When comparing mortgages most people ask two questions, why are there so many different mortgage types and what’s the difference between each type? Here are the basic descriptions to some of the most common mortgages available.
Fixed-Rate Mortgage
When comparing mortgages a fixed-rate mortgage is a mortgage that has a fixed interest rate for the entire term of the loan. The distinguishing factor of a fixed-rate mortgage is that the interest rate over every time period of the mortgage is known at the time the mortgage is originated.
There are 10, 15, 20, 25, 30 and 40 year fixed rate loans. The benefit of a fixed-rate mortgage is that the homeowner will not have to contend with varying loan payment amounts that fluctuate with interest rate movements. There is typically a tradeoff when it comes to choosing a mortgage between risk and reward, or between an adjustable-rate mortgage and a fixed-rate mortgage. Depending on market conditions (the shape of the yield curve), an adjustable-rate mortgage might have a large initial payment advantage over a fixed-rate mortgage. However, if such a scenario exists, there is a probability that the payments on the adjustable-rate mortgage will rise over time. Mortgage borrowers need to understand and measure risks when deciding between an adjustable-rate and fixed-rate mortgage.
ARM (Adjustable-Rate) Mortgage
When comparing mortgages a type of mortgage in which the interest rate paid on the outstanding balance varies according to a specific benchmark. The interest rate paid by the borrower will be based on a benchmark plus an additional spread, called an ARM margin. An adjustable rate mortgage is also known as a “variable-rate mortgage” or a “floating-rate mortgage”.
There are 2/28, 3/27, 5/25, 7/23 and 10/20 ARM home loans. The initial interest rate is fixed for a period of time after which it is reset periodically, often every month. All 2/28, 3/27, 5/25, 7/23 and 10/20 mortgages are examples of ARMs. A 2/28 mortgage’s initial interest rate is fixed for a period of two years and then resets to a floating rate for the remaining 28 years of the mortgage. A 3/27 mortgage is typically the same as a 2/28 mortgage, except that the interest rate is fixed for three years and then floats for the remaining 27 years of the mortgage. Same for the 5/25, 7/23 and 10/20.
FHA Mortgages
American homeownership continues to increase at a steady rate due to the implementation of FHA home loans. More than seventy years ago, FHA began helping Americans gain the financial independence that comes with owning a home. By creating reasonable mortgage terms and rates, FHA has helped Americans become some of the best housed people in the world with over 73 million Americans currently owning their own homes.
When comparing mortgages FHA loans benefit those who would like to purchase a home but haven’t been able to put enough money away and they help people whose credit has been hurt by bankruptcy or foreclosure. FHA’s mortgage insurance allows individuals who may have been denied by conventional underwriting to qualify for a home loan.
VA Mortgage
The VA loan began in 1944 as the GI Bill of Rights. The GI Bill was signed into law by President Franklin D. Roosevelt and provided veterans with a federally guaranteed home with no down payment. This feature was designed to provide housing and assistance for veterans and their families, and the dream of home ownership became a reality for millions of veterans.
VA guaranteed loans are made by private lenders, such as banks, savings & loans, or mortgage companies to eligible veterans for the purchase of a home, which must be for their own personal occupancy. The guaranty means the lender is protected against loss if you or a later owner fails to repay the loan. The guaranty replaces the protection the lender normally receives by requiring a down payment allowing you to obtain favorable financing terms.
HARP 2.0
When comparing mortgages a HARP 2.0 allows homeowners with decreasing property values to qualify for mortgage interest rates at historic lows. HARP 2.0 is a program designed to help homeowners with no equity, refinance their Fannie Mae or Freddie Mac owned mortgage, into a new fixed rate loan, with a lower monthly payment. HARP 2.0 loans are made by lenders, such as banks or mortgage companies to eligible homeowners for refinance only.
Jumbo Mortgage
When comparing mortgages a jumbo mortgage is a mortgage loan in an amount above conventional conforming loan limits. This conventional standard is set by the two government-sponsored enterprises Fannie Mae and Freddie Mac. When FNMA and FHLMC limits don’t cover the full loan amount, the loan is referred to as a “jumbo mortgage”.
Because jumbo loans are bought and sold on a much smaller scale, they often have a slightly higher interest rate than conforming loans do, even though the spread between the two varies with the economy. If you are looking for a jumbo loan and need more information or advice, call 800-818-2946 to take advantage of the most competitive jumbo rates available.
Reverse Mortgage HECM
When comparing mortgages a Reverse Mortgage HECM is also known as a Home Equity Conversion Mortgage (HECM) and can provide homeowners over the age of 62 with some valuable income options. With a Government Insured Reverse Mortgage HECM the homeowner keeps ownership of the home and lives in the home, without making monthly mortgage payments, while receiving tax free money that can be used for any purpose. Outstanding mortgages currently on the property are paid off with a Reverse Mortgage HECM. Taxes, insurance and general maintenance must be paid as required.
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