5 Different Types of Mortgages

5 DifferentTypes of Mortgages

Tired of renting and ready to buy a home in the South Bay? Perhaps you’re relocating to Manhattan Beach? Or maybe you already live in Hermosa Beach and have decided that it’s time to upgrade to a bigger home? If you're shopping for a home, odds are you are shopping for a home loan as well. These days, however, it's by no means a one-mortgage-fits-all model. So, whether you’re a first-time buyer or a seasoned homeowner, here are the 5 most common types of home loans to help you find the right one for you:

ConventionalMortgages

A conventional mortgage is a home loanthat’s not insured by the federal government. There are two types ofconventional loans: conforming and non-conforming.A loan is considered “conforming” when it meets guidelines set by FannieMae or Freddie Mac, two government-sponsored entities that acquire the bulk ofmortgages after they are made between a lender and a borrower. One majorrestriction on conforming loans is their size. They cannot exceed Californiaconforming loan limits, which is$726,525 in Los Angeles County.

Generally,these loans require a higher credit score than government-issued mortgages, anda 20% down payment. However, newer guidelines allow for as low as 3% down withadditional private mortgage insurance (PMI).

Best For:

Conventional conforming loans are idealfor borrowers with strong credit, a stable income and employment history, and adown payment of at least 3 percent.

Jumbo Mortgages

Homeprices in California are high compared to many states in the U.S. Borrowershere sometimes need a bigger loan, one that exceeds conforming loan limits.That’s where jumbo mortgages come in. These loansare available in amounts usually up to $3 million with competitive interestrates.

Best For:

            Jumbo loans make sense for more affluent buyerspurchasing a high-end home. Borrowers should have good to excellent credit,high incomes and a substantial down payment. Many reputable lenders offer jumboloans at competitive rates.

Fixed-rate loan

The most common type of loan, afixed-rate loan prescribes a single interest rate—and monthly payment—forthe life of the loan, which is typically 15 or 30 years. Onlytaxes and insurance will change over time. Additionally, because the term(duration) of the loan is half of a 30-year loan, 15-year mortgages carry lowerinterest rates but higher monthly payments.

Best For:

Homeownerswho aren’t planning on moving anytime soon. You pay a set amount each month fora fixed amount of years, regardless of the rise and fall of interest rates.However, it does take longer to build equity, so plan on staying in your homefor at least 7-10 years.

Adjustable-Rate Mortgages

Unlike the stability offixed-rate loans, adjustable-rate mortgages (ARMs) have fluctuatinginterest rates that can go up or down with market conditions. Many ARM productstypically have an interest rate set lower than fixed-rate loans for a few yearsbefore it resets to a variableinterest rate for the remainder of the term. Though certainARMs have caps on how much the interest rate or monthly mortgage can increase,making them much more feasible.

BestFor:

Homebuyers with lower credit scores. Since people with poor credittypically can't get good rates on fixed-rate loans, an ARM cannudge those interest rates down enough to put homeownership within easierreach. These loans are also great for people who plan to move andsell their home before their fixed-rate period is up and their rates startchanging.

Government-Insured Mortgages

California FHA Loans

FHA loans are popular with first-timehome buyers and people that haven’t had interest in property within the last 3years. They only require a 3.5% down payment, and FHA’s requirements are prettyforgiving for borrowers with less-than-perfect credit. They allow down paymentgifts from blood or by-marriage relatives. Although, if you do make a smaller downpayment (less than 80% loan-to-value), an annual mortgageinsurance premium (MIP) is required. This insuranceis paid monthly and tacked onto the principal, interest and insurance portionsof the payment. Additionally, FHA loans have a one-time, upfrontmortgage insurance premium (UFMIP) at the time ofclosing.

California VA Loans

VA loans are one of the best deals goingbecause they require zero down. Borrowers must be activeduty or honorably discharged veterans. Unlike other government-sponsored loans,no mortgage insurance is required. However, there is a one-time, upfront VA FundingFee. Like other programs, loan limits apply. The California VA loan limit,for one-unit properties, is $726,525.

California USDALoans

USDA loans help moderate-to low-incomeborrowers buy homes in rural areas. You must purchase a home in a USDA-eligiblearea and meet certain income limits toqualify. USDA loans are another zero down payment option, with a fee appliedfor payments of less than 20%. Additionally, the USDA does not specify aminimum borrower credit score, and down payment gifts are allowed. Like othergovernment-insured mortgages, USDA loans have an upfront guaranteefee at the time of closing.

Best For:

Government-insured loans are ideal ifyou have low cash savings, less-than-stellar credit and can’t qualify for aconventional loan. VA loans tend to offer the best terms and most flexibilitycompared to other loan types for military borrowers.

Now What?

Too much information? Don't worry about it, just give us a call and we will help you figure out what you need and connect you with the best loan people here in the South Bay.