Adjustable Rate Mortgages (ARMs)
Conventional Fixed-rate Mortgages
FHA & VA Loan Programs
Construction and Renovation Mortgages
Stated Income Loans and Other “no doc” Loans
First and Second Mortgage Combination Loans
If your loan amount is more than the conforming
loan limits, your loan interest rate might increase. The conforming loan
limits are set by federal agencies and adjusted every year. Currently,
the limit is $320,000 - so if your loan amount (not home value amount)
is more than that, you will likely pay a somewhat higher interest rate.
Risk versus reward
When determining an interest rate, a mortgage company must consider
different types of risk. One type of risk is the likelihood that a
particular borrower will pay back the loan in a timely manner. This is
where a good credit history can be important; if you credit is less than
perfect, you may get a higher interest rate or have to pay more closing
Another important factor is debt to income ratio. A borrower with a high
level of debt is seen as statistically more likely to default on loan
payments. The added risk for this type of situation means the lending
institution will need to charge a higher interest rate.
Another type of risk is the anticipated future market interest rate
fluctuations. When making long term loans, a lending institution must
try to anticipate what might happen with the market interest rate over
the lifetime of a loan. The longer the loan, the greater the uncertainty
about what may happen to rates over the period of the loan.
One way to secure a lower interest rate is to choose a shorter term
loan, such as a 15 or 20 year payback period. Mortgage companies can
generally give a lower interest rate for these loans, because there is a
shorter period of time for market interest rates to fluctuate.
Home purchases made with little or no down
payment are also seen as riskier by lending institutions. If a borrower
were to default on a loan where there is no equity, then the bank is
more likely to lose money through the foreclosure process. This added
risk corresponds to higher interest rates for loans with a low down
payment. So the best rates can be obtained with a minimum 20% down.
One more thing to keep in mind when looking for
the best interest rate is closing costs. Many mortgage companies have
started paying some or all loan closing costs in order to attract
customers. But you actually end up paying those costs through a slight
increase in interest rate.
Debt to income ratio will also have an affect on
your interest rate. If you have a lot of debt, you may be seen as a
riskier prospect, and therefore you will get a higher interest rate. Try
to pay off all other debt in order to get the best possible home
As there are many types of borrowers with
different needs, mortgage lenders have created many loan programs to try
to meet those needs. Here are some of the most common types.
Conventional loan. This has been the most
popular loan type, and is most useful if you think you are going to stay
in your home for a long period of time (at least five years). A
conventional loan usually requires at least a 10% down payment.
If you are going to buy your first home, it can
often be difficult to save a significant down payment. There are a
number of loan programs specifically tailored for this situation. One
government program is administered by the Federal Housing Administration
and is known as an FHA loan. The FHA actually guarantees this type of
loan, so that lenders get paid back if the borrower defaults. FHA loans
can require only a 3% down payment, or possibly even less. FHA loans
have limitations on size, and are more expensive because they require
mortgage insurance, which adds to the overall cost of the loan. With FHA
loans, many of the closing costs (including the initial mortgage
insurance premium) can be added to the loan amount, reducing the need
for more cash at purchase time.
Many conventional loans require that down
payment funds come from income savings or from the sale of another
property. These programs often require proof of the source of down
payment funds. An FHA loan allows gift funds to be use for the down
payment, and no verification of source is required. The source of the
donor is restricted to family members and a few types of organizations.
Mortgage insurance for FHA loans currently
require a 1.5% premium to be paid at purchase time, and a renewal
premium of 0.5% every year of the loan term. On a non-FHA conventional
loan, the mortgage insurance premium can be as low as 0.5% and renewals
as low as 0.3% during the loan term. If the down payment is large
enough, mortgage insurance may not be required at all. Many borrowers
will pay mortgage insurance for the first few years of the loan, but
when enough equity has accumulated, they will re-finance their loan in
order to stop paying the mortgage insurance renewal.
If you are a veteran you may qualify for a
Veterans Administration (VA) loan. VA loans require no down payment in
most cases, and you don’t have to pay a monthly mortgage insurance
premium. Many mortgage lenders are prepared to help you get a VA loan.