What are Fixed Rate Mortgages?

The most common type of mortgage program where your monthly payments for interest and principal never change. Property taxes and homeowners insurance may increase, but generally your monthly payments will be very stable.

Fixed rate mortgages are available for 30 years, 20 years, 15 years and even 10 years. There are also "biweekly" mortgages, which shorten the loan by calling for half the monthly payment every two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 "months" worth, every year.)

Fixed rate fully amortizing loans have two distinct features. First, the interest rate remains fixed for the life of the loan. Secondly, the payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term. The most common fixed rate loans are 15 year and 30 year mortgages.

During the early amortization period, a large percentage of the monthly payment is used for paying the interest . As the loan is paid down, more of the monthly payment is applied to principal . A typical 30 year fixed rate mortgage takes 22.5 years of level payments to pay half of the original loan amount.

What are Conventional Loans?

Conventional Loans are secured by government sponsored entities or GSE's such as Fannie Mae and Freddie Mac or by private investors for loan amounts higher than the limits set by the GSE's. Conventional loans can be made to purchase or refinance homes with first and second mortgages on single family to four family homes.

In general, Fannie Mae and Freddie Mac's single family, first mortgage loan limit is $333,700 in 2004. This limit is reviewed annually and, if needed, changed to reflect changes in the national average price for single family homes. The current loan limit applies to all conventional mortgages delivered after January 1, 2004.

2002 Conventional Loan Limits

First mortgages
• One Family loans: $333,700
• Two Family loans: $427,150
• Three Family loans: $516,300
• Four Family loans: $641,650
• Note: Maximum original loan amounts are 50 percent higher for first mortgages on properties in Alaska, Hawaii, Guam and the U.S. Virgin Islands.

Second Mortgages
• $150,350 (in Alaska, Hawaii, and the US Virgin Islands: $225,525)

What are Jumbo Loans?

A loan which is larger (more than $333,700 as of 1/1/04) than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.

What are FHA Loans?

FHA mortgage insurance programs that help low and moderate income families become homeowners by lowering some of the costs of their mortgage loans. While this insurance is not free, you can finance the up front insurance premium at the time of purchase and add to your regular mortgage payments.


Down Payment Gifts - FHA allows 100% of the down payment to be a gift from friends, family or other sources.


FHA has maximum loan amounts, which vary from one county to another. It is critical that your loan amount, including financed closing costs, not exceed the maximum set by FHA for the county in which your property is located. There are no income limits on FHA loans.


FHA has several loan programs that include:


Section 203(b) - A single family program that has down payment requirements as low as 2.25%, with a total cash investment as low as 3% and this 3% can be a gift or a grant.


Streamline Refinance - A program that reduces the amount of documentation and underwriting that needs to be performed by the mortgage company.

FHA ARM - A single family adjustable rate mortgage that provides mortgage insurance for a person to purchase or refinance a principal residence at a lower initial interest rate.


Property Improvement Loan Insurance (Title I) – A program that makes it easier for consumers to obtain affordable home improvement loans by insuring loans made by private lenders to improve properties that meet certain requirements.


Reverse Mortgage – A program for homeowners 62 and older who have paid off their mortgages or have only small mortgage balances remaining. The program allows homeowners to borrow against the equity in their homes in a lump sum, on a monthly basis for a fixed term or for as long as they live in the home, or on an occasional basis as a line of credit.


What are VA Loans?

A veteran who doesn't have a certificate can obtain a VA Loan by completing VA Form 26-1880, Request for a Certificate of Eligibility for VA Home Loan Benefits and Veterans who served on active duty and were discharged under conditions other than dishonorable, during World War II and later periods are eligible for VA loan benefits.

More than 29 million veterans and service personnel are eligible for VA financing. Even though many veterans have already used their loan benefits, it may be possible for them to buy homes again with VA financing using remaining or restored loan entitlement.

VA Loan Purposes 
To buy a home, including townhouse or condominium unit in a VA approved project. To build a home. To simultaneously purchase and improve a home.

Obtaining a VA Loan
The CRV (certificate of reasonable value) is based on an appraiser's estimate of the value of the property to be purchased.

VA Loan Costs
A basic funding fee of 2.2 percent must be paid to VA by all but certain exempt veterans.

Restoration of Entitlement
Veterans who had a VA loan before may still have "remaining entitlement" to use for another VA loan. The current amount of entitlement available to each eligible veteran is $36,000.

VA Loan Questions & Answers
Question:  Can I get a VA loan if I have had a bankruptcy in the last few years?
Answer:  VA credit standards state that a veteran with a bankruptcy less than 3 years ago would generally not be considered a satisfactory credit risk.

What are Subprime Loans?

If you have a low credit score, you may not qualify for a conventional loan or low down payment loans offered by FHA and VA. In this case, you may consider a subprime mortgage. Because of the higher risk associated with lending to borrowers that have a low credit score you may have to pay a higher interest rate.


You should study the specific terms of a subprime loan that you qualify for to determine if it is a loan that will help your financial situation. Subprime loans are one way for you to get into the home you want at today's price. If you already own a home, a subprime loan can give you an opportunity to clean up your credit and ultimately refinance into a lower rate at a later time. If you have a mortgage, you can look at refinancing more than what you currently owe on the house and get cash back for the equity you already have in the home. This cash out could be used to pay off higher rate credit cards, bankruptcy, foreclosure or collections and liens. It could be a good way to clean up a troubled credit history, save money each month and start rebuilding your credit worthiness.


Whether for a purchase or refinance, subprime loans should typically be used as a short term solution until you can improve your credit score and refinance into a lower rate loan.


