Traditional Mortgages

Fixed Rate vs. Adjustable Rate

Fixed rate loans are loans that have the same interest rate throughout the life of the loan. Consequently the payment also stays the same throughout the life of the loan. A very common type of loan is a 30 year fixed rate loan.

Adjustable rate loans, also called Arms, are loans in which the interest rate applied on the outstanding balance varies throughout the life of the loan. Usually, the initial interest rate is fixed for a period of time, after which it resets periodically. A common type of ARM is a 5/1, in which it carries a fixed interest for 5 years, after which is adjusts every 1 year.



Government Insured Loans vs. Conventional Loans

A Government Insured Loan is one that provides insurance to the lender if the borrower fails to repay the loan. Common types of these loans include FHA and VA loans.

FHA loans are loans insured by the Federal Housing Administration. Since the loan is insured, lenders can offer good terms like:

  • Low Down Payment (usually as low as 3.5%)
  • The financing of some closing costs (which means they are included in the payment)
  • Low closing costs

This type of loan is usually easier to qualify for and in some cases requires a minimum 500 credit score. 

VA loans are loans guaranteed through the Veterans Administration. These programs are only available to certain borrowers. To qualify for a VA loan you must be:

  • A current member of the U.S. Armed Forced
  • A Veteran
  • A Reservist, National Guard Member
  • An eligible Surviving Spouse

 

Conventional Loans

A conventional loan simply is one that is not backed by the Government. If the borrower defaults on this loan, the Private Mortgage Insurance company makes sure the lender gets paid back. For that reason Conventional loans carry Private Mortgage Insurance payments (PMI) until the borrow has paid off 20% of the loan (80% Loan-to-Value).

Conventional mortgage loans must adhere to guidelines set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) and are available to everyone, but they are more difficult to qualify for than VA and FHA loans. (Since there is no government insurance, conventional loans pose a higher risk for lenders so credit and income requirements are stricter than for FHA and VA mortgages).

Generally to qualify for a conventional loan one must have:

  • Good Credit
  • Steady Income
  • Money for down payment (sometimes as little as 3%, but 5% minimum usually)

 

Michigan First Time Home Buyers

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