There are several basic types of Charlotte NC mortgage loans available to home buyers in the Charlotte NC area. If your home purchase will require financing, then understanding the basic home loans will assist in helping you to determine which option is better for you. Below explains different types of home loans as well as pros & cons for each.
Fixed Rate Mortgages verses Adjustable Rate Mortgages
As a borrower, you will want to first decide whether you want a fixed-rate or an adjustable-rate mortgage loan. All loans fit into one of these two categories, or a combination “hybrid” category. Here’s the primary difference between the two types:
- Fixed-rate mortgage loans have the same interest rate for the entire repayment term. Because of this, the size of your monthly payment will stay the same year after year. It will never change. It has the same interest rate, and the same monthly payment, for the entire term. Fixed rate mortgages can range anywhere from 15-year fixed to a 30-year fixed. Of course, the more years you choose, the cheaper your payment will be.
- Adjustable-rate mortgages (ARMs) have an interest rate that will change or “adjust” from time to time. Typically, the rate on an ARM will change every year after an initial period of remaining fixed. It is therefore referred to as a “hybrid” product. A hybrid ARM loan is one that starts off with a fixed or unchanging interest rate, before switching over to an adjustable rate.
Pros and cons: adjustable versus fixed-rate mortgages
As you might imagine, both of these types of mortgages have certain pros and cons associated with them. The Adjustable Rate Mortgage (ARM) starts off with a very low rate which will increase over time. Borrowers utilize this option to save money upfront and or if they plan to refinance before the rate adjusts. The con is if for some reason you are unable to refinance and rate adjusts to an amount you are unable to afford.
With the Fixed Rate mortgage option (most popular option amongst homebuyers), you know exactly what your mortgage payment will be month after month and year after year. The con is higher interest charges, when compared to the initial rate of an ARM.
Government Insured Mortgage Loans verses Conventional Loans
So now that you understand the difference between a fixed rate mortgage loan and a adjustable rate mortgage loan, the next step is to decide whether you want to use a government insured home loan (such as FHA or VA), or a conventional “regular” type of loan. The differences between these two mortgage types are:
NON INSURED LOAN
A conventional home loan is one that is not insured or guaranteed by the federal government in any way. This distinguishes it from the three government-backed mortgage types explained below (FHA, VA and USDA).
The Federal Housing Administration (FHA) mortgage insurance program is managed by the Department of Housing and Urban Development (HUD), which is a department of the federal government. FHA loans are available to all types of borrowers, not just first-time buyers. The government insures the lender against losses that might result from borrower default. Advantage: This program allows you to make a down payment as low as 3.5% of the purchase price. Disadvantage: You’ll have to pay for mortgage insurance, which will increase the size of your monthly payments.
The U.S. Department of Veterans Affairs (VA) offers a loan program to military service members and their families. Similar to the FHA program, these types of mortgages are guaranteed by the federal government. This means the VA will reimburse the lender for any losses that may result from borrower default. The primary advantage of a VA home loan (and it’s a big one) is that borrowers can receive 100% financing for the purchase of a home. That means no down payment whatsoever.
USDA / RHS Loans
The United States Department of Agriculture (USDA) offers a loan program for rural borrowers who meet certain income requirements. The USDA Home Loan Program is managed by the Rural Housing Service (RHS), which is part of the Department of Agriculture. This type of mortgage loan is offered to “rural residents who have a steady, low or modest income, and yet are unable to obtain adequate housing through conventional financing.” Income must be no higher than 115% of the adjusted area median income [AMI]. The AMI varies by county. See USDA available Homes for sale or use the link below to input a specific address.
Learn more: USDA borrower eligibility website
Combining: It’s important to note that borrowers can combine the types of mortgage types explained above. For example, you might choose an FHA loan with a fixed interest rate, or a conventional home loan with an adjustable rate (ARM).
Jumbo Mortgage Loan verses Conforming Mortgage Loan
Now that you know a little bit more about fixed rate mortgages verses adjustable rate mortgages. Insured mortgages verses non-insured mortgages, here is another distinction that needs to be made, and it’s based on the size of the loan. Depending on the amount you are trying to borrow, you might fall into either the jumbo or conforming category. Here’s the difference between these two mortgage types:
- A conforming loan is one that meets the underwriting guidelines of Fannie Mae or Freddie Mac, particularly where size is concerned. Fannie and Freddie are the two government-controlled corporations that purchase and sell mortgage-backed securities (MBS). Simply put, they buy loans from the lenders who generate them, and then sell them to investors via Wall Street. A conforming loan falls within their maximum size limits, and otherwise “conforms” to pre-established criteria.
- A jumbo loan, on the other hand, exceeds the conforming loan limits established by Fannie Mae and Freddie Mac. This type of mortgage represents a higher risk for the lender, mainly due to its size. As a result, jumbo borrowers typically must have excellent credit and larger down payments, when compared to conforming loans. Interest rates are generally higher with the jumbo products, as well.
Whether you’re a homebuyer or mortgage shopper, education is the key to knowing the best option for you. Although this page explains the different types of mortgage loans available in 2016, it only provides a brief overview of each type. If you would like more information about different home loan options, please feel out the form below. You can also APPLY ONLINE to see which option you may qualify for.