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Lenders categorize home financing into two groups based on the
amount. Conforming home loans have a current maximum of $417,000 for a single family
residence, and non-conforming home loans have an amount over
the conforming limit. The primary difference to you as a borrower is the interest
rate. Non-conforming home loans usually have about 1/2 % higher rate
Fixed rate home financing: Simple interest, fully amortized home loans, with payments
that remain the same for the full term, which is usually for 30 or 15 years,
although some lenders may offer variations such as 20 year terms. The advantage of 15
year home loans, is the accelerated principal reduction, while the disadvantage
can be the higher monthly payments.
Adjustable rate home financing: Typically 30 year, simple interest,
fully amortized home loans, which may not be subject to the conforming lending
limits. The interest rate is determined by adding an index plus a
margin. The index is a financial point of reference, such as the 11th
district cost of funds or the one year treasury, and is the part of the
equation that
fluctuates according to economic conditions, while the margin always
remains the same.
Rate adjustment periods can be monthly, every six months, or yearly.
Lenders also offer hybrid home loans which are fixed for the initial 3, 5, or 7 years,
and the remaining term converting to a loan that usually adjusts on a yearly basis.
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