Mortgage Loans: Basic Types

It is the American dream to own your own home. When you save your money to make a down payment, you will need to apply for a mortgage loan. You should think about the following when considering purchasing a home and getting a mortgage loan:

• The amount you can afford as a monthly payment
• The amount you can make as a down payment
• The number of years you plan to live in the home
• The stability of your income

Mortgages can be classified into two categories: conventional loans and government loans. They can further be categorized as fixed rate loans, adjustable rate loans, and different combinations of these mortgage loans.

Mortgages are provided by three government agencies:

• The U. S. Department of Veteran Affairs (VA)
• The U. S. Department of Housing and Urban Development (HUD)
• The U. S. Department of Agriculture Rural Housing Service (RHS)

Conforming and Non-conforming Mortgage Loans

There are two types of conventional mortgages: conforming mortgage loans and non-conforming mortgage loans. Conforming mortgage loans follow the guidelines and conditions set forth by Fannie Mae and Freddie Mac. These two companies are stock-holder owned corporations that purchase mortgage loans from lending institutions. They package the loans into securities and sell them to investors. Each year the two companies, Fannie Mae and Freddie Mac set loan limits for first home loan applicants.

Fannie Mae and Freddie Mac have their own guidelines for

• Down payments
• Suitable properties
• Loan amounts
• Borrower credit and income requirements

Non-conforming loans include Jumbo loans and B and C loans. Jumbo loans are above the maximum amount established by Fannie Mae and Freddie Mac. This type of mortgage loan has a higher interest rate than conforming loans because a smaller percentage of these loans are packaged as securities for resell.

B and C mortgage loans are loans for applicants who secured a mortgage loan before but now have filed for foreclosure and/or bankruptcy. These loans may also be extended to borrowers who have a record of late payments.

Fixed Rate and Adjustable Rate Mortgages

Conventional and government mortgage loans can be classified as fixed rate mortgages and adjustable rate mortgages. Fixed rate mortgages have a monthly payment that is fixed over the life of the loan. These can range from 10 to 30 years. The popular fixed rate terms are 15 years and 30 years. If you select a shorter mortgage period, you pay less interest.

An adjustable rate mortgage is one in which the monthly payments can change periodically. The interest on this type of loan depends on the type of index made to the interest rate. These indexes include Constant Maturity Treasury (CMT, Prime Rate, Certificate of Deposit Index (CODI), 12-Month Treasury Average (MTA), Cost of Savings Index (COSI), Certificate of Deposit (CD) Indexes, Treasury Bill (T-Bill), Fannie Mae's Required Net Yield (RNY), and so on.

When you are considering the purchase of a home, you should become familiar with the various types of loans and research lenders so you know you will be getting a good deal when you apply for your mortgage loan.