Mortgage Types

Fixed-Rate Conventional Mortgage

A conventional loan is a loan made to a buyer by a commercial lender without a third-party participant, such as government agencies like Veterans Affairs (VA) or the Federal Housing Administration (FHA).  Fixed-rate conventional loans are typically paid off in equal monthly payments spread over 15 or 30 years.  The interest rate stays the same and the principal and interest payment remains constant throughout the life of the loan.

Adjustable-Rate Mortgage (ARM; also "variable rate")

The interest rate adjusts--monthly, every 6 months, or annually.  The adjustment is tied to a financial market index (such as one-year Treasury bills).  Most ARMs set a maximum adjustment (or "cap") on rates for each year and the life of the loan.

 FHA Loan

These are loans insured by the FHA (Federal Housing Administration).  This insurance increases lenders' willingness to provide loans to borrowers.  FHA charges an advance mortgage insurance premium (MIP) fee which is rolled into the loan, as well as a monthly mortgage insurance charge for all loans.  Additionally, there is a limit on the size of loans they will insure; this limit varies by county.  FHA loans are assumable if the buyers qualify.

VA Loan

Qualified veterans can take out loans up to a specific limit with no down payment.  VA-guaranteed loans are fully assumable if the buyers qualify.  VA charges a funding fee at the time of purchase of  2% - 3% of the loan.

Non-Conventional Loans

These loans are sometimes known as B, C, or D.  Non-conventional loans may be chosen by buyers that do not qualify for a conventional product.  Most non-conventional loans have both higher interest rates and a greater number of discount points.  Additionally, they often carry pre-payment penalties.  In todays economic climate these products are very difficult (sometimes impossible) to locate.

Jumbo Loans 

A Jumbo Loan, also called a non-conforming loan, is a mortgage with a loan amount greater than the conforming limit.  The conforming loan limit is set every January and is currently $417,000 .  The conforming loan lmit is the maximum loan size eligable for purchase by either Fannie Mae or Freddie Mac, who purchase the underlying securities from mortgage originators.  Jumbo loans are more expensive than conforming loan products.

Interest Only Mortgage  

The Interest Only Program was very popular and still is attractive to some purchasers, especially for second mortgages.  The payment is calculated by taking the loan amount, multiplied by the interest rate, divided by 12 (EX. $150,000 loan amount @ 6.5 = $9,750.50 / 12 = $812.50 per month payment.)  Low payments mean Buyers can qualify for more house.

The beauty of this product is that it allows you to control and accelerate the repayment of your mortgage.  Be careful!  Although mortgages can be fixed for a period of time, many of the products adjust monthly and carry pre-payment penalties.