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Traditional Types of Mortgages

Before you learn about the numerous home loan options out there offered by various lenders, you need to have a basic understanding of mortgages first. Once you know what a mortgage is and how typical home loans work, visit your mortgage company and ask them to explain some of the other home finance products in further detail.

Usually lenders put mortgages into two categories based on the loan amount. The maximum loan amount as dictated by Fannie Mae is the limit for a conforming loan. Any loans under or at this cap are considered conforming loans. Any mortgages for an amount over the limit are called non-conforming loans. The only reason these terms matter to you as the home buyer is the difference in interest rate. Usually non-conforming loans have a higher interest rate, up to one half percent higher.

The two main types of loans are fixed-rate mortgages and adjustable-rate mortgages. Fixed-rate mortgages are clear cut and simple. You pay modest interest and principal on a regular basis, at the same set amount for the life of the loan. Usually fixed-rate loans are for 30 or 15 years, but some mortgage companies offer loans for 20 years or other term lengths. A 15 year loan may cost you higher monthly payments, but it will probably reduce your interest much faster than other loans since you are paying it off faster.

Adjustable-rate mortgages are usually 30 year loans that are fully amortized and offer simple interest. The interest rate changes depending upon the capital market, as measured on an index. The margin always remains the same as the rates fluctuate in accordance to the current economic conditions. Some adjustable-rate mortgages will be adjusted each month while others can have six month or annual adjustment periods.

In addition to these classic mortgages, there are a number of other home loan options out there. Talk to a professional about your other options and what will be the most suitable option for you and your circumstances.

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