connect with me
LOAN TYPES Residential Home Loans have two main types:
FIXED RATE
Fixed rate loans are "fully amortizing" over 10, 15, 20 or 30 years. Fully amortizing means interest rate and required payment is set for the life of the loan. Over-payment to a fully amortized loan will cause loan to pay off more quickly; however, it will not change monthly payment, unless loan is recast which means monthly payments are re-calculated.
ADJUSTABLE RATE MORTGAGES (ARMS)
Adjustable rate loans aka ARM loans are also normally amortized over 15 or 30 years. ARM loans start with an initial fixed rate period of 3, 5, 7 or 10 years during which rate and payment are fixed. After initial period ends, payment changes with ARM rate and ARM caps.
ARM rate = index + margin. The index (Treasury, Libor, Prime Rate) is a benchmark interest rate which changes as the market changes.
The margin is set by the lender when you apply for your home loan and it normally never changes.
In addition to a rate, ARM loans have caps which are maximum changes allowable within its structure. ARM caps are expressed by three numbers, such as 5/1/2. The first number aka initial cap = MAXIMUM amount rate can rise at first adjustment after the initial fixed rate period ends. The second number aka periodic cap = HOW OFTEN rate and payment can change after initial fixed period ends. The third number aka lifetime cap = MAXIMUM amount rate can increase over life of the loan.
Determining whether a fixed rate versus an ARM loan is better for you depends on a number of factors, such as: how long you intend to hold property, how often you refinance, current interest rates.
LOAN CATEGORIES Residential Home Loans have two main categories:
CONVENTIONAL
Conventional loans aka standard bank loans are not guaranteed or insured by the federal government. Conventional loans require down payments as low as 3% (for conforming) and 5%(for high balance conforming). Any conforming loan with LESS THAN 20% down must contain mortgage insurance (either built into rate or paid separately along with loan).
GOVERNMENT INSURED
Government insured loans fall into three types: FEDERAL HOUSING ADMINISTRATION (FHA) LOANS, VETERAN'S ADMINISTRATION (VA) LOANS and UNITED STATES DEPARTMENT of AGRICULTURE (USDA) LOANS. Unlike conventional loans, these loans are "government backed," guaranteed by the federal government with special insurance to protect against default. These types of loans often allow for low down payments (3.5% FHA, 0% down VA), lower FICO scores, more flexible down payments.
LOAN SIZES Residential Loans have three main sizes.
I. STANDARD CONFORMING
Conforming loans conform to Fannie Mae or Freddie Mac guidelines, guidelines set for easy resale of mortgages on the secondary market. Traditionally, these loans offer the lowest overall rates and best terms.
2024 STANDARD CONFORMING HIGH COST LOAN LIMITS FOR CALIFORNIA:
UNITS LOAN LIMIT
1 $766,550
2 $981,500
3 $1,186,350
4 $1,474,400
II. HIGH BALANCE CONFORMING
High Balance Conforming loans also conform to Fannie Mae or Freddie Mac guidelines. These loans are intended for high cost areas where home prices and loans generally exceed standard conforming limits. While still competitive, high balance conforming loans take a higher rate than standard conforming loans.
2024 HIGH BALANCE CONFORMING HIGH COST LOAN LIMITS FOR CALIFORNIA:
UNITS LOAN LIMIT
1 $1,149,825
2 $1,472,250
3 $1,779,525
4 $2,211,600
*conforming loan limits vary by county
III. JUMBO
Jumbo Loans exceed loan size outlined within Fannie Mae or Freddie Mac guidelines. Therefore, jumbo loans are considered higher risk loans. They are underwritten to the standards of a portfolio lender or bank. And, jumbo loans typically have more stringent guidelines and take a higher rate than conforming loans.