First time home buyers generally might not understand how mortgages work or if there are a lot of types of mortgages or some categories of mortgages. I know, it’s quite confusing at first, but don’t you worry, this article is what you need to let you know more about if there are different mortgages and on how they work.

To start, there are two types of mortgages that you should know; government and conventional.

Government loans are mortgages that are sponsored by a government agency such as the Federal Housing Administration (FHA), the Veteran’s Administration (VA) for veterans, and the Rural Housing Service (RHS) or Farmers Home Administration (FmHA) for those living in rural areas. These are the loans that work best for home buyers for low or moderate incomes since they only require low down payments and have less strict qualifying guidelines. Although it must be understood that none of these companies loan you the money, but they guarantee loans granted by lenders who participate in the mortgage program.

Conventional loans are not guaranteed, insured or made by the federal or state government.

There are also various types of mortgage for you to know.

Fixed Rate Mortgage (FRM) is a loan on which the interest rate and monthly payment do not change. This is a great option for people who visualize owning their homes on the long run. The lenders will charge higher interest rates for these loans because the money is loaned for a longer time, which is a bigger risk to the lender.

Adjustable Rate Mortgage (ARM) is loan on which the monthly payments will increase or decrease over time, based on changes in the ARM’s interest rate index. The payments typically are adjusted every six months or once a year. Common indices to which ARMs are tied include the 11th District Cost of Funds, one-year T-note and six-month T-bill.Image title

Jumbo loans are the loans that surpass compliant loan amounts that are quantified by Fannie Mae and Freddie Mac. Also, the interest rates on
jumbo loans are usually higher since the risk of default involved is also larger.

There are a lot of things that you can know about mortgages besides the ones mentioned above. One thing that a lot of people are generally scared of are termite infestations, which leads us to prepayment penalties. These penalties can be as high as the equivalent of the six months’ interest on your entire mortgage and these are fees to pay of a loan early. So avoid loan offers that has pre-payment penalties when checking mortgages. If you find yourself in this situation, negotiate with your preferred lender or broker and maybe you can prepay up to just 20 percent of the total loan without getting to pay for a penalty.

Private Mortgage Insurance (PMI) is the insurance that lenders require when a buyer can’t pay at least 20 percent of the down payment. To make it simpler, this is money paid to insure the mortgage when the down payment is less than 20 percent.

Need to know more about how mortgages & what mortgage you will qualify for? Contact  (843) 321-9317 to make the most out of your mortgage.