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Understanding Your Mortgage Options.
As you read this, keep in mind that the mortgage industry is changing every day and many mortgage companies are expanding their financing options. Therefore, understand that these are general guidelines and feel free to ask your mortgage broker/lender if any new guidelines apply.

Mortgage Programs


Conventional Mortgage Program
(also known as Conforming)
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A conventional mortgage is a loan that is long term (typically 30 or 15 years) and meets the guidelines as put forth by FNMA (Federal National Mortgage Association) and FHLMC (Federal Home Loan Mortgage Corp.). These guidelines include satisfactory types of borrowers, kinds of property, and loans amounts up to $300,700 ($451,050 in Alaska and Hawaii).

Mortgage Insurance (MI) is required on a conventional loan if the loan-to-value is more than 80%. For example, if a borrower purchases a home for $200,000 and applies for a loan of $180,000 (90% loan-to-value), he or she will be required to pay mortgage insurance to obtain the loan. Mortgage insurance is typically paid on a monthly basis.

A conventional mortgage is generally non-assumable and does not have a pre-payment penalty.

Fixed Rate Conventional Mortgage

The most common type of Conventional Mortgage is a fixed rate mortgage. Two distinct characteristics of a fixed rate loan are an interest rate that doesn't change and a loan amount that is repaid in equal monthly payments.

The most common term lengths for fixed rate mortgages are 30 years and 15 years. A 15 year term usually has a lower interest rate than a 30 year term mortgage.

As a fixed rate mortgage is repaid, more interest than principal is paid in the early years of the loan. However, the longer the borrower keeps and repays the mortgage, the larger the percentage of principal is paid with each monthly payment. A lender/broker can supply an amortization schedule to demonstrate this.

Adjustable Rate Conventional Mortgage

Another type of Conventional Mortgage is an adjustable rate mortgage (ARM). The main difference between an ARM and a fixed rate is that an ARM has an interest rate and monthly payment that is subject to change. This type of mortgage is less common than a fixed rate mortgage because many borrowers do not want to worry about their mortgage rate changing during the term of their loan. An ARM does have beneficial qualities that appeal to borrowers in certain situations.

An ARM is a mortgage with an interest rate that is subject to change periodically, based on an index that is determined at the time of obtaining the mortgage. The interest rate may go up or down, and the monthly payments of the mortgage will adjust accordingly.

As mentioned before, there are advantages to an ARM. Usually, the beginning interest rate of an ARM is lower than a fixed rate mortgage. This can be great for someone that is going to live in his or her home for a short amount of time (usually less than 5 years). And with a lower interest rate, the loan's payments are also smaller. With a smaller monthly payment, a borrower can sometimes qualify for a larger loan amount (this will depend on the lender). Some adjustable rate mortgages can be assumable. Finally, if interest rates remain steady or actually decrease an ARM can be less expensive than a fixed rate mortgage over the long term.

The main disadvantage of an ARM is the possibility of a higher monthly payment. To many people, this is a high enough risk to outweigh any advantages and thus avoid acquiring this type of loan.

ARM products usually have a beginning interest rate that is fixed for a predetermined amount of time. Most lenders/brokers offer ARM mortgages that are fixed for 1, 3, 5, 7, or even 10 years. The shorter the fixed time period, the lower the start rate. These mortgages typically convert to a 1 year ARM after the first time period has passed. At that point, the interest rate would be subject to change once a year thereafter. The details of an ARM can be complex; borrowers should consult their loan officer with any specific questions.

Balloon Conventional Mortgages

One last type of Conventional Mortgage is a balloon mortgage. This type of mortgage has a fixed interest rate, but at some point requires the borrower(s) to make a final lump sum payment.

Usually, a balloon mortgage has a fixed interest rate and monthly payments are based on a 30 year fixed payment schedule. However, the actual term of the loan is shorter than the 30 year payment schedule. Most balloons have a 5 year term or a 7 year term. At the end of the 5 or 7 years, the loan is due and payable in a lump sum. However, most balloon mortgages include an option to refinance the loan at the end of the 5 or 7 years.

A borrower might choose this type of mortgage if he or she plans on living in the home a short amount of time and does not plan on needing a mortgage for 30 or 15 years. Therefore, he or she would want to take advantage of the lower interest rates offered with a balloon mortgage.

Balloon and adjustable rate mortgages offer lower introductory rates and greater flexibility than fixed mortgages. Depending on each borrower's situation, either of these products might provide a right combination of factors. All borrowers should feel comfortable discussing different mortgage options with their loan officer.


Jumbo Mortgage Program (also known as Non-Conforming)
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A jumbo mortgage consists of the same features as a conventional mortgage (see definition above), however the loan amount exceeds the loan limit set by FNMA and FHLMC.

Fixed Rate Jumbo Mortgages

One type of jumbo mortgage is a fixed rate mortgage. The characteristics of a jumbo fixed rate mortgage are the same as a conventional mortgage. Depending on the loan amount however, certain loan-to-value restrictions may apply. Consult a qualified loan officer for details.

Adjustable Rate Jumbo Mortgages

Jumbo mortgages can have adjustable rates also. The features of a jumbo adjustable rate mortgage (ARM) are similar to those of a conventional mortgage. Depending on the loan amount however, certain loan-to-value restrictions may apply. Consult a qualified loan officer for details.

Balloon Jumbo Mortgages

Balloon jumbo mortgages are another option for a borrower. The guidelines for this type of jumbo mortgage vary depending on lender/broker. Consult a qualified loan officer for details regarding this type of loan.


FHA Mortgage Program (a type of Government-Guaranteed mortgage)
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A FHA mortgage is obtained through a local lender/broker, however the Federal Government guarantees these mortgages through the Department of Housing and Urban Development (HUD).

A borrower might choose a FHA mortgage because it allows for greater flexibility in income, credit, and down payment requirements. A loan that might not be approved as a conventional loan might be approved as a FHA loan.

All FHA loans require Mortgage Insurance (MI). An up front premium of 1.75% of the loan amount is required and is typically added to the loan amount. A FHA loan also requires a monthly MI premium of .5%. In comparison, a conventional mortgage only requires a monthly MI premium if the loan-to-value is over 80%.

FHA loans are only available with fixed rates or 1 year adjustable rates. FHA loans also have a maximum loan amount that varies according to the property location.

A qualified loan officer can advise a borrower if he or she should consider a FHA mortgage.


VA Mortgage Program (a type of Government-Guaranteed mortgage)
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A VA mortgage can be obtained through a local lender/broker, and similar to a FHA mortgage, it is guaranteed by a government agency, the Veterans Administration.

Unlike any other mortgage programs described, only eligible veterans that have served in the armed forces (as defined by VA) can obtain a VA loan.

One feature of a VA loan is the ability of an eligible veteran to finance up to 100% of the purchase price of a property. The veteran can also add the VA funding fee to the purchase price, thus lowering the amount of cash the borrower needs to purchase a home. The VA funding fee is a fee charged by the Veterans Administration to insure the payment of the mortgage. The funding fee is usually 2.75% of the purchase price, but varies depending on the amount of times the veteran has previously purchased a home using the VA mortgage program.

VA loans have a maximum loan amount that as of January 2000 could not exceed $203,000.

All veteran borrowers should consider this mortgage program when reviewing their borrowing options. Regional VA offices can answer any questions regarding a veteran's eligibility status.

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