Without the use of a mortgage, many people would not be able to own a house. Since the inception of mortgage loans, many different types of loans have been introduced. These include ARMs or adjustable rate mortgages and fixed rate loans, amongst many other types of loans. In addition, depending on your loan-to-value ratio and your credit rating, the type of loan lenders are willing to give you vary. Most typically, you will need to 20 percent down payment on a property, while the bank finances the other 80 percent.
If you go with an FHA “loan,” or Federal Housing Administration loan, they insure the bank by 100 percent for the loan amount you have with the bank. The FHA isn’t really the one giving you the loan, but they insure the bank to make the loan out to you. With an FHA, you can pay as little at 3.5 percent down payment of the purchase price of the property you intend on purchasing.
An adjustable rate mortgage, or ARM, is a loan with an adjustable rate. These home loan rates may be initially lower than a fixed rate. This rate fluctuates based upon the economic index the market and is regulated by the Federal government. This type of loan is also referred to as a variable-rate mortgage. There are limitations as to the charges that can be placed on this type of loan. The difference in the adjustable rate and the market rate for any given time is the index in addition to the margin.
Fixed rates are just that– fixed. These home loan rates are not tied to an index rate, but may be initially higher that an adjustable rate. The reason is that the adjustable rate takes risk away from the lender. The borrower’s rate takes into account the lender’s margin and thus reduces the risk. A fixed rate takes the guess work out of the payment amount per month for the borrower and thus poses more of a risk to the lender’s margin. These types of home loan rates do not change for the life of the loan.
A loan-to-value ratio is the amount borrowed in a loan compared to the amount the real property is appraised for or the amount of the property’s recent purchase amount, whichever of the two is less. The end result is a percentage of what that loan-to-value is. For example, a borrower borrows $300,000 to purchase a home appraised at $400,000. The loan-to-value is equivalent to 75 percent. Lenders look at the risk of loaning money to a borrower based up their loan-to-value ratio. The greater the loan, the greater the chance of default. The greater the equity in the real property, the less of a risk to the lender. To decrease the risk for lenders, they may request that the borrower purchase mortgage insurance. A low loan-to-value ration is below 80 percent. This is why only the borrowers with the best credit history may have 100 percent loan-to-value ratios.
The type of home loan rates available to you vary upon certain conditions. Your credit is a factor, the amount you have in-hand for the down payment is a factor, and another factor is the amount you wish the bank to loan you. Getting your credit report before you decide to take out a loan is wise and talking with a home loan lender is the best way to judge which loan and ultimately which type of rate is best for you.