Prior to 1990 it was very difficult for anyone to obtain a mortgage if they did not qualify for a conventional, FHA or VA loan. Subprime loans were developed to help higher risk borrowers obtain a mortgage. Many borrowers with bad credit are good people who honestly intended to pay their bills on time. Catastrophic events such as the loss of a job or a family illness can lead to missed or late payments or even foreclosure and bankruptcy. Now there are mortgage companies that take into consideration events outside the borrower's control.


The higher the lender perceived its risk to be, the higher the rate they will charge for the privilege of borrowing their money. The lower the risk, the lower the rate. Several risk factors are taken into consideration when evaluating a borrower for a subprime mortgage, the most important being payment and credit history.


Debt to income level, employment history, type of property and assets are other factors that are taken into consideration when determining if you qualify for a conventional, government or subprime loan.

Several Factors Affect Your Mortgage Rate

The amount of your loan can increase your interest rate if the amount financed exceeds the conforming loan limits established by Fannie Mae and Freddie Mac. The conforming loan limit changes at the beginning of each year.

Shorter loans, such as 20 year or 15 year note, can save you thousand of dollars in interest payments over the life of the loan, but your monthly payments will be higher. An adjustable rate mortgage may get you started with a lower interest rate than a fixed rate mortgage, but your payments could get higher when the interest rate changes.

A larger down payment – greater than 20% - will give you the best possible rate. Down payments of 5% or less should expect to pay a higher rate as you are starting with less equity as collateral. If you've got the cash now and want to lower your payments, you can pay points on your loan to lower your mortgage rate. It's a simple concept, really: In exchange for more money upfront, lenders are willing to lower the interest rate they charge, cutting the borrower's payments. Closing costs are fees paid by the lender, if you don’t want to pay all of the closing costs, expect a higher rate which will pay the lender additional interest over the life of the loan.

Credit quality and debt-to-income-ratio affect the terms of your loan through your credit Score. If you have good credit and your monthly income far surpasses your monthly debt obligations, you will get approved at a lower interest rate. However, if your monthly income barely covers your minimum debt obligations, even if you have a good credit report, you will not receive the lowest available interest rate.

Information on Low Down Payments

Simply put, mortgage insurance protects the mortgage company against financial loss if a homeowner stops making mortgage payments. Mortgage companies usually require insurance on low down payment loans for protection in the event that the homeowner fails to make his or her payments.

When a homeowner fails to make the mortgage payments, a default occurs and the home goes into foreclosure. Both the homeowner and the mortgage insurer lose in a foreclosure. The homeowner loses the house and all of the money put into it. The mortgage insurer will then have to pay the mortgage company's claim on the defaulted loan.

For this reason, it is crucial that the family buying the home can really afford it, not only at the time it is purchased, but throughout the time period of the loan.

Although the cost of the mortgage insurance is paid by the home buyer, or borrower, the mortgage insurer works directly with the mortgage company. Mortgage insurance is available to commercial banks, savings & loans and mortgage bankers, all of whom offer mortgage loans to home buyers.

Remember that mortgage insurance is not the same as credit life insurance, also called mortgage life insurance. This type of policy repays an outstanding mortgage balance upon the death of the person who took out the insurance policy.

The Secondary Market

The mortgage company's decision to use mortgage insurance is driven by the requirements of investors in the mortgage market. Because of the losses that could occur, major investors require mortgage insurance on all loans made with low down payments.

The three primary investors in home loans are Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) and Government National Mortgage Association (Ginnie Mae). By purchasing and selling residential mortgages, Fannie Mae and Freddie Mac help keep money available for homes across the country.

Unlike Fannie Mae and Freddie Mac, Ginnie Mae does not actually buy mortgages. It adds the guarantee of the full faith and credit of the U.S. Government to mortgage securities issued by mortgage companies.

The Two Choices: Government Insurance and Private Insurance

Now that we have explained how mortgage insurance works and why it is necessary, let's look at the basic kinds of mortgage insurance. Low down payment mortgages can be insured in two ways -- through the government or through the private sector. Mortgages backed by the government are insured by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA) or the Farmers Home Administration (FmHA).

Although anyone can apply for FHA insurance, the other two government mortgage guarantee programs are much more targeted. The VA program is limited to qualified, eligible veterans and reservists. This program is very specialized, so contact your mortgage professional for the details. The FmHA insures loans for the construction and purchase of homes in rural communities.

Obtaining conventional financing is the alternative to obtaining a home loan backed by the government. Conventional mortgages are all home loans not guaranteed by the government, including those guaranteed by private mortgage insurers.

Although government and private insurance are based on the same concept of allowing families to get into homes with less cash down, there are many differences between the two. Often, your mortgage professional will play an important role in suggesting and deciding which insurance is selected.

Home buyers must make a down payment of at least 5% of a home's value to be considered for private mortgage insurance. However, under some special programs, the down payment requirement allows the buyer to use a gift or grant to cover 2% of the 5% down payment required by private mortgage insurers. The gift or grant may come from a friend, relative, community group or other organization.

Private mortgage insurance is available on a wide variety of home loans and there is no preset limit on the loan amount. Although differences such as these may affect whether the mortgage company prefers to work with government or conventional mortgages, your mortgage professional will discuss which one would be better for your situation.

With the wide variety of loans available, home buyers have the freedom to choose the type of loan that best suits their needs. Early on in the home buying process, it is a good idea to meet with several companies to compare the types of mortgages they offer and shop for the best price and terms. Best of all, working with a mortgage insurer can be very easy, whether your loan is insured by the FHA or a private mortgage insurance company, because your mortgage professional handles all of the arrangements.

By making lending money to home buyers safer, mortgage insurance helps more families get into homes of their own.

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