Home buyers often have a lot of questions about mortgages and mortgage terms since there are so many different types available. This article will answer some of those common questions, starting with the differences between conventional, VA, and FHA mortgages.
What is a conventional mortgage?
Conventional mortgages are the most common type of home loan, and are not insured or guaranteed by any government entity. Down payments typically range from 3% to as much as the home buyer would like to pay, although there are some 0% down payment programs available as well.
Typically, mortgage insurance (non-government) is required for conventional loans with down payments less than 20%. However, alternative options are available that provide loans without mortgage insurance even with very low down payments. A loan officer can best direct you to a program that meets your objectives.
What are VA loans?
VA loans are guaranteed by the Veterans Administration and are available only to qualified veterans. The primary benefit of a VA loan is the ability to obtain 100% financing. The veteran pays a funding fee to the VA at closing, and the fee may be included in the loan. The funding fee varies from 0% to 3% of the loan amount, depending on a variety of factors.
What is an FHA loan?
FHA loans require very low down payments and are insured by the Federal Housing Administration. A one-time mortgage insurance premium is paid at closing and a small monthly MI premium is included in the loan payment. The amount of the up-front and monthly MI premium varies with the term of the loan and the loan-to-value ratio.
What is an adjustable rate mortgage?
An adjustable rate mortgage (ARM) has an interest rate that’s guaranteed for an initial period of time, then adjusts based on market conditions. Adjustable rate loans are often converted to a fixed-rate loan.
The length of the initial rate, the method and limitations of the rate adjustments and the convertibility of the loan (to a fixed-rate loan) varies with each loan. Borrowers have substantial flexibility due to a large variety of ARM products from which to choose, making ARMs a popular choice for many borrowers.
What is a balloon mortgage?
A balloon mortgage is typically amortized over 30 years, but the balance becomes due before the 30 years is up. For example, a five-year balloon will have payments based on a 30-year mortgage, but after the first five years the borrower must pay the remaining balance in full or refinance the mortgage.
What is a fixed-rate mortgage?
A fixed-rate mortgage provides an interest rate that is fixed for the life of the loan, and provides maximum payment stability. Whether interest rates go up or down, your fixed-rate loan will stay the same.
What is an interest only loan?
An interest only loan lets the borrower pay only the interest each month. For example, on a $100,000 loan with a 6.25% interest rate, you’d pay $520.83 with an interest only loan, and $615.72 with a fully amortized loan.
That’s a savings of $94.89 each month! BUT. . . just making an interest only payment will not reduce your loan balance, and after one year you would still owe the full loan amount (in this case) $100,000.
If you have any additional question about mortgages, or are buying a home in the Bend area, feel free to contact me.
David Winfrey is a Home Loan Consultant and Mortgage Planner for Countrywide Home Loans, as well as a frequent contributing writer for OHM. Feel free to contact him with any questions you may have about home mortgages and financing.