Conforming/Jumbo/Super Jumbo

For borrowers with excellent credit and good debt-to-income ratios, conforming loans which top out at $417,000 carry the lowest rates.  "Agency jumbo" rates are the next category which can go as high as $729,750.  Rates for "agency jumbo" loans are higher than standard conforming rates. Above $729,750 the loans are considered to be "Jumbo" loans and rates are higher than on "agency jumbo" loans.  Some of the criteria lenders use include:  loan-to-value of the property; borrowers’ credit; and the adequacy of the documentation used to support the loan.

types of loans

One of the most popular types of mortgages is the fixed rate mortgage.  Fixed rate mortgages are popular because the payment never changes over the life of the loan, so the borrowers do not have to worry about the uncertainty of what their payments will be in the future.

Most fixed rate loans are for 30 years, but some lenders will structure them for 10, 15 or 20 years.  If there is no balloon payment then the loans are structured to be fully paid off at the end of the loan term.

Adjustable Rate Mortgages usually start at a lower interest rate than fixed rate mortgages, or are the only mortgage available due to the undesirability of the loan (such as borrowers' poor credit, undesirable property, etc.)

All adjustable rate mortgages have two components, an index and a margin.  The index is a commonly used financial instrument, such as Prime, LIBOR, Treasury Bills, 6 Month C.D. Rate, 11th District Cost of Funds Index, etc.  The index is the portion of the adjustable rate mortgage that adjusts.  The other component is the margin.  The margin is set before the loan closes and will generally remain the same over the life of the loan.  The index plus the margin determines the note rate on the mortgage.  If you have a loan that is "Prime + 1.5%" and Prime is 4.0%, then your note rate is 5.5% (4.0% + 1.5%).  If Prime goes up to 4.5%, then your note rate becomes 6.0%.

Hybrid loans have characteristics of both fixed rate mortgages and adjustable rate mortgages.  The mortgages are fixed for a certain amount of time, usually 3, 5, 7 or 10 years, and then become an adjustable rate mortgage.

Hybrid loans are desirable because the fixed rate for the fixed period is generally lower than what is available for a fixed rate mortgage, yet the borrower does not have to worry about the mortgage adjusting until the fixed rate period expires.  If borrowers know they will only own their home for 3-4 years, then a hybrid mortgage that is fixed for 5 years can be attractive.  If rates are high and borrowers feel that rates will go down in the next couple of years, then a hybrid mortgage can be attractive combined with the strategy of refinancing to a fixed rate mortgage when rates come down.