come down much, though they have seen a slight year over year decline. It has only come down by about 2% between 2023 and 2022. In that same time frame, interest rates have gone up by about 3%, from 3.6% to 6.15% for a 30 year fixed loan. 

That means that a house that was $450,000 last year may be selling today for $441,000, but your payment will have gone up by about $700 a month! That’s astronomical.

It is more important now than ever that you understand the types of mortgage loans so you can make sure you get a payment and a total deal that works for you. 

5 TYPES OF MORTGAGE LOANS

1. CONVENTIONAL

A conventional loan is one that is not backed by any type of government program. You will typically pay less in overall costs than you would with a government backed loan, but your interest rate may be a bit higher. 

The two types of conventional loan are conforming and non-conforming. Conforming simply means the loan is subject to standards set by the Federal Housing Finance Agency, which typically means the loan must fall under the price of $726,200 in most areas and $1,089,300 in areas with higher costs of living. 

Non-conforming loans are those that fall outside of these standards. 

With a conventional loan, your FICO score must be above 620, you often have to have a higher down payment, up to 3%, and your debt to income ratio must be below 43%. Also, if your loan is more than 80% of the price of your home, you will need to pay Private Mortgage Insurance (PMI). 

2. JUMBO LOAN

Jumbo loans were established to purchase homes in extremely expensive areas of the country like Los Angeles, San Francisco, New York City, and Hawaii. You can borrow money at interest rates similar to those of conventional loans, but the down payment required is usually much higher, up to 20% and a FICO score of 700 or higher is typically required with a DTI of lower than 45%.

3. GOVERNMENT INSURED 

It is immensely helpful to know if you qualify for a government insured loan as it can help with down payment, interest rates, and even poor credit. Examples of government insured loans are FHA loans for first time home buyers, which only call for a FICO of 580 and a down payment of 3%, USDA loans, which help low income borrowers and can eliminate the need for a down payment entirely, and VA loans for veterans, which provide low interest rate mortgages with no down payment or mortgage insurance required. 

4. FIXED RATE

A fixed rate mortgage is one that sets the rate for your loan for the duration of your term. These can be conventional, jumbo, or government insured loans, and are great to have when interest rates are super low. 

5. ADJUSTABLE RATE MORTGAGE (ARM)

Adjustable rate mortgages can be both a blessing and a curse. They are great for getting into a home with a super low interest rate when interest rates are otherwise high. You will buy the home with an interest rate that is superficially low and fixed for the first few years of your loan. The problem is once that fixed term ends, the interest rate will spike and then adjust every 6 months according to the market. These loans are only a good idea for people who feel comfortable betting on interest rates falling as the home could become unaffordable and result in a default after the fixed period ends. An excess of ARM loans was one of the primary factors in the bursting of the housing bubble in 2008. 

In the end, it is critical for you to understand all of your options when it comes to interest rates and mortgage loans, especially in this volatile market. Be sure you have a lender and a realtor you trust. 

And remember, if you work with Tyler Goff Group, we’ve got a network of trusted lenders we can refer you to.