Over the past couple of months, we've been answering some commonly asked questions on all things money matters. Something you’re dying to know? Email us at firstname.lastname@example.org. We’d love to hear from you and feature your question on our WashLine blog! Here's one that kept popping up...
What are the differences in mortgages?
If you’ve done any research at all into getting a loan to help you buy a house, aka a “mortgage,” then you’ve likely encountered the confusion that is lending terms. You usually don’t need to look further than a bank, credit union or mortgage lenders’ web site to see that there are a plethora of types of loans available.
There are adjustable, fixed rate, jumbo, balloon, government-issued, FHA or VA – the list goes on. Since most of these terms are unique to mortgage lending, it can be difficult to understand what they all mean. Let’s break it down…
First things first: Government or Conventional?
Mortgages in the U.S. are backed, or held, by the U.S. government OR by an organization or company (usually a financial institution.)
Government-insured mortgages include FHA (Federal Housing Administration), VA (Veterans Affair) or USDA (United States Department of Agriculture). The government issues these mortgages in order to help and incentivize certain groups, like those living in rural locations or veterans, to buy a home. The advantages (and disadvantages) of government-insured loans vary greatly, and it’s important to understand that not every government-loan is available to every individual. If you are interested in buying a home, then an experienced mortgage lender should be able to explain what (if any) government loans may be right for you AND what it could mean for your financial situation down the road.
Note: Borrowers can still apply for government-issued mortgages with banks, credit unions and mortgage companies. You do not need to apply for a VA, FHA, USDA or other government-insured mortgage directly with the government. (Because Washington Federal does not sell our loans to other banks or the government, meaning all the mortgages that we make stay on our books, we do not offer government-issued mortgages.)
Conventional mortgages refer to loans that are not backed by the federal government.
Many banks or credit unions that issue mortgages to borrowers sell their conventional mortgages on the “secondary market.” Those sales often go to Fannie Mae, Freddie Mac or another large, national or international financial institution. Not the case at Washington Federal.
We're one of the region's few portfolio lenders.
If you get a loan with us, you can trust that money is staying right here – in our communities. Why does that matter? As a portfolio lender, we’re not constrained by someone else’s lending requirements, so we can make common-sense decisions when it comes to your loan. This means greater flexibility in the types of homes and properties we’re able to finance and more transparency for our borrowers. Plus, you’ll know exactly who to call with questions.
The big two – adjustable rate and fixed rate.
When you first apply for a loan, choosing an adjustable rate or a fixed rate mortgage will be one of your first decisions.
Fixed-rate mortgages have the same interest rate throughout the life of the loan. So if you have a 30-year fixed-rate loan, then your monthly payment will be the same every single month for 30 years. Pretty straightforward. The benefits of fixed-rate mortgages are fairly self-explanatory – you’ll know exactly how much your payment will be until your loan’s paid off. You could pay for that stability - fixed-rate mortgages do generally come with a higher interest rate, a burden for some first-time buyers.
Adjustable-rate mortgages (ARM) are a little trickier. Unlike a fixed-rate loan, payments for an ARM can move and up and down as the lender’s interest rate fluctuates, which could increase or decrease your monthly payment. (Most lenders adjust their interest rate based on the Federal Reserve’s interest rate and market conditions.) ARM loans usually have an initial fixed-rate period during which your rate can’t change, followed by a longer period during which your rate can change at preset intervals.
When you’re looking at mortgage products, ARM loans usually include some numbers before them. For example, a 5/1 ARM is a typical product. This means that your rate won’t change for 5 years – during the introductory period. The “1” means that the interest rate can change every year after that.
Why get an ARM? Generally the initial rate is lower than a fixed rate, BUT since you can’t predict future rates, you won’t know for certain what you’ll be paying in the future. (ARMs do come with “caps.” Caps are structured differently by lender and product, but are designed to limit the amount of change year-to-year or over the life of the loan.)
Other terms you might hear…
Balloon loans allow you to make interest-only, or near interest-only, payments for a period of time, usually 3 or 7 years, before requiring that the full loan amount be paid, or refinanced into another loan.
Jumbo loans are just that, loans of a high amount that exceed the conforming loan limits established by Fannie Mae and Freddie Mac. Because most lenders that issue these types of loans often can’t resell them on the secondary market, the interest rate is usually higher, as the risk for the issuer is greater.
Still confused? The Consumer Finance Protection Bureau (CFPB) offers a helpful site, Understand loan options.