There are several types of mortgage features available on the market today and it is easy to get confused, so here are a few of the basics:
A conforming mortgage is given for loans of up to $417,000. This method allows for easy budgeting and long-term planning and if interest rates are low, you can lock in a favorable rate. Conforming mortgages can be conventional mortages, meaning the amount of down payment required from the borrower is 20% of the appraised property price or sales price, whichever is lower, giving a loan-to-value (LTV) ratio of 80%. So on a $200,000 home price, the bank/lender would put up $160,000 and the buyer/borrower would put up $40,000. Non-conventional mortgages are simply ones in which the loan-to-value ratio is less than 20% and we discuss this in another section.
A mortgage for amounts over $417,000 is commonly referred to as a non-conforming or “jumbo” loan. Jumbo mortgages offer financing on loans exceeding the conforming loan limits. Set by congress, the conforming limit is defined by the maximum loan amount available for purchase by Fannie Mae and Freddie Mac, the two federally chartered organizations that purchase mortgage securities in the secondary market. Jumbo loans are often subjected to premiums on interest rates and other restrictions, due to greater default risk and amount borrowed. In addition, it is extremely uncommon for a jumbo loan to have a zero-down program.
For the ultra-luxury home market, purchasers can seek out a super jumbo mortgage. These types of mortgages are even more complicated but offer loan amounts of $1 million and extend to around $10 million.
A conventional 30-year fixed rate mortgage loan can provide the security of a monthly principal and interest payment that never increases because the interest rate stays the same throughout the life of the loan. The only change in monthly payment amount with this mortgage could be a result of the amount the lender collects for mortgage insurance, property taxes or homeowners insurance for escrow payments.
A conventional 15-year fixed rate mortgage reduces the amount of interest paid over the life of the loan by shortening the amortization schedule (number of years the mortgage will be fully paid off) and thus increasing the monthly amount applied to principal reduction. However, the monthly payment will be much higher than that of a 30-year mortgage loan. Some mortgage companies offer different amortization options, such as 10, 20 or even 40 years.
