The Best Loan for You

Understanding Your Financing Options

The Best Loan For You

Choosing the right mortgage is as important as choosing the right home. There are a variety of loan programs, loan terms, loan rates and loan options available today. Sorting through the choices to find the best loan for you can be daunting. Our Shea Mortgage* team can provide you with a basic understanding of loan options available and the definition of key terms to help you choose the loan that best fits your needs.

Mortgage loans can be classified and categorized a few different ways. We'll start with how the loans are structured for repayment which generally falls into two categories: Fixed rate and adjustable rate mortgages.

Fixed Rate Mortgages

With a fixed rate mortgage, the interest rate remains the same for the entire term of the loan. The most common fixed rate loan term is 30 years and is referred to as a 30-year fixed mortgage. 15-year loan terms are also popular.

The primary advantage of a fixed rate loan is the certainty of knowing your payment amount and knowing that it will not change. The disadvantage is that this certainty may come with a slightly higher interest rates than the alternatives. These loans are best suited for buyers who plan to stay in their new home for the foreseeable future and who want security of knowing what their payment will be for the length of the loan.

Adjustable Rate Mortgages (ARM)

With adjustable rate mortgages, also known as ARM's, the interest rate on these loans is adjusted periodically based on a specified financial index. Commonly used indexes include the London Interbank Offered Rate (LIBOR), the Cost of Funds Index (COFI) or 1-Year Treasury Notes.

These loans typically have a low starting rate therefore lowering your monthly payment compared to a fixed rate mortgage. However, because the rate is tied to an index that fluctuates based on market conditions, there is risk of your monthly payment moving higher should the index move up.

Hybrid Mortgages

These loans combine elements of both a fixed rate and an adjustable rate mortgage. They start off as a fixed rate for a set number of years and then convert to an adjustable mortgage.

An example of such a loan is a 5-Year ARM or a 5/1 ARM. This means the loan's interest rate is fixed for the first 5 years then it becomes adjustable. Variations on the hybrid loans, such as a 3/1 ARM or 7/1 ARM, alter the length of the fixed part of the loan. In these instances, the fixed period would be 3 years and 7 years respectively.

The advantage of this loan is that the fixed rate period of the loan usually has a lower interest rate than a 30-year fixed mortgage. For buyers who plan to stay in their new home for 5 years or less, this can be a more affordable yet less risky alternative. The disadvantage of this loan is that the adjustment could be significantly higher in rate making your monthly payments unaffordable.

FHA and VA Mortgages

A second way to categorize loans is by whether or not they are government insured. The two most common types of government insured loans are Federal Housing Authority (FHA) and Veteran's Administration (VA). These loans are not made by the government. The government's role in these loans is to guarantee their repayment to the lender in the event of a default. Because of the added security this government backing provides, the underwriting rules may be more flexible and people that would otherwise not qualify for a loan may be able to obtain one. Essentially, you still go through the same process as a conventional mortgage - just with some additional paperwork.

The key question to ask is, do you qualify for an FHA or VA loan? The fact is many people do. In particular, the first-time buyers can often qualify for an FHA loan while only Veterans may qualify for a VA loan. There are many factors that determine qualification and if a government program is even right for you.

Conventional Mortgages - Conforming or Jumbo

Conventional mortgages come primarily in two varieties, conforming and jumbo. This distinction refers to the loan amount. The top end of the conforming limit starts at $484,350. If your loan amount (not the purchase price of the home) is below that number, you would be eligible for a conforming loan. The specific limit varies based on where you are purchasing and in some areas is as high as $726,525.

The distinction between conforming and jumbo is made to assist with underwriting. Jumbo loans are considered riskier because of the higher loan amounts and therefore come with higher rates.

Please contact our Shea Mortgage team if we can be of any assistance in determining the best loan for you. 

Buyers are NOT required to use Shea Mortgage, are free to use any lender of their choosing, and are free to decline any incentives tied to the use of Shea Mortgage. Shea Mortgage is an independent member of the J.F. Shea family of companies. Lending In: Arizona: Arizona Department of Financial Institutions License #0904079, NMLS #40397. California:  NMLS ID #40397, CA Department of Real Estate License #01197403. Colorado: Colorado Uniform Consumer Credit Code Supervised Lender License #988132. Florida: Florida Office of Financial Regulation License MLD111, NMLS #40397. Nevada: State of Nevada Department of Business and Industry Division of Mortgage Lending License Number 4111. North Carolina: North Carolina Commissioner of Banks Mortgage Lender License #L-106078, NMLS #40397. Texas: SML Mortgage Banker Registration – MLS – 40397. Virginia: State Corporation Commission Bureau of Financial Institutions License Number MC-5849. Washington: Washington Department of Financial Institutions Consumer Loan License #CL-40397. Neither Seller nor Shea Mortgage can guarantee your credit score will improve or that participation in this program will result in loan approval on any specific terms, rates or conditions.

 

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