What’s a mortgage? A mortgage is simply a loan create to assist you finance your new home. It indicates that a specific amount of money will be loaned at a specific interest rate for a specific term (a specified period of time after which such term is said to be ended). In addition, you agree to make timely payments throughout the duration.

Mortgage Options

Conventional Mortgage
A conventional mortgage is a fixed or adjustable-rate, fully amortized loan secured by a mortgage or deed of trust that is not insured or guaranteed by an agency of the federal government (such as FHA or VA). Most types of conventional loans are paid off over 15, 25, or 30 years.

Terms of a conventional loan differ among lenders, but basically a loan can be acquired even without a deposit. When the deposit is less than 20%, it is often necessary for the loan to have private mortgage insurance (PMI) to protect the lender. Private Mortgage Insurance (PMI), also known as Lenders Mortgage Insurance (LMI), is insurance payable to a lender that may be required when taking out a mortgage loan. It is an insurance in the case that the mortgagor is not able to repay the loan, and the lender is not able to recover its costs after foreclosing the loan and selling the mortgaged property. The annual cost of PMI varies between 0.19% and 0.9% of the total loan value, depending on the loan term, loan type and proportion of the total home value that is financed.

Conventional mortgages can be conforming or non-conforming. A Conforming Mortgage complies with specific Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) underwriting guidelines. A jumbo loan, which is also known as a non-conforming loan, is a loan that exceeds the maximum loan limits set by two large government-sponsored entities, the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Fannie Mae and Freddie Mac, respectively. Naturally, loans that conform to the limit are called conforming loans. Conforming loans are eligible to be purchased by both Fannie Mae and Freddie Mac. Conventional mortgages can have a fixed rate or adjustable rate.

Fixed-Rate Mortgages
A fixed rate mortgage (FRM) is a mortgage loan where the interest rate on the note remains the same through the term of the loan, as opposed to loans where the interest rate may adjust or “float.” Other forms of mortgage loan include interest only mortgage, graduated payment mortgage, adjustable rate mortgage, negative amortization mortgage, and balloon payment mortgage. Fixed-rate mortgages give you the security of knowing your monthly principal and interest payment will not change over the life of the loan. This type of conventional mortgage also protects you from rising interest rates. No matter how high market interest rates go, your mortgage rate remains the same. Prosperity Mortgage offers a variety of fixed-rate products, with loan terms ranging from 10 to 30 years. Fixed-rate mortgages are better for those buyers who:

Plan to stay in their homes a long time
Are on limited or fixed incomes
Are buying a home at a time when interest rates are comparatively low
Prefer regular payments with no surprises

Adjustable Rate Mortgages
An adjustable rate mortgage, called an ARM for short, is a mortgage with an interest rate that is linked to an economic index. The interest rate, and your payments, are periodically adjusted up or down as the index changes. During the preliminary fixed period, an ARM has a lower interest rate than a similar fixed-rate mortgage, so you’ll save on your monthly payments during the early years of your loan term. Because this type of conventional mortgage offers lower upfront monthly payments, it can help you:

Save money if you expect to move or refinance. If you plan to move or refinance before the end of the loan’s preliminary fixed period, you can take advantage of lower payments without worrying about future rate increases.

Manage your cash flow in a high-rate environment. If you are buying a home at a time when interest rates are comparatively high, an ARM can help you avoid making high monthly payments right away.

Plan for future income increase. An ARM can help you keep your payments low while your income increases during the loan’s fixed period.

Purchase a more expensive home. Because your maximum loan amount is based on the initial monthly payments, you may be able to borrow more.

Potentially improve your credit standing. The lower initial rate can make your payments easier to manage, helping you improve your credit and expand your financing opportunities if you make timely payments on your mortgage loan and other credit obligations.
After the initial fixed-rate period, the remainder of the loan term is divided into adjustment periods of one year or six months, depending on the mortgage you choose. At the end of each adjustment period, the interest rate may change based on existing market conditions.

VA Loan
Department of Veteran’s Affairs Loans are government guaranteed loans available to qualified military and ex-military personnel. Generally, there are less fees, preferred interest rates and lower down payment requirements for this program.

FHA Loan
The Federal Housing Authority insures federally qualified lenders against any default payments by the borrower. While the down payment can be as low as 2.25% of the purchase price, the FHA charges the borrower an up-front mortgage insurance premium fee to obtain mortgage insurance on the loan. The fee may be collected as a lump sum at loan closing or as a periodic amount included in the monthly payment, or both. Prepaid interest, called points, may also be charged by the lender. FHA loans have historically allowed lower income Americans to borrow money for the purchase of a home that they would not otherwise be able to afford. The program originated during the Great Depression of the 1930s, when the rates of foreclosures and defaults rose sharply, and the program was intended to provide lenders with sufficient insurance. Some FHA programs were subsidized by government, but the goal was to make it self-supporting, based on insurance premiums paid by borrowers.

Financed Closing Costs
Many lenders today will assist buyers with closing costs. In exchange for paying a somewhat higher interest rate, a lender may build into the mortgage its normal charges plus pay other closing costs up to a specified amount. These plans vary widely, so study them carefully.

Balloon Mortgage
A balloon mortgage can be an excellent option for many home buyers. A balloon mortgage is usually rather short, with a term of five to seven years, but the payment is based on a term of 30 years. They often have a lower interest rate, and can be easier to qualify for than a traditional 30 year fixed mortgage. There is, however, a risk to consider. At the end of your loan term you will need to pay off your outstanding balance. This usually means you must refinance, sell your home or convert the balloon mortgage to a traditional mortgage at the current interest rates.