Monday, May 9, 2016
By Jed Williams
Types of Loans

When purchasing a home, there are so many things to consider that your head will likely be spinning from the beginning. You will need to get a prequalification letter, but then determine how much you can actually spend on a mortgage. You will need to figure out where you want to live, what kind of home you want, if you want to live with an HOA or not, and a myriad of other things. Then you need to sort out the purchase price and terms of the contract. Luckily for you, your Hagan agent is well versed in all of these processes and can help you make the right decisions for you and your situation. In addition to all of these, you may want to consult your agent on the type of loan that would best suit your needs.

Not all loans are created equal, nor will you qualify for all types. There are a number of loans you may want to consider, and I have compiled a list of just a few of them. Be aware that there are many more out there, and be sure to do your due diligence in deciding which would be best for you.

Conventional Loans

Conventional loans are those that are not backed by the government. They include almost all different types of loans aside from FHA, VA, and USDA, which are government-backed. Conventional loans typically require higher down payments and credit scores than government loans do. Most lenders will not loan more than 80% of the value of the home to borrowers who pursue this type of loan. If they do, however, they will almost certainly require the borrower to also purchase Private Mortgage Insurance, or PMI. This PMI protects the lender if the borrower cannot fulfill his obligations in repaying the loan. Included under the umbrella of conventional loans are fixed-rate mortgages, adjustable-rate mortgages, interest-only mortgages, and no-cost loans.

Fixed-rate mortgages

Fixed-rate mortgages are loans that come with an interest rate that will not change, no matter what the market around you does. Sometimes this is an advantage and sometimes a disadvantage. Getting a fixed rate, you are likely getting a very good deal long term on your loan. Because interest rates change almost daily, you are guaranteeing that your rate will never increase. Suppose you sign loan documents for a fixed rate of 3.5% and then the market tanks and interest rates sky rocket. You are locked in for your 3.5%. On the other hand, you may have signed your final loan documents on a day when speculation about the market was shaky and interest rates were way up. Perhaps you signed for 6% or 7%, and then the next day things settle and interest rates settle back at 4%. You are, unfortunately, locked in at the higher rate. Of course things don’t move that much that quickly, typically, but month-to-month and year-to-year they can and will and many times even more drastically.

Adjustable-rate mortgages

Adjustable rate mortgages are the exact counterpart to fixed rate mortgages. As the name suggests, the interest rate is variable. When you sign your loan documents, you are typically just signing for a certain amount, and an interest rate is not usually present. Sometimes your lender will give you a range of percentages that your rate won’t dip below or spike above, but you are oftentimes at the mercy of the market. Like fixed-rate mortgages, sometimes this can work in your favor and sometimes to your detriment. Month to month, your payment will likely be different, and if you’re not following the market to know what the current interest rate is, you may open your mortgage bill and experience a little bit of shock. On the other hand, if you’ve had a few months of high interest rates, you may be expecting more of the same, and get a pleasant surprise upon opening the bill. Over a 15 or 30 year loan term, those numbers can certainly fluctuate quite a bit. Sometimes you’ll be getting an interest rate that is lower than what you would have locked yourself into had you chosen a fixed-rate mortgage, other times, more. Over the course of your loan term, it is hard to say which one will cost you more or less, and you need to decide what is best for you in your situation for the long or short term.

Interest-only mortgages

Rarely lenders will agree to interest-only mortgages. Like the other two names of loan types suggest, interest-only mortgages allow the borrower to pay only the interest and none of the principle on their loan. Not typically suggested for borrowers, this type of loan can be a great option if a very strict set of circumstances presents itself. Rates are almost always variable, and your mortgage payment will be different every month, like on a regular adjustable rate mortgage. However, the actual mortgage payment will be much lower than a regular adjustable rate mortgage because none of the principle will be included in the payment.

No cost loans

No cost loans are those that require no down payment. Popular at the height of the market, lenders required borrows to put no money down to secure their loans. With no cash required up front, this is an attractive option to home buyers with little to money in their bank accounts. Interest rates are typically much higher and the lender will likely require Private Mortgage Insurance, but it is a viable option for borrowers who are just starting out or may have experienced a temporary financial set back, but are getting back on their feet.

Government loans

Government-backed loans include FHA, VA, and USDA loans. FHA loans, or those from the Federal Housing Administration, are available to everyone who qualifies, and are guaranteed by government institutions. VA loans, or those available through the department of Veterans Affairs, are available only for military members and their families. USDA loans are 100% financing available to only buyers who are purchasing in rural areas. All of them are insured and guaranteed by government agencies and come with specific terms, requirements, and perks.

Your Hagan agent is well versed in the different types of loans available, though not specifically what your lender will offer to you. Once you have talked to your lender and discussed your options, you will have a better idea of the options available. Feel free to discuss your specific situation with your agent and what your lender is offering to you. Your agent may have some insights and angles to consider that may not have occurred to you previously.

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Jed WilliamsJed Williams
Principle Broker and founder of Hagan Realty