Conventional or high-ratio
A conventional loan is a loan for no more than 75-80% of the appraised value or purchase price of the property, whichever is less. The remaining amount required for a purchase (20-25%) comes from your resources and is referred to as the down payment. If you have to borrow more than 75-80% of the money you need, you'll be applying for what is called a high-ratio loan.
How Do high-ratio loans work:
You must have at least some down payment when you buy a home. Any purchase where the down payment is between 1% and 19% is a high-ratio loan, and the loan must be insured. The insurer will charge a fee for this insurance. The amount of the fee will depend on the amount you are borrowing and the percentage of your own down payment. Typical fees range from 1.00% to 3.25% of the principal amount of your loan. This amount can be paid up front or added to the principal portion of your loan. A Loan Specialist can help you determine the exact amount.
No money down loans are common today and they are discussed in another article.
Fixed rate or variable rate
When you take out a fixed-rate loan, your interest rate will not change throughout the entire term of your loan. As a result, you'll always know exactly how much your payments will be and how much of your loan will be paid off at the end of your term.
With a variable-rate loan, your rate will be set in relation to a common banking rate such as the T-Bill, Prime rate+ or Libor. In other words, it may vary from month to month or year to year depending on the type of loan. Historically, variable-rate loans have tended to cost less than fixed-rate loans when interest rates are fairly stable.
When rates change, your payment amount could change or remain the same, depending on your type of loan. Some of these loans are referred to as Neg-Am (negative amortization) loans and should have very careful consideration before acceptance.
Short term or long term
The term is the length of the current loan agreement. A loan typically has a term of 2 to 40 years (most common 30 years). Usually, the shorter the term, the lower the interest rate.
A short-term loan is usually for two years or less. A long-term loan is generally for 15 years or more. Short-term loans are appropriate for buyers who believe interest rates will drop at renewal time. Long-term loans are suitable when current rates are reasonable and borrowers want the security of budgeting for the future. The key to choosing between short and long terms is to feel comfortable with your loan payments. After a term expires, the balance of the principal owing on the loan can be repaid, or a new loan agreement can be established at the then-current interest rates.
Pre-payments
Some loans can be paid off at any time without penalty. They are suited to homeowners who are planning to sell in the near future or those who want the flexibility to make large, lump-sum payments before maturity.
Other loans are commitments for specific terms. If you want to pay off the loan balance, you will need to wait until the maturity date or pay a penalty (usually about 6 months interest).
Rates and terms change on a daily basis and until you lock a loan the rate is subject to market change. There are hundreds and hundreds of different lenders with different terms and conditions shop carefully and use a reputable lender that you can trust. Experienced loan professionals know that the lowest interest rate is not always the best loan.
