Types of Loans
A conventional mortgage simply refers to any mortgage loan that is not insured or guaranteed by the federal government.
Conventional mortgage loans can be both fixed mortgages or adjustable-rate mortgages, including hybrid ARMs. These types of loans may be conforming or non-conforming, with the former meeting the standards set forth by goverment-sponsored enterprises Fannie Mae and Freddie Mac.
Be careful not to confuse conventional with conforming, as the two terms are very different. However, neither are considered government loans, despite the fact that Fannie and Freddie are now in government control.
“FHA loans” are mortgages insured by the Federal Housing Administration (FHA), which can be issued by any FHA-approved lender in the United States.
Congress established the FHA in 1934 to help lower income borrowers obtain a mortgage that otherwise would have trouble qualifying. In 1965, the FHA became part of the Department of Housing and Urban Development’s (HUD) Office of Housing.
Before the FHA was established, it was common for homeowners to put down 50% of the value of the property as a down payment on short-term balloon mortgages, which clearly wasn’t practical going forward.
Unlike conventional loans, FHA loans are government-backed, which protects lenders against defaults, making it possible to for them to offer prospective borrowers more competitive interest rates on traditionally more risky loans.
An “adjustable-rate mortgage” is a loan program with a variable interest rate that can change throughout the life of the loan. It differs from a fixed-rate mortgage, as the rate may move both up or down depending on the direction of the index it is associated with.
All adjustable-rate mortgage programs come with a pre-set margin that does not change, and are tied to a major mortgage index such as the Libor, COFI, or MTA. Some banks and mortgage lenders will allow you to choose an index, while many rely on just one of the major indices for the majority of their loan products. In our opinion, it's one of the best mortgages for investment purposes.
A fixed-rate mortgage is the most ordinary and uncomplicated mortgage available to homeowners today. As the name suggests, the interest rate on a fixed mortgage does not change during the entire duration of the loan, which is typically 30 years. For that reason, fixed-rate mortgages do not have associated mortgage indexes, margins, or caps, because they are not variable-rate loans.
Another key characteristic of the fixed-rate mortgage is that monthly mortgage payments remain constant throughout the life of the loan, to the very last month when the loan is finally paid off.
In other words, there aren’t too many surprises with a fixed-rate loan, allowing the homeowner to sleep at night.
NO COST REFINANCE
A no cost refinance is essentially a loan transaction in which the lender or broker pays settlement costs, including typical lender fees such as processing and underwriting fees, the appraisal fee, and loan origination points, along with third party costs like title/escrow fees and so on.
You may be asking yourself how banks and lenders make up for the absence of fees that normally must be paid during a refinance (or purchase) transaction.
Assuming the lender actually pays your closings costs, doing so will bump up your interest rate, sometimes dramatically, in order to make up for the missing fees that are typically charged at closing.
Many homeowners carry both a first and second mortgage, often closed concurrently during a home purchase transaction. In these cases, the second mortgage is referred to as a “piggyback loan” because it sits behind the first mortgage. Piggyback loans are used to extend financing terms, allowing borrowers to put down less on a home, or break up their loan into two separate amounts to produce a more favorable blended rate.
The information provided above is a very brief explanation of the types of loans. If you would like additional information, please contact us and we will connect you with one of our highly recommended loan officers to further assist you.
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