Understand Home Loan Types
When you begin investigating mortgages, you’re faced with a lot of pesky jargon and acronyms you probably haven’t dealt with before now. But don’t get discouraged! Here are our top 4 things to know before you start shopping for that home loan:
30s, 15s and 10-years, oh my! Why does term matter?
One of the first decisions you need to make about your mortgage is how long you want the loan to last - this is called the term. A longer term will offer you lower, more affordable monthly payments but you will end up paying more in interest over time and your home equity will be slower to build.
7/1, 5/1, 3/1: Why are we talking about ARMs?
Another big decision you’ll have to make is whether your loan will have a fixed rate or variable rate. Variable rate mortgages are also known as Adjustable Rate Mortgages or ARMs. Despite their name, ARMs start out with a fixed interest rate for a set period of time - indicated by the first number. The second number refers to how many years are between rate adjustment periods.
For example, a 5/1 ARM will have a constant interest rate for the first 5 years of the loan and will then adjust to market rates at the end of the 5th year, continuing to adjust annually thereafter.
The loan term of an ARM is 30 years, but these mortgages are rarely held for the full term before the home is sold. An ARM will typically offer you lower initial interest rates - and therefore lower monthly payments - at the outset of your loan; they tend to be best for home-buyers planning to own a home for a short period of time before selling.
Conforming or jumbo: Which one is better?
A conforming mortgage is the most common type of mortgage and is the right solution for most people, though it may not be suitable for many in high cost areas such as LA. It’s called conforming because it must “conform” to certain standards established by government-backed mortgage securitizers Fannie Mae and Freddie Mac. In 2017, a conforming loan must not exceed $424,000 in traditional markets or $625,500 in high-cost markets and the down payment is set at 20% or more of the total home value (we’ll talk about options for low down payment options next). In Los Angeles County, the limits are $636,150 for a one-unit property and $814,500 for a two-unit property.
Jumbo mortgages come into play in housing markets where property values are particularly high and a conforming mortgage is not large enough to cover the total loan amount. Qualifying for a jumbo loan usually requires lower debt-to-income ratios, higher credit scores, larger down payments and higher emergency saving funds than qualifying for a conforming loan.
Did you know: Conforming loan programs allow a down payment as low as 3.0% but not all lenders offer them.
Low down payment options: What if I don’t have 20% for a down payment?
There are a number of options for homebuyers to purchase a house without having 20% for a down payment. There are a few programs that allow borrowers to get a mortgage with as little as a 3.0% down payment on the home, going as low as 0.5% down in certain cases. There are also specialty programs - like those through the Department of Veteran Affairs (VA) and Department of Agriculture (USDA) - which offer mortgages with as little as zero down for specific groups such as veterans or those in rural areas.