Depending upon several factors, some of which include geographic location, credit scores, current interest rates and current income, different loans work best for different home buyers. A good example of this is West Coast borrowers who opted for different versions of an adjustable rate mortgage (ARM) for their home buying needs in recent years. At the time of many of these ARMs, the initial interest rate was significantly lower than those for traditional fixed-rate mortgages, so their payments were quite affordable at the onset of the loan.
One common theory for using an ARM is to buy a home with initial low interest and low payments. This may buy enough time for homeowners to improve their credit scores, and maybe even increase their income. The end goal is to refinance to a traditional fixed-rate mortgage by the time the ARM adjusts to a much higher interest rate and payment. There are definite risks in using an ARM for a mortgage, including the risk of interest rates climbing to the maximum allowed by your ARM contract. That could make your monthly payment unaffordable for your income level.
Other loans that present a risk, but mostly to the loan servicer, are jumbo loans and Fannie Mae (FNMA) and Freddie Mac (FHLMC) `B’, `C’ and `D’ loans, as opposed to conforming `A’ loans. A Jumbo loan is a loan that is for more than the maximum allowed by Fannie and Freddie’s set borrowing limits. Any loans other than `A’ loans indicate that the borrower has experienced some type of financial hardship - e.g., foreclosure, bankruptcy or late payments revealed by credit report. The use of `B’, `C’ or `D’ loans is to provide short-term financing to these borrowers until they can improve their credit and refinance with conforming `A’ financing.
There are many other loan types available that you will want to research before deciding on a home loan. Some conventional and government loans you may want to consider are traditional fixed rate loans and those available through the Federal Housing Administration (FHA), U.S. Department of Agriculture Rural Housing Service (RHS), Veterans Administration (VA), Ginnie Mae (GNMA), Fannie Mae and Freddie Mac. A conventional loan includes all loans other than those offered through FHA, VA or RHS.
A traditional fixed-rate loan is a mortgage where the interest rate and payments remain the same throughout the life of the loan. You typically, but not always, have to come up with 20 percent down, or you have to buy private mortgage insurance (PMI). Depending on your credit score and other factors, your interest rate is often higher with less down.
Most loans through the FHA, RHS, VA, Ginnie, Fannie and Freddie are fixed-rate loans; although, there are some exceptions. The advantage of obtaining a home loan through one of these entities is that you often have flexibility that you don’t have through banking or other financial institutions. There are income limits, however, that disqualify many borrowers.
You won’t know what’s available to you unless you contact a lender for more information. To begin the loan process, contact three different lenders. Find out what each one has available, including type of loans available, interest rate offered and all fees associated with the loan. Request everything in writing. Armed with this information you will be a formidable force in obtaining the best loan that fits your family’s needs.
Ki lives and works in the Austin real estate market. Buyers can search the Austin MLS for homes and properties on his website. The website also provides a mortgage calculator widget for visitors as well as general statistics on the Austin real estate market.