Types of Home Loans
When it comes to paying for your home, you have a wide range of financing options. Your home mortgage will likely come through a financial institution such as bank, or it may come through the seller.
We can direct you to a mortgage expert who can help you sort through the options. But here’s our run-down on the basics: (Remember, interest rates quoted here are intended for illustration only. Rates change daily.)
Conventional
Characteristics: Can be obtained with as little as 5 percent down payment. If the down payment is less than 20 percent, it may be necessary for the loan to have Private Mortgage Insurance (PMI) to protect the lender.
Term: Paid off in equal monthly payments over 15, 25 or 30 years.
Interest Rate: Stays the same for the life of the loan.
Adjustable Rate Mortgage (ARM)
Characteristics: Low initial interest rate with payments that typically increase over time. Popular with first-time buyers and buyers who plan to move or refinance in three to five years.
Term: Varies by lender.
Interest Rate: Subject to change on a periodic basis.
Balloon
Characteristics: Lower interest rates and monthly payments than fixed-rate loans. Best for borrowers who plan to move or refinance within the loan term. May allow conversion to a fixed-rate loan at term’s end.
Term: 5-7 year loans, amortized over 30 years. Repaid in equal monthly payments plus a “balloon” payment for the remaining balance.
Interest Rate: Varies by lender.
Buy-down
Characteristics: Home owner, builder or third-party puts additional cash up-front in exchange for a lower interest rate.
Term: Varies.
Interest Rate: Varies.
FHA
Characteristics: Insures loans, making lenders willing to finance home purchases on favorable terms. Down payments as low as 3 percent. Discount points may be paid by either seller or buyer.
Term: Varies by lender; however, the FHA charges an up-front Mortgage Insurance Premium, similar to Private Mortgage Insurance, that can be financed in the mortgage amount or paid in cash at settlement. The borrower must also pay an annual Mortgage Insurance Premium of 0.50 percent, which is collected monthly.
Interest Rate: Varies by lender.
Non-conforming
Characteristics: Provides home buyers with products that do not conform to the normal FHA/VA and conventional lending guidelines. These unique loan products are tailored to fit specific financial situations, including:
- Bankruptcies less than 2 years from discharge;
- No income/no asset verification loans;
- Late payments on previous or current mortgage;
- Bank statement programs for the self-employed; or
- Excessive credit problems, but sufficient liquid assets to work with.
Term: Varies.
Interest Rate: Varies.
Owner Assisted
Characteristics: Owners may finance first, second, third or fourth loans. They may loan their equity back as a first mortgage (often called a “take back”).
Term: As determined by the owner.
Interest Rate: As determined by the owner.
Second Mortgage
Characteristics: Made by the seller or by a commercial lender.
Term: Varies. Sometimes interest-only payments are made until the term date, when the balance is due.
Interest Rate: Based upon lender or buyer/seller agreement.
Veterans Administration
Characteristics: Available to qualified veterans of the Armed Services, Reserves and National Guard. Loans can exceed $200,000 with no down payment. Flexible underwriting guidelines. Closing costs may be a gift. Can be combined with second mortgages and are assumable (upon qualifying) by future buyer.
Term: Payment fixed for the full term.
Interest Rate: Varies by lender.
Renovation Financing
Characteristics: Provides buyers money to fix up, renovate, repair, replace or remodel a home with the purchase. Can combine this type of financing with FHA or Conventional financing.
Term: Varies.
Interest Rate: Varies.
