Loan options overview

Loan options overview

Understanding the various loan types will help you
make a sound decision about which loan is best for you.

The primary loan types are:
  • Fixed rate loans, where the interest rate and the payment stay the same for the life of the loan
  • Adjustable rate loans or ARMs, which are thirty-year loans that have an interest rate fixed for an initial period, generally three, five, seven or ten years. After the fixed period, the interest rate, and therefore the payment, adjusts annually for the remainder of the loan term.
  • Conforming loans, which must conform to Fannie Mae and Freddie Mac guidelines, have a loan amount that cannot exceed a set limit ($625,500 in most of the Bay area)
  • Jumbo loans, which have varied guidelines and loan limits as high as $5 million.
  • FHA and VA loans, also called government loans, allow for very low down payments and have very rigid requirements for qualification. They also have other unusual features, some of which are good and others not.

 
If you are purchasing and have less than 20% down, you may have the option of choosing a single loan which requires mortgage insurance (MI), or avoid the mortgage insurance by getting two loans, a first mortgage and a home equity line called a ‘piggyback’.

You may want to pay one or more ‘points’ to lower the interest rate and payment.

There are also loans available with an interest-only payment, as well as loans with unusual features for first-time or low-income home buyers and other loans which have specific, unusual features that you can learn more about in Unconventional loans.
 

How do you decide which loan is best in your circumstances? 

In most situations you can follow this template:

  1. Choose between a fixed-rate loan and an ARM.
  2. Determine whether you need a conforming or a jumbo loan.
  3. If you have a low down payment - less than 20% down or less than 20% equity if refinancing – opt for either a government loan, a loan that has mortgage insurance, or go for a ‘piggyback’.
  4. Calculate whether it makes sense to lower the rate by paying ‘points’.
  5. If you think that you have an unusual loan situation look at Unconventional loans.