Types of Mortgage Loans
In the past, homebuyers more or less had limited mortgage loan options. These days, there are more options than you can shake a stick at, but here's a primer on the basics.
With the real estate market explosion over the last 10 years, a call has gone out for unique mortgage loan programs. Bankers have been more than happy to answer the call. For many borrowers, traditional mortgage loans still fit the bill. Here's an introduction.
- Conforming Loans – The loans comply with requirements set down by Fannie Mae and Freddie Mac, two government sponsored entities that buy and sell loans from mortgage lenders. These entities put strict caps on the loans they will buy, with single-family homes having a mortgage cap in the range of $360,000. With the booming real estate market, many areas such as San Diego do not come close to fitting into the conforming loan market since homes average in the $600,000 range.
- Non-Conforming Loans – Known as "Jumbo Loans", these mortgages are written for loans that exceed the $360,000 cap mentioned previously. They tend to have slightly higher interest rates, but are readily available.
- Bad Credit Loans – In the mortgage industry, mortgage brokers often refer to a borrower's "paper." This paper refers to people with less than stellar credit. "B" paper refers to relatively small problems, while "D" paper refers to bigger issues such as bankruptcy filings. The worse your paper, the more you can expect to pay in interest, points and down payment amounts. You need to carefully determine whether paying these extra penalties makes financial sense.
With each of the above loans, you'll have the option of going with a fixed interest rate or an adjustable-rate. Fixed interest rates simply set a definitive interest rate that will be charged over the length of the loan. Adjustable rates typically start at a figure lower than fixed rates but can be moved up to reflect changes in the cost of borrowing money. In many ways, you are betting on whether interest rates will increase in the future.
For a great majority of people, basic mortgage loan options still suffice when it comes to borrowing money. Don't fret if you have problems qualifying for these loans. There are many other options on the market these days.