Loan Types

Fixed Rate Mortgage: (FRM)

Fixed rate mortgages are the most common type of loan product available because they provide the most security in terms of rate and payment stability. Once your loan funds, your interest rate and monthly payment will remain the same throughout the life of your loan. Most home owners like this type of program because it allows them to plan for the future with no unexpected changes. Fixed rate mortgages come in many different types of durations: 10, 15, 20, 30 and 40 year terms. Usually the shorter the term, the lower the interest since the lender has to guarantee the pricing of your loan for a shorter duration.  However with a shorter duration comes a higher monthly payment. Consumers usually look to fixed rate loans when interest rates are low or there looking to hold on to the property long term. While this loan may not help you generate the greatest monthly savings or provide the lowest monthly payment, it is indeed the most conservative of all loan programs.


Adjustable Rate Mortgage: (ARM)

Adjustable rate mortgages are loans that have the possibility of an adjusting interest rate over the life of the loan. While these loans have received much bad press over the years these can be a great loan product if used in the right way. ARMs like FRMs have a specific period of time that your interest rate is fixed before you enter your adjustment period. While your ARM is in the fixed duration it serves the same purpose and provides the same security as a FRM. It is after your fixed duration expires that brings concern to most consumers. Most of the ARMs you will see today are called Hybrid Loans because they carry a combination of a fixed rate period before the loan enters into adjustment. Typically you can find ARM products with 1,3,5,7, or 10 year fixed rate periods with annual or biannual adjustments after that. Rates on these types of loans tend to be lower then a FRM generating a lower monthly payment and a greater savings over the life of the loan. Consumers usually look to these loans when interest rates are high, cash flow is more important now than in the future, or if they are only planning on owning the home for a specific period of time. The drawback to this loan product is that it does not provide the long term security and predictability as FRM.

 
Interest Only:

Interest only loans can come in the form of FRM or ARM. This is a designation to the loan product that allows you to pay interest only on your loan and not principal. Interest only loans are valid for a maximum of 10 years or 120 months; then the loan will fully amortize over the following 20 years. Consumers look at these products when immediate cash flow is more important or for investment reasons. Consumers commonly misunderstand that there is value in paying into the principle of your home, because it grows at a zero rate of return.  Savvy investors have discovered that they can generate a greater rate of return in the market when compared to paying principle into your home. This isn’t a recommended approach to financing your home unless you have a full understanding of the market and are disciplined in your investments. Many home owners have fallen prey to this loan program because they were enticed by the low monthly payment only to later realize they haven’t been paying any principle into their home nor saving and investing the difference. Like ARMs, interest only mortgages have received a lot of bad press of the last few years.  However like ARMs, interest only mortgages can be very powerful if used in the right way.


FHA:

FHA is a loan product that is insured by the Federal Housing Administration. The Federal Housing Administration was formed in 1934 to help the country recover from economic collapse after the Great Depression. The main goal of FHA was to promote home ownership and help as many people get into a home as possible. These loans were typically for, but not limited to first time home buyers that may not otherwise qualify for a conventional loan product. FHA loans are the fastest growing segment now that 80/20 financing and subprime lending are no longer available. These loans allow for a low down payment requirement of only 3.5% and have flexible credit guidelines accepting credit scores as low as 580. Pricing is very competitive and at times better then conventional 30 year products. However FHA does require an upfront and monthly mortgage insurance premium due to the flexibility of the loan program. Mortgage insurance is purchased on theses loans to guard against the potential loss if the loan holder were to default. FHA loans can come in the from of a FRM or ARM.


VA:

VA loans like FHA loans are sponsored by the U.S. Government and were created to reward certain members and veterans of the armed forces for service to their country. The loan programs provide options with zero down and low closing cost without any extra add on to pricing as seen on conventional loan products. These loans also have flexible credit guidelines and do not require any reserve requirements. Pricing is very competitive and falls in line with FHA and Conventional financing. At this point this is one of the last true 100% financing loan programs available. VA loans also come in the form of a FRM and ARM.


USDA:

USDA (United States Department of Agriculture) is another government sponsored loan product. This product is available for rural housing in communities with less then 10,000 in population. The goal of USDA is also to promote home ownership in the cities and counties that fall out of the metropolitan landscape. These loans are insured by the USDA and offer lower interest rates, flexible credit guidelines, and require little to no assets. USDA and VA at this point are the only two true 100% financing available, no down payment requirement. The down side to this loan is that the property must fall in designated areas, there are income limitations, and mortgage insurance is required for this product. 

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