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.
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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.
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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.
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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.
Equal Housing Lender.