Classification of mortgage loans
Different types of mortgage loans are available in the market with varying conditions, and it is important for one to choose what fits their needs as accurately as possible and also consider the time taken fha loan approvals .
The first classification is the interest rate.
- Fixed rate mortgage loans maintain a constant interest rate throughout the loan. The reason behind it is the consistency maintained in the monthly payment sizes.
- Adjustable rate mortgage loans (ARMs) have an adjusting or varying interest rate with time. It is known as a hybrid product as the change in interest rate happens only after it remains constant for a given period.
If we take the 5/1 ARM loan into consideration, the number 5 signifies the time for which interest rate remains constant, and the number 1 represents how often the interest period will change in terms of years.
The other types of mortgage loans are classified on the basis of whether the government insures them or not. FHA, VA and USDA loans fall under the government-insured loans while the one that is not backed up by the government insurance is known as a conventional loan.
- FHA loans are managed by a department of the federal government. It provides mortgage insurance due to which the monthly payment size could increase.
However, the down payment can go as low as 3.5% of the purchase price. VA loans are offered to the members of military service and their families. This plan can take place with absolutely no down payment, and the monthly payments include mortgage insurance. The department of agriculture provides USDA/RHS loans to rural residents whose income falls below 115% of AMI (adjusted area median income).
Fannie Mae and Freddie Mac are government corporations that function by buying loans from the lenders and selling them to investors through Wall Street.
- A conforming loan is the one that meets the guidelines of these government corporations.
- A jumbo loan is the type of mortgage that exceeds these guidelines and limits of the loan.
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