Hartz Homes Presents: The ABCs of Home Loans
There is a variety of home loan options available to home buyers today. Here is a basic guide for the most common types of mortgage loans. Note: It is a good idea to consult with a reputable loan expert to get the full, up-to-date details as you decide what’s best for you. Hartz Homes has preferred lenders that can quickly and easily help you in this process.
The three basic options are as simple as ABC.
A. The first option is a fixed vs. adjustable rate mortgage loan.
One of your first choices is whether you want a fixed-rate or an adjustable-rate loan. All loans fit into one of these two categories, or a combination “hybrid” category. Here’s the primary difference between the two types:
Fixed-rate
These mortgage loans have the same interest rate for the entire repayment term. Because of this, the size of your monthly payment will stay the same throughout the entire term of your loan. It will never change. This is true even for long-term financing options, such as the 30-year fixed-rate loan. It has the same interest rate, and the same monthly payment, for the entire time.
Adjustable-rate
Adjustable-rate mortgage loans (ARMs) have an interest rate that will change or “adjust” from time to time. Typically, the rate on an ARM will change every year after an initial period of remaining fixed. It is therefore referred to as a “hybrid” product. A hybrid ARM loan is one that starts off with a fixed or unchanging interest rate, before switching over to an adjustable rate. For instance, the 5/1 ARM loan carries a fixed rate of interest for the first five years, after which it begins to adjust every one year, or annually. That’s what the 5 and the 1 signify in the name.
B.The next choice is between a government-insured and a conventional loan.
You will also have to decide whether you want to use a government-insured home loan (such as FHA or VA), or a conventional “regular” type of loan. Here are the differences between these two mortgage types:
Conventional Loan
A conventional home loan is one that is not insured or guaranteed by the federal government in any way. This distinguishes it from the three government-backed mortgage types explained below (FHA, VA and USDA).
Government-insured home loans include the following:
FHA Loans
The Federal Housing Administration (FHA) mortgage insurance program is managed by the Department of Housing and Urban Development (HUD), which is a department of the federal government. FHA loans are available to all types of borrowers, not just first-time buyers. The government insures the lender against losses that might result from borrower default. Advantage: This program allows you to make a down payment as low as 3.5% of the purchase price. Disadvantage: You’ll have to pay for mortgage insurance, which will increase the size of your monthly payments.
VA Loans
The U.S. Department of Veterans Affairs (VA) offers a loan program to military service members and their families. Similar to the FHA program, these types of mortgages are guaranteed by the federal government. This means the VA will reimburse the lender for any losses that may result from borrower default. The primary advantage of this program (and it’s a big one) is that borrowers can receive 100% financing for the purchase of a home. That means no down payment whatsoever.
USDA / RHS Loans
The United States Department of Agriculture (USDA) offers a loan program for rural borrowers who meet certain income requirements. The program is managed by the Rural Housing Service (RHS), which is part of the Department of Agriculture. This type of mortgage loan is offered to “rural residents who have a steady, low or modest income, and yet are unable to obtain adequate housing through conventional financing.” Income must be no higher than 115% of the adjusted area median income [AMI]. The AMI varies by county.
Combining: It’s important to note that borrowers can combine the types of mortgage loans explained above. For example, you might choose an FHA loan with a fixed interest rate, or a conventional home loan with an adjustable rate (ARM).
C. The Third option is a jumbo vs. conforming loan
There is another distinction between loan types, and it’s based on the size of the loan. Depending on the amount you are trying to borrow, you might fall into either the jumbo or conforming category. Here’s the difference between these two mortgage types:
Conforming Loan
This loan meets the underwriting guidelines of Fannie Mae or Freddie Mac, particularly where size is concerned. Fannie and Freddie are the two government-controlled corporations that purchase and sell mortgage-backed securities (MBS). Simply put, they buy loans from the lenders who generate them, and then sell them to investors via Wall Street. A conforming loan falls within their maximum size limits, and otherwise “conforms” to pre-established criteria.
Jumbo Loan
On the other hand, a jumbo loan exceeds the conforming loan limits established by Fannie Mae and Freddie Mac. This type of mortgage represents a higher risk for the lender, mainly due to its size. As a result, jumbo borrowers typically must have excellent credit and larger down payments, when compared to conforming loans. Interest rates are generally higher with the jumbo products, as well.
Hartz Homes encourages you to continue your research beyond this article. Education is the key to making smart decisions as a mortgage shopper. Feel free to contact our preferred lender who can be a great resource for you.
Please check out these new home communities from Hartz Homes:
Armitage Pointe of Addison, Illinois (Chicago area new home construction)
Bella Vista Townhomes of Bolingbrook, Illinois (Chicago area new home construction)
Heather Glen of New Lenox, Illinois (Chicago area new home construction)
Hibernia of New Lenox, Illinois (Chicago area new home construction)
Leigh Creek of New Lenox, Illinois (Chicago area new home construction)
Manchester Cove of Mokena, Illinois (Chicago area new home construction)
Marquis Pointe of Montgomery, Illinois (Chicago area new home construction)
Marywood Meadows of Montgomery, Illinois (Chicago area new home construction)
Nantucket Lakes of New Lenox, Illinois (Chicago area new home construction)
Oliviabrook of Oakbrook Terrace, Illinois (Chicago area new home construction)
Park West of Manteno, Illinois (Chicago area new home construction)
Playa Vista of Plainfield, Illinois (Chicago area new home construction)
Sky Harbor of New Lenox, Illinois (Chicago area new home construction)
Whisper Creek of Mokena, Illinois (Chicago area new home construction)
Hartz Homes has new home communities in:
Addison, Illinois (Chicago area new home construction)
Aurora, Illinois (Chicago area new home construction)
Bolingbrook, Illinois (Chicago area new home construction)
Lockport, Illinois (Chicago area new home construction)
Manteno, Illinois (Chicago area new home construction)
Mokena, Illinois (Chicago area new home construction)
Montgomery, Illinois (Chicago area new home construction)
New Lenox, Illinois (Chicago area new home construction)
Oakbrook Terrace, Illinois (Chicago area new home construction)
Plainfield, Illinois (Chicago area new home construction)