Types of Loans

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Types of Loans

How can we choose the right type of loan? It is very important to choose the right type of mortgage loan based on your situation and goals, whether it be a mortgage loan to buy a house, or a refinancing loan. Let’s consider the applications suited for each type of loan.


Fixed Rate Program

From the beginning to the end of the loan, the interest rate does not change. Because the interest rate is fixed, the monthly loan payments are unchanged, and it is easy to set up a repayment plan. Those who wish to use this loan often prioritize peace of mind. Typically, a 15 or 30-year loan.

Adjustable Rate Mortgage

As housing interest rates fluctuate, the monthly loan payments also increase or decrease. Compared to a fixed rate mortgage, there are many advantages in the case of a low interest rate, but people often shun this mortgage thinking of the possibility that interest rates will jump. However, if one makes the best use of its characteristics, it is possible to set up an advantageous mortgage. Adjustable Rate Mortgages usually provide a fixed rate period, and are divided into two types of loans below:

Intermediate ARM

The initial years follow a fixed-rate loan, then the loan switches to a floating rate. In the case of a variable interest rate loan, interest rates are updated once a year, so the monthly loan payment amount is fixed for each year.

3/1 ARM-The first three years follow a fixed interest rate. Then, switch to a floating rate. Additionally, there are other intermediate ARM loans such as 5/1 ARM, 7/1 ARM, 10/1 ARM, etc.

Monthly ARM

Interest rate is fixed for one or three months, then switched to the floating rate. The interest rate is updated every month. In other words, the loan payments will vary each month. However, in a normal case, because one month’s minimum payment is set, if you pay this amount of money, the loan does not go into delinquency and the remainder is added to the loan and becomes new debt.

Especially, because it is rare in the United States to live in the same house for 30 years, if you plan to sell the home within five years of buying, the Intermediate ARM (5/1 ARM) is a better arrangement than the 30-year fixed mortgage.

In addition, among individual business owners and investors, there are many who choose a Monthly ARM. This is in part due to the importance of cash flow. In particular, if there is a difference in monthly income, or if there is no money in hand to invest cash to business opportunities, the loan will not fall into delinquency even if one pays the minimum payments of the loan (The difference between paying now and paying later)

Government Loan

A loan for which the United States government is the guarantor. Even people who do not meet loan acquisition conditions can receive these real estate loans.

FHA (Federal Housing Administration) Loan

Features of FHA Loans
  • Minimum 3.5% down payment
  • Possible even at a low credit score
  • First time Home Buyers can add a tax credit of $8000 to the down payment
  • Debt ratio is okay at 55%
  • Must pay for two types of insurance (UFMIP and monthly MIP at the time of purchase); obligated to pay MIP (mortgage insurance) for five years
  • Credit penalties are more lenient
    *For Foreclosure usually 7 years 3 years, Short sale 4 years 2 years, Bankruptcy 7 years 3 years

Conventional Loan

Provided by banks and credit unions, conventional loans are divided into the following two types:

Conforming Loan – Loan amount less than $424,100

A conforming loan has lower interest rates compared to a jumbo loan, and the screening criteria is not too strict. The mortgage must meet the criteria of Fannie Mae (FNMA) or Freddie Mac (FHLMC), special institutes (GSE, or government sponsored enterprise) for the purpose of stabilizing the US housing supply. The loan amount has been determined within the limits provided by Freddie Mac and Fannie Mae, with the maximum amount being determined by the region of the subject property and number of residents per household in the subject property.

The Role of Freddie Mac (FHLMC) and Fannie Mae (FNMA)

Federal Housing Finance Agency (FHAC) = Sets all of the criteria, such as the maximum amount of a conforming loan that the Federal Housing Finance Agency can buy out, the DTI (Debt to Income ratio), and required documents.
High Balance Loan: Loan amount up to $636,150

Jumbo Loan – Loan amount above $636,150

Jumbo loans exceed the loan limits defined by Freddie Mac (FHLMC) and Fannie Mae (FNMA). The screening criteria becomes stricter for these loans.
* A loan amount of over $1,000,000 is referred to as Super Jumbo.
Depending on the borrowing limit, the interest rates, screening criteria, as well as various options of the loan also change.

There are many sites where you can easily simulate your own loan payment; please see the examples below:

http://cgi.money.cnn.com/tools/houseafford/houseafford.html http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx

If you are interested in home loans, refinancing, or real estate investment,
please contact us for more information!