Loan Programs

Fixed rate mortgages are the most common type of loan program. In this type of program, the interest rate remains unchanged over the entire life of the loan. This means that the monthly principal and interest payments never change as well. Typically, fixed rate mortgages vary in term as they range from 10 to 30 years and can be paid off at any time without penalty.

However, it is important to note that, even though you have a fixed rate mortgage, your monthly payment may vary depending on whether you have an "impound account". An impound account, or escrow account, is one in which your property tax and homeowners insurance dues are collected on a monthly basis in your monthly mortgage payment. In addition to the monthly loan payment, an additional amount will be prorated and collected to pay for your property tax and insurance when they become due. If the property tax or the insurance changes over time, the borrower's monthly payment will be adjusted accordingly. However, the overall payments in a fixed rate mortgage are generally very stable and predictable.

Some features and facts of fixed rate mortgages include:

• stable monthly mortgage payments throughout the life of the loan
• an interest rate that will never change (unless the mortgage is refinanced)
• most popular type of home loan

Adjustable rate mortgages are a type of mortgage with an initial interest rate which is fixed for a specified period, but will adjust periodically. For example, a 5/1 ARM is an adjustment rate mortgage that sets the initial interest rate for five years, but will adjust every one year after that initial period. The interest rate adjustments are tied to a benchmark, which can be the interest rate on certificates of deposits or Treasury bills, or specific indices such as the Secured Overnight Financing Rate (SOFR) or the London Interbank Offered Rate (LIBOR).

Some features of adjustable rate mortgages include:

• low initial "teaser rates"
• initial interest rates can be locked for a number of years (1 year, 5 years, 7 years, etc.)
• are best for borrowers who don't plan on keeping the mortgage for a long time and are comfortable with some level of risk
• monthly payments may change drastically over time

VA loans are mortgages that are backed by the Department of Veteran Affairs. These loans offer military veterans various benefits such as low interest rates, no down payment, and no mortgage insurance. This program was designed to help military veterans and are best for military-qualified borrowers who want low interest rates and now down payment minimum.

Some VA loan benefits include:

• No down payment
• No mortgage insurance
• Lower interest rates
• No prepayment penalty
• Lower closing costs
• Comes with government backing (Department of Veteran Affairs)

Conventional loans are ones which are not back by the government. These types of loan usually comes in two types: conforming and non-conforming loans. Conforming loans are ones that falls within the limits set by Federal Housing Finance Agency (for example, the maximum dollar limit changes year-by-year). Non-conforming loans are ones which do not meet guidelines; jumbo loans are the most common type of non-conforming loan and are named as they are mortgages above the FHFA limit.

Some features and requirements of conventional mortgages include:

• ability to be used for primary, secondary, or investment properties
• maximum debt-to-income ratio of 45-50% to qualify
• necessity to pay PMI (Private Mortgage Insurance) if your down payment is less than 20% of the sales price
• significant documentation used to verify income, asset, employment, etc.

FHA home loans are mortgage loans that are insured against default by the Federal Housing Administration (FHA).  FHA loans are available for single family and multifamily homes. These home loans allow banks to continuously issue loans without much risk or capital requirements. The FHA doesn't issue loans or set interest rates, it just guarantees against default.

FHA loans allow individuals who may not qualify for a conventional mortgage obtain a loan, especially first time home buyers. These loans offer low minimum down payments, reasonable credit expectations, and flexible income requirements.

Jumbo loans are a type of mortgage where the loan amount is above the conforming loan limit. For example, the 2021 maximum conforming loan limit for single-family homes in the majority of the U.S. is $548,250. This maximum limit can vary depending on location, type of property, etc. This type of loan is best for borrowers who are buying an expensive house and desire to borrower a higher-than-typical amount of money.

Similarly to jumbo loans, high-balance loans are a type of mortgage where the loan amount is above the conforming loan limit. For example, the 2021 maximum conforming loan limit for single-family homes in the majority of the U.S. is $548,250. This maximum limit can vary depending on location, type of property, etc. This type of loan is best for borrowers who are buying an expensive house and desire to borrower a higher-than-typical amount of money. It is typical for this type of loan to have stricter requirements to qualify when compared to conforming loans. Also, the interest rates for high-balance loans tend to be higher than conventional loans as this type of loan carries more risk for lenders.

There are many different types of home loans available, and this can make it seem overwhelming to most homebuyers and borrowers. Is the best mortgage product for a fixed rate, adjustable rate, or government loan mortgage? There is no single clear-cut answer for all borrowers! Choosing a loan type is an important decision and the best type of loan for your personal situation depends on many factors. However, it is important to remember that spending time to research and explore all mortgage options now can result in saving thousands of dollars in the long run.

Below are some questions to help guide you in the right direction:

• What will your financial situation look like in the next few years?
• How much can you comfortably afford for your monthly payment?
• Which type of mortgage is best for me?
• How does my credit score affect the interest rates offered to me?
• Will I have to pay mortgage insurance?
• What other closing costs will I need to pay at closing?

A professional mortgage lender is the best resource available to help you decide which loan best fits your needs. AmericanLoan.com has multiple decades of experience and would love to be part of your mortgage process.