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A new home may be one of the biggest purchases you’ll make in your life. Before you begin shopping for the right home to buy, you’ll need to explore mortgage options if you’re planning to finance the purchase. Not all home loans are the same, though. So, doing your research before moving forward can help you select the most suitable
option for your financial situation and possibly keep more money in your pocket. Plus, you’ll know what to expect, in terms of guidelines, when you apply. Types of mortgages
1. Conventional loanConventional loans, which are not backed by the federal government, come in two forms: conforming and non-conforming.
Pros of conventional loans
Cons of conventional loans
Who should get a conventional loan?If you have a strong credit score and can afford to make a sizable down payment, a
conventional mortgage is probably your best pick. The 30-year, fixed-rate conventional mortgage is the most popular choice for homebuyers. 2. Jumbo loanJumbo mortgages are home loan products that fall outside FHFA borrowing limits. Jumbo loans are more common in higher-cost areas such as Los Angeles, San Francisco, New York City and the state of Hawaii, where home prices are often on the higher end. Pros of jumbo loans
Cons of jumbo loans
Who should get a jumbo loan?If you’re looking to finance a home with a selling price
exceeding the latest conforming loan limits a jumbo loan is likely your best route. 3. Government-insured loanThe U.S. government isn’t a mortgage lender, but it does play a role in making homeownership accessible to more Americans. Three government agencies back mortgages: the Federal Housing Administration (FHA), the U.S. Department of Agriculture (USDA) and the U.S. Department of Veterans Affairs (VA).
Pros of government-insured loans
Cons of government-insured loans
Who should get a government-insured loan?Are you having trouble qualifying for a conventional loan due to a lower credit
score or minimal cash reserves for a down payment?FHA-backed and USDA-backed loans could be a viable option. For military service members, veterans and eligible spouses, VA-backed loans are often better than a conventional loan. 4. Fixed-rate mortgageFixed-rate mortgages maintain the same interest rate over the life of your loan, which means your monthly mortgage payment always stays the same. Fixed loans typically come in terms of 15 years or 30 years, although some lenders allow borrowers to pick any term between eight and 30 years. Pros of fixed-rate mortgages
Cons of fixed-rate mortgages
Who should get a fixed-rate mortgage?If you are planning to stay in your home for at least five to seven years, and want to avoid the potential for changes to your monthly payments, a fixed-rate mortgage is right for you. 5. Adjustable-rate mortgage (ARM)Unlike the stability of fixed-rate loans, adjustable-rate mortgages (ARMs) have interest rates that fluctuate with market conditions. Many ARM products have a fixed interest rate for a few years before the loan changes to a variable interest rate for the remainder of the term. For example, you might see a 7-year/6-month ARM, which means that your rate will remain the same for the first seven years and will adjust every six months after that initial period. If you consider an ARM, it’s essential to read the fine print to know how much your rate can increase and how much you could wind up paying after the introductory period expires. Pros of ARMs
Cons of ARMs
Who should get an ARM?If you don’t plan to stay in your home beyond a few years, an ARM could
help you save on interest payments. However, it’s important to be comfortable with a certain level of risk that your payments might increase if you’re still in the home. Other types of home loansIn addition to these common kinds of mortgages, there are other types you may find when shopping around for a loan:
Next stepsNow that you have an idea of the right kind of loan for your home purchase, it’s time to find the right mortgage lender to make it happen. Every lender is different, and it’s important to comparison shop to find the best terms that fit your finances. From the brick-and-mortar bank and credit unions in your neighborhood to online-only mortgage companies, there is a wide range of options to choose from. Read Bankrate’s lender reviews of some of the leading names in mortgages, and follow this guide to find the best lender. With additional reporting by David McMillin Is Fannie Mae and Freddie Mac a conventional loan?Approval Guidelines. All loans backed by Fannie Mae and Freddie Mac are typically conventional loans, which are not insured by the government.
Is Fannie Mae and Freddie Mac owned by the government?Fannie Mae and Freddie Mac Are Government Sponsored Enterprises. Fannie and Freddie are private corporations that were chartered by Congress—the formal term for this kind of company is a Government Sponsored Enterprise (GSE). There are several other GSEs, like the Farm Credit System.
What does Fannie Mae and Freddie Mac do?Fannie Mae and Freddie Mac buy mortgages from lenders and either hold these mortgages in their portfolios or package the loans into mortgage-backed securities (MBS) that may be sold. Lenders use the cash raised by selling mortgages to the Enterprises to engage in further lending.
What is the difference between Fannie Mae and Freddie Mac and Ginnie Mae?Fannie Mae sells loans that originate with large commercial banks. Freddie Mac deals with the smaller savings associations and credit unions. Both of them deal with conventional mortgages. Ginnie Mae serves the same function but focuses on government-backed loans, such as FHA and VA.
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