Mortgage Loan Types – Learn The Basics

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Discover the different mortgage loan types
The right mortgage loan type is something to celebrate

Are you thinking about buying your first–or next–home? Then you’ve probably got a lot on your mind! Your house is most likely the largest purchase you’re ever going to make. So it makes sense that there are a ton of variables to mull over.

You have questions like:

  • Can I afford to buy a house?
  • What do I need to know about mortgage loans?
  • What is the step-by-step process of getting a mortgage?
  • How long does it all take?

The most important decision–after deciding whether or not you’re actually ready to be a homeowner– is figuring out just how you’re going to pay for your new house. Since almost no one has a big wad of cash laying around, you’re going to need a mortgage loan.

USA Today stated that, in November, mortgage rates rose almost 4 percent. And, Janet Yellen, the Federal Reserve Chair, recently stated that interest rates are likely to keep rising.

So, how do you know which mortgage loan type is the right fit for you?

Fixed Rate Loan

A fixed rate loan is exactly as it sounds: the interest rate stays the same, during the entire loan period. This type of loan is great because you always know just how much you’re paying each month. But yet, they also could cost you more in the long run. If interest rates are low, you may be locked in at a higher price than you’d like.

Adjustable Rate Mortgage

An ARM  is a mortgage with a fluctuating interest rate, dependent on the index rate. The loan begins with a set interest rate. After the adjustment period, the time during which the rate cannot change, is over, the rate is reset. While ARMs are potentially cheaper than fixed rate loans, they are also riskier.

VA Loan

VA loans are guaranteed by the United States Department of Veterans Affairs for veterans of the military or their surviving spouses. VA members on active duty are usually eligible after half a year of service. There are no down payments with VA loans and, as of 2012, the Department of Veterans Affairs has guaranteed 20 million loans.

FHA Loan

The first Federal Housing Administration loans were granted during the Great Depression, when foreclosures and default rates skyrocketed, as a way to  give lower-income homeowner-hopefuls federal assistance with purchasing properties. With an FHA loan, closing costs may be covered, the down payment is low and the borrower pays mortgage insurance in the case of a default.

Jumbo Loan

A jumbo mortgage loan is a loan that exceeds regulatory loan limits. There are risky for lenders because they’re costly. Interest rates and down payments are typically higher than normal loans because if they default, they’re hard to sell. According to Bankrate.com, “2,916 counties have a limit of $417,000” and “108 counties have a loan limit of $625,500. These are available in the highest-priced housing markets, such as Los Angeles, New York City and San Francisco.”

When you’re ready to take the next step for you and your future home, sit down with your bank or credit union mortgage team to plan out your mortgage – step by step.

Discover the different mortgage loan types
Discover the different mortgage loan types

Other Mortgage Loan Considerations

In-House Options

Dane County Credit Union offers multiple in-house options on each of the mortgage loan-types above, ranging from 7 years to 15 years. These are serviced locally and stay with DCCU for the life of the loan. Our services don’t have loan application fees, and we have free pre-approvals as well.

Secondary Market

DCCU offers secondary market options like loans ranging from a 5/1 ARM to a 30-year fixed mortgage. Other available program options include low-or-no down payment, as well as low closing costs.

Mortgage Team

It’s important to find a mortgage team that offers solid and consistent communication and will find a customized solution to your needs. Our mortgage team’s goal is to consider your unique situation and come up with a personalized plan. We will make your mortgage experience easy and as simple as possible.

Mortgage Broker

A mortgage broker is a licensed professional who helps borrowers find funding for their mortgage loan needs. They serve as the “middle man” between the lending company and the homebuyer. For finding your mortgage, they usually charge the lender or borrower–or, both–a fee, or a small percentage of the loan. Remember: a small percentage on a big loan can add up quick. For example 2% of a $250,000 loan is $5000! Dane County Credit Union does not use a broker, or charge a broker’s fee.

You’ll never know unless you ask

If you’re still unsure about whether or not you’re ready to start the home-buying process, don’t hesitate to visit a DCCU branch for a free mortgage consultation, or just come in and chat.

Deciding to buy a home, and beginning the mortgage process, is one of life’s biggest steps so it’s best to be well informed about your options.

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Published by

Tom S.

Tom is a 2006 graduate of UW Madison, currently residing in Verona with his wife and 2 girls. He has been passionate about writing ever since he was 15 years old, and displays that same enthusiasm in his work today. When he’s not sharing insightful financial wisdom, you can find Tom chilling on the Union Terrace, enjoying craft beer at the Great Dane, or hiking at Governor Nelson State Park. In the Fall he loves to take his family to Badger Football games!