SACRAMENTO MORTGAGE BROKER BREAKS DOWN THE PROS AND CONS OF EACH TYPE OF HOME LOANS
There are three main categories of loan options: fixed or adjustable, government-insured or conventional, and jumbo or conforming. It’s always best to speak to a Sacramento mortgage broker for the right type of loan you need but this article aims to outline the general pros and cons of each set of options.
Fixed-rate vs. Adjustable-rate Loans
Fixed Rate Loans
Fixed-rate mortgages are loans that have the same interest rate for the life of the loan. This means that every month, the loan-holder is billed the exact same amount. With all types of loans it’s important to speak to a Sacramento mortgage broker to determine what’s best for you and your situation.
- Pros: This can be useful as it provides consistency and predictability in what is due each month. If lending rates go up, this does not affect the interest rate of the loan. It’s very easy to shop around and compare fixed-rate loans because all the information is available upfront.
- Cons: If interest rates decrease, you still have to pay at the interest rate you locked in at the time of the loan.
Adjustable Rate Loans
ARMs, or adjustable rate mortgages, are home loans in which the interest varies depending on a financial market. Each ARM is tied to a specific market and variations in that market affect the monthly interest rate on that loan.
- Pros: Most ARMs begin with a fixed-rate interest rate that is lower than a mortgage that is fixed-rate for the entirety of the loan. If a home-owner is able to pay off the mortgage in that fixed-rate period, it could lead to a lot of savings. Even if the loan-holder isn’t able to pay off the mortgage in the fixed-rate period, the market may have low interest rates for long periods, making the monthly payments not especially expensive. The state of California mandates certain caps for the frequency and intensity of interest rate changes within a given year and over the lifetime of the loan. This prevents an ARM from having absurd or excessively frequent changes to the interest rate.
- Cons: Your monthly bill will be a bit of a surprise unless you’re paying close attention to the relevant market. Even if you are paying attention, there’s no way to control how a specific market will do across the life of the loan. That uncertainty puts a loan-holder at risk, with the potential for high increases in interest rates. If a loan-holder intends to stay in their home for a long period of time, it may not be wise to choose an ARM.
Government-insured vs Conventional Loans
There are three main groups that offer loans guaranteed by the government entity: the Federal Housing Administration, the Veterans Affairs Department, and the USDA. While these loans are provided by private lenders, a branch of the government promises the debt will be repaid as a sort of vouching system. These guarantees are made through mortgage insurance, the fee of which is passed on to the loan-holder. So while it makes it possible for lower-income individuals to get a loan for a home, there is an additional fee of mortgage insurance in the monthly payment due. Speak to a Sacramento mortgage broker if you feel a government-insured loan is best for you.
- Pros: The lower requirements to get these loans makes them ideal for first-time homebuyers or lower-income individuals who may not be in the best position to get a loan or to put down a lot of money on a down payment. Low interest rates also mean that the loans are more affordable and the ability to defer payments can be helpful when other costs arise.
- Cons: These loans require mortgage insurance that must be paid for the duration of the loan, unless a larger down payment is made. There are also limits on the amount of the loan in a given area, which can inhibit the purchase of a home in a more expensive neighborhood. It also may be difficult to refinance this type of loan.
Unlike government-insured loans, like the first-time homebuyer loan, conventional loans are not insured by any government entity. This means the lender takes on more risk by offering such a loan to a lower-income individual or someone with poor credit. Thus, if a loan-holder is unable to make a 20% down payment, he or she will have to take out private insurance on the loan, much like the government serves as insurance in a government-backed mortgage loan.
- Pros: Since the government is not involved, conventional loans are a bit simpler to deal with. There also is much more flexibility – they can be used for second homes, there is no cap, etc. Most conventional loans are what is called “conforming,” meaning they must conform to certain rules including a minimum FICO score, maximum loan amount, etc. This means that, while there is a certain flexibility, these loans are still held to a certain standard.
- Cons: When a loan-holder is not able to put down 20% as a down payment, he or she must purchase private mortgage insurance. The rate on this insurance is credit-sensitive, unlike with government-backed loans, so the rates have the potential to be high.
Jumbo vs. Conforming Loans
As mentioned above, conforming loans must adhere to certain rules. These rules are outlined by Fannie Mae and Freddie Mac, two major mortgage buyers. When compared to jumbo loans, they are for smaller loans, as outlined in the Fannie Mae/Freddie Mac guidelines. A Sacramento mortgage broker can explain the rules in better detail as it pertains to your situation.
- Pros: Conforming rules are more flexible than jumbo loan rules, since the size of the loan (and therefore risk) is smaller. The rates are more competitive, you can get a fixed-rate or ARM conforming loan, and the credit minimums are lower (around 620). Any type of income may be considered qualifying for the loan and the debt-to-income ratio required is less stringent.
- Cons: The amount of the loan is smaller, so it may not meet your needs!
A jumbo loan exceeds the loan limit set by the Fannie Mae and Freddie Mac guidelines. This type of mortgage is a higher risk, since the amount of money on the line is so much higher.
- Pros: The loans offered are for more money than what is allowed in conforming loans, so it can cover a higher cost.
- Cons: Since the risk is higher, the requirements are, too. To be approved for a jumbo loan, a borrower must have very good credit (usually at least 700), the debt-to-income ratios are not as flexible and are lower, and it may be necessary to go through two appraisals. Additionally, interest rates are not as competitive, especially for fixed-rate jumbo loans.
This article is non-exhaustive and meant to explain the very basics of some home loans. It is important to speak to an experienced professional when considering taking out a loan.
Speak to a Sacramento Mortgage Broker About Your Loan Today
The Sunrise Vista Mortgage Team is dedicated in providing top-notch financial services with the lowest rates possible. We have created lasting relationships with each and every client and are here to serve you. Give us a call at (916) 729-2000 to speak to a Sacramento mortgage broker regarding your loan needs.