Loan types and programs
There are an infinite number of loan types out there, and lenders are constantly coming up with new ones to wrangle in new homeowners. The type of loan you choose is a very important aspect of the loan process, and one you should completely understand before making any kind of commitment.
These days you’ll see ridiculous loan programs that allow anyone to qualify for a home loan. There are 1% start rate loans often referred to as neg-ams or pick-a-payment programs, and 40yr and 50yr loans that stretch the payment out over the a longer period. Most potential homeowners these days are after 100% financing, often because they have no assets to put a down payment on a property. And because of these new highly scrutinized loan programs that exist, the number of high-risk borrowers in the United States is increasing at an alarming pace.
But if you take the time to educate yourself on the many loan types out there, you’ll effectively decrease your chances of defaulting on your mortgage. That said, let’s talk about the many different loan types and programs.
Before getting into specific programs, I want to highlight the types of loans available to potential homeowners.
One way home loans are differentiated is by their loan amount size. Any loan below $417,000 is considered a “conforming loan“, whereas any loan amount over $417,000 is considered a “jumbo loan“. Although in Alaska and Hawaii the confirming limit is $625,500. Also note that the conforming limit is constantly changing, rising quite a bit in the last few years as housing prices have skyrocketed.
A conforming loan is also known as a conventional loan, namely because it is mandated by Congress, and can be sold to either the Federal National Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corporation (FHLMC). Because it’s more conventional, rates on these loan amounts will be lower than what you’d see on a jumbo loan amount. This can save potential homeowners serious money, especially if your loan amount is on the fringe. Sometimes dropping your loan amount a few thousand dollars can lower your rate tremendously, so keep this in mind anytime your loan amount hovers around the conforming limit.
The opposite of a conforming loan is a jumbo loan. A jumbo loan is simply any loan amount higher than the conforming limit. A jumbo loan also exceeds Fannie Mae’s and Freddie Mac’s loan limits, and thus will carry a higher interest rate in most cases.
Then there are government loans, such as the FHA loan. This type of mortgage is backed by the Federal Housing Administration (FHA). Another type of government loan is a VA loan. The max loan amount for these types of loans will vary by county.
Now that you know a bit about loan types, we can focus on loan programs. As I mentioned earlier, there are a ton of different programs out there, and more seem to surface everyday. Let’s start with the most basic of loan programs, the 30yr fixed loan.
The 30yr fixed loan is as simple as they come. Most mortgages are based on a 30 year amortization, and the 30yr fixed is no different. The 30yr fixed loan is just how it sounds, a 30 year loan that is fixed for 30 years. What this is means is that the loan will take 30 years to pay off, and the rate will stay fixed during those 30 years. There isn’t much else to it. Let’s say you secure a rate of 6.5% on a 30yr fixed loan with a loan amount of $500,000. You’ll have monthly payments of $3160.34 for a total of 360 months, or 30 years. You will be required to pay the same amount each month until the liens are paid off. So the total amount you would pay on a $500,000 loan at 6.5% over 30 years would be $1,137,722.40.
Monthly Payment: $3,160.34
Total Interest Paid over Life of Loan: $637,722.44
Interest Paid in 2006: $32,335.45
Interest Paid in 2007: $31,961.17
Average Monthly Interest Paid over Life of Loan: $1,771.45
You will also need to pay taxes and insurance on top of this mortgage payment, so keep that in mind when figuring out what you can afford. Here is a list of state property taxes.
This sounds steep, but most people don’t stay in a 30 year loan for 30 years. They either pay it down quicker by making higher monthly payments, or they may sell or refinance the loan.
Another common and simple to understand loan is the 15 year fixed loan. This works exactly like the 30yr loan except the same fixed payment is made in half the time, 180 months or 15 years. Obviously the payment will be double, but you will pay less interest and gain more equity in a shorter amount of time. People who have an ample amount of income usually prefer this type of loan to reduce the overall cost of financing a mortgage.
This is how it breaks down:
Monthly Payment: $4,355.54
Total Interest Paid over Life of Loan: $283,996.63
Interest Paid in 2006: $31,900.36
Interest Paid in 2007: $30,536.41
Average Monthly Interest Paid over Life of Loan: $1,577.76
The monthly payment is significantly higher, but the amount of total interest paid over the life of the loan is much less. Because you’re putting more money towards the equity of the home, you paying less interest each month, which you’ll see as the $1.577.76 figure as compared to the $1,771.45 you’d pay on a 30yr fixed loan. That’s nearly $200 a month that you would save in interest charges by electing to take a 15yr fixed mortgage. Although the monthly payment is significantly higher than the 30 year fixed mortgage, the total interest paid during the 15 year loan is substantially lower. It may seem like the obvious choice, but it’s more complicated if you factor in tax deductions and the power of leverage. Not to mention if you can afford a monthly mortgage payment that high.
Learn about other mortgage programs such as the option-arm mortgage, adjustable-rate mortgages, second mortgages, no cost loans and interest-only home loans.
