5 Different Types of Mortgages

5 Different Types of Mortgages

Tired of renting and ready to buy a home in the South Bay? Perhaps you’re relocating to Manhattan Beach? Or maybe you already live in Hermosa Beach and have decided that it’s time to upgrade to a bigger home? If you’re shopping for a home, odds are you are shopping for a home loan as well. These days, however, it’s by no means a one-mortgage-fits-all model. So, whether you’re a first-time buyer or a seasoned homeowner, here are the 5 most common types of home loans to help you find the right one for you:

Conventional Mortgages

A conventional mortgage is a home loan that’s not insured by the federal government. There are two types of conventional loans: conforming and non-conforming. A loan is considered “conforming” when it meets guidelines set by Fannie Mae or Freddie Mac, two government-sponsored entities that acquire the bulk of mortgages after they are made between a lender and a borrower. One major restriction on conforming loans is their size. They cannot exceed California conforming loan limits, which is $726,525 in Los Angeles County.

Generally, these loans require a higher credit score than government-issued mortgages, and a 20% down payment. However, newer guidelines allow for as low as 3% down with additional private mortgage insurance (PMI).

Best For:

Conventional conforming loans are ideal for borrowers with strong credit, a stable income and employment history, and a down payment of at least 3 percent.

Jumbo Mortgages

Home prices in California are high compared to many states in the U.S. Borrowers here sometimes need a bigger loan, one that exceeds conforming loan limits. That’s where jumbo mortgages come in. These loans are available in amounts usually up to $3 million with competitive interest rates.

Best For:

            Jumbo loans make sense for more affluent buyers purchasing a high-end home. Borrowers should have good to excellent credit, high incomes and a substantial down payment. Many reputable lenders offer jumbo loans at competitive rates.

Fixed-rate loan

The most common type of loan, a fixed-rate loan prescribes a single interest rate—and monthly payment—for the life of the loan, which is typically 15 or 30 years. Only taxes and insurance will change over time. Additionally, because the term (duration) of the loan is half of a 30-year loan, 15-year mortgages carry lower interest rates but higher monthly payments.

Best For:

Homeowners who aren’t planning on moving anytime soon. You pay a set amount each month for a fixed amount of years, regardless of the rise and fall of interest rates. However, it does take longer to build equity, so plan on staying in your home for at least 7-10 years.

Adjustable-Rate Mortgages

Unlike the stability of fixed-rate loans, adjustable-rate mortgages (ARMs) have fluctuating interest rates that can go up or down with market conditions. Many ARM products typically have an interest rate set lower than fixed-rate loans for a few years before it resets to a variable interest rate for the remainder of the term. Though certain ARMs have caps on how much the interest rate or monthly mortgage can increase, making them much more feasible.

Best For:

Home buyers with lower credit scores. Since people with poor credit typically can’t get good rates on fixed-rate loans, an ARM can nudge those interest rates down enough to put homeownership within easier reach. These loans are also great for people who plan to move and sell their home before their fixed-rate period is up and their rates start changing.

Government-Insured Mortgages

California FHA Loans

FHA loans are popular with first-time home buyers and people that haven’t had interest in property within the last 3 years. They only require a 3.5% down payment, and FHA’s requirements are pretty forgiving for borrowers with less-than-perfect credit. They allow down payment gifts from blood or by-marriage relatives. Although, if you do make a smaller down payment (less than 80% loan-to-value), an annual mortgage insurance premium (MIP) is required. This insurance is paid monthly and tacked onto the principal, interest and insurance portions of the payment. Additionally, FHA loans have a one-time, upfront mortgage insurance premium (UFMIP) at the time of closing.

California VA Loans

VA loans are one of the best deals going because they require zero down. Borrowers must be active duty or honorably discharged veterans. Unlike other government-sponsored loans, no mortgage insurance is required. However, there is a one-time, upfront VA Funding Fee. Like other programs, loan limits apply. The California VA loan limit, for one-unit properties, is $726,525.

California USDA Loans

USDA loans help moderate-to low-income borrowers buy homes in rural areas. You must purchase a home in a USDA-eligible area and meet certain income limits to qualify. USDA loans are another zero down payment option, with a fee applied for payments of less than 20%. Additionally, the USDA does not specify a minimum borrower credit score, and down payment gifts are allowed. Like other government-insured mortgages, USDA loans have an upfront guarantee fee at the time of closing.

Best For:

Government-insured loans are ideal if you have low cash savings, less-than-stellar credit and can’t qualify for a conventional loan. VA loans tend to offer the best terms and most flexibility compared to other loan types for military borrowers.

Now What?

Too much information? Don’t worry about it, just give us a call and we will help you figure out what you need and connect you with the best loan people here in the South Bay.