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Types of Loans

Some of these loan types and characteristics may be shared. For example, you can have either fixed or adjustable conventional loans.

Conventional Loans - These are the most common types of first mortgages for consumers with a 0%-20% down payment and good credit. A 3%-9% seller’s concession towards closing costs is allowed based on LTV, (loan to value). These loans are underwritten through common guidelines set forth by Fannie Mae (or the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation.)

FHA (Federal Housing Administration) Loans - Started in 1934, these are loans insured by the FHA. They help low to moderate income families get mortgages. They require 3% into the transaction, 2.25% can be applied toward down payment and .75% towards closing costs. A 6% seller’s concession toward closing costs is allowed. FHA is often used by first time home buyers.

VA (Department of Veterans Affairs) Loans - Established in 1944, these loans are to assist eligible people on active military duty or retired status to buy primary residences. This loan requires no down payment and the seller can pay for all of the closing costs.

Jumbo Loans - Any loans over $417,000 are considered Jumbo Loans. They usually carry a higher interest rate and more money down than a conventional loan.

Fixed Rate Mortgages - The interest rates on these mortgages are fixed for the life of the loan. The 30 year fixed is most common term used for a purchase and the 15 year fixed being popular for refinances.

Adjustable Rate Mortgages (ARMs) - The interest rate on these mortgages is fixed for a small period of time either 2, 3, 5, 7 or 10 years then they beginning adjusting. Commonly they adjust either every 6 months or every year, using a common benchmark rate as means of calculating the change. They usually carry yearly and lifetime caps for rate increases and decreases.

Hybrid Loans - These loans carry a fixed rate for a period of time, then adjust. Some common types are the 7/23, which gives you a fixed rate for 7 years and then adjusts according to market changes, and the 10/1 which is fixed for 10 years than changes to a one year adjustable.

Interest Only Loans – These loans require an interest-only payment for an initial period of time which varies from 5-15 years. After the interest only period is done the outstanding principal balance is then amortized into a principal and interest payment for the remaining term of the loan. Note: You can make payments toward the principal balance at any time. Whatever the principal balance is at the end of the interest-only period is amount that will be amortized into the remaining term.

Option ARMS – The Option ARM gives you different payment options every month. You can choose to make a minimum monthly payment, an interest only payment or a fully amortized payment. If the minimum payment is made than negative amortization occurs and the difference between the minimum payment and the fully indexed interest payment is applied to your principal balance.

Construction Loans - These loans are meant to finance the actual construction of a home. They are usually interest-only loans and are then paid off or converted into permanent financing when the construction has been completed. They have higher rates than permanent financing.

80/10/10 Loans - These loans are used to avoid Private Mortgage Insurance (PMI). You carry an 80% first mortgage and a 10% second mortgage with 10% equity, which means in a purchase you are putting 10% down. There is also an 80/15/5 with the same structure.

80/20 Loans – This loan is also used to avoid Private Mortgage Insurance and get 100% financing. You carry a first mortgage of 80% and a second mortgage of 20%.

Home Equity Loans - These are used to take out a relatively small amount of money ($10,000-$50,000) for almost any purpose imaginable, from fixing up your house, funding an education, to buying a new car. The interest rate on these is usually competitive, there are few fees, and because of the equity position these loans are usually tax deductible.

HELOC- Home Equity Line Of Credit – This is usually a second mortgage taken out on your property. The line of credit is usually based on the going PRIME rate. You make payments based on your outstanding principal balance, similar to a credit card. Your line may have a limit of 100,000, but if you’ve only taken out 20,000 that what your payment is based on, you can pay down your line at any time and use money from your line up to your limit. The monthly payment may be an Interest Only payment or a Principal and Interest Payment.

No Fee Loans - A relatively new type of mortgage, these loans reduce your closing costs to little or nothing, but they will carry a higher interest rate. You either pay closing costs and receive the absolute lowest rate or you reduce your closing costs at the expense of a higher monthly payment.

Subprime "B-D" Credit Loans - A very broad term to describe anyone who has anything less than perfect credit, from a few late payments to bankruptcies and foreclosures.