Confused About Mortgages

Confused About Mortgages

Conventional Mortgage: The most common mortgage type and usually has best rates.  It is not insured or guaranteed by the federal government in any way. This is what makes it different from the three government-backed mortgage types explained below (FHA, VA and USDA).

FHA Mortgage: 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. You do not have to be a first time buyer to qualify. The government insures the lender against losses that might result from borrower default.There are advantages like allowing you to make a down payment as low as 3.5% of the purchase price.But the Disadvantages can include: having to pay for mortgage insurance, which will increase the size of your monthly payments.

VA Loan: The U.S. Department of Veterans Affairs (VA) offers a loan program to military service members, active and veterans. 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 this program is that borrowers can receive 100% financing for the purchase of a home. That means no down payment whatsoever.

USDA Rural Housing Loan: The United States Department of Agriculture (USDA) offers a loan program for rural borrowers who meet certain income requirements. The 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.

We can’t really talk about loans without mentioning Fixed and Adjustable Rates. These can apply to most loans – it will be your choice so know the difference and weigh the pros and cons.

Fixed Rate mortgage loans will have the same interest rate for the life of the loan. This will keep your loan payment the same until the loan is paid off. But remember, many lenders will require to pay more than just your loan payment. You will likely have an escrow account attached to the loan for your property taxes and home owners insurance. You pay 1/12th of the combined total of these things each month with your loan payment. Because property taxes & insurance rates can change over time your escrow payment may cause the whole of the payment to change slightly over time.

Adjustable Rate mortgage loans (ARM) have interest rates that can change or “adjust” from time to time. Generally, the rate on the ARM will stay the same for a fixed amount of time and then can change yearly after the initial period. While ARM loans usually start off with a lower rate there is the uncertainty of where the rate may go in the future. The same escrow payment situation mentioned in the Fixed Rate explanation applies here as well. 

In Conclusion; there are definitely more types of mortgage loans out there, but these are the most common. There are also programs that might assist you with down payments and other obstacles that might keep you from getting a loan. These can vary by state and area where the home is located. For example, in Michigan there is a program that will help you with your down payment. It is valid in specific areas and has qualifications you must meet in order to use it and it must be paid back when and if you sell the home.

If you are confused when talking about loan types with your lender do not hesitate to ask questions. It is in their best interest to make sure you understand your loan and to help you find the best type for your situation. It is also a good idea to shop around for your loan. Just because you’ve had a checking account with ABC Bank for as long as you can remember doesn’t mean they will be the best lender to help you.

Another good resource for loan questions or lender referrals will be your Real Estate Agent. They want you to know all your options and can sometimes point you in the right direction. It is illegal for them to get any kind of payment or gift from lenders, but they know who answers the phone at all times of the day and on weekends and who works the hardest to make sure you get the loan that’s best for you. 

Some of the information in this article was sourced from a posting by HBI – Home Buying Institute.

Kelly Pangburn Headshot
Phone: 231-519-1872
Dated: November 1st 2018
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