Unraveling the Various Loan Structures Before You Buy

If you’ve ever investigated the different types of loans available, you might have found the number of available mortgage financing options overwhelming.

There are fixed-rate, adjustable-rate, conforming, and nonconforming loans to explore. So how do you know which one is right for you? Here are four of the most common home loan structures simplified.

Adjustable And Fixed-Rate Home Loan Structures

Fixed-rate and adjustable-rate mortgages, as their names suggest, offer unchanging and fluctuating interest rates respectively. So how do you know which one is best for you?

Fixed-Rate Mortgages

Two common fixed-rate mortgages include the 15-year loan and the 30-year loan.<

The 15-year loan has a structure that will allow you to pay off your entire home in 15 years. If you secure a low rate, this advantageous financing option allows you to keep the same rate throughout the entire loan term. 15-year mortgages are ideal for homebuyers who can afford high mortgage payments and wish to save on interest rates.

The 30-year alternative shares a fixed interest rate with the 15-year loan. Unlike its shorter counterpart, the 30-year loan requires lower monthly payments, although interest rates are typically higher than shorter loans. These higher rates can however be worth it if you prefer to make lower, more affordable monthly payments.

Adjustable-Rate Mortgages

Unlike predictable fixed-rate mortgages, adjustable-rate mortgages (ARM) mirror the fluctuation of the real estate market.

So when is it worth it to choose a less predictable loan over a potentially safer, fixed-rate mortgage? Adjustable-rate mortgages offer a low initial rate for anywhere from one to ten years before matching the market’s ever-changing interest rates. If you are planning to sell your home in just a few years or you have the finances to pay off your loan in a short time, an adjustable-rate mortgage is a viable option.

If you are consulting with various mortgage lenders to find out which loan is best for you, there are important questions you can ask to speed up the process.

Conforming Vs Nonconforming

If you’ve been researching the different types of loans available to home buyers, you have probably encountered articles and other resources referencing conforming and non-conforming loans. So what’s the difference?

Conforming Loans

Lenders that offer conforming loans follow the Fannie Mae and Freddie Mac rules, ensuring that buyers receive fair treatment from lenders. Conforming loans are best for financially secure buyers who are purchasing average-price homes and who wish to pay lower interest rates and less mortgage insurance. To enjoy the benefits of a conforming mortgage loan, buyers must have credit scores of at least 620 to qualify. The higher your credit score is, the lower your mortgage interest rates will be. If you can afford a down payment that equals or exceeds 20%, you can bypass mortgage insurance fees entirely.

While homebuyers can enjoy lower interest rates with conforming loans, this mortgage financing choice includes borrowing limits and isn’t available for home purchases exceeding $548,250. Buyers with low incomes are also unlikely to qualify for this type of loan.

Non-Conforming Loans

A non-conforming loan refers to any type of mortgage financing option that is not backed by Fannie Mae and Freddie Mac.

Government-funded loans are most popular for low-income homebuyers, as no to low down payments are necessary.

FHA (Federal Housing Administration) mortgages are extremely popular throughout the country, as low-income buyers only need a downpayment of 3.5% to purchase a house.

Other common non-conforming loans include VA (Veterans Affairs) and USDA (U.S. Department of Agriculture) loans. These low-cost options are perfect for veterans and rural homebuyers respectively who cannot afford a traditional down payment.

While low down payments are good news for low-income buyers, interest rates and funding fees rates are higher than those of alternative loans.

Jumbo loans are a specific type of non-conforming loan designed for buyers of homes that exceed $548,250. While this mortgage financing option includes similar requirements to other types of loans, lenders offering jumbo loans are typically stricter about debt-to-income (DTI) ratios due to greater risks if buyers default on their loans.

Understanding the difference between various mortgage financing options is the first step to getting a home loan. The complexity of home loan structures may seem intimidating at first glance, although buyer-orientated lenders can help you take this important step in your home-buying journey.

At Supreme Lending, we provide home buyers with custom loan options that fit their buying situations best. Start here today to get started on the journey to buying your dream home.

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