As a borrower, one of your first choices is whether you want a fixed-rate or an adjustable-rate mortgage loan:

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Fixed Rate Mortgage

These loans have the same interest rate for the entire repayment term. Because of this, the size of your monthly payment will stay the same, month after month, and year after year. It will never change. This is true even for long-term financing options, such as the 30-year fixed-rate loan. It has the same interest rate, and the same monthly payment, for the entire term.

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Adjustable Rate Mortgage

These loans (ARMs) have an interest rate that will change or "adjust" from time to time. Typically, the rate on an ARM will change every year after an initial period of remaining fixed. It is therefore referred to as a "hybrid" product. A hybrid ARM loan is one that starts off with a fixed or unchanging interest rate, before switching over to an adjustable rate. For instance, the 5/1 ARM loan carries a fixed rate of interest for the first five years, after which it begins to adjust every one year, or annually. That's what the 5 and the 1 signify in the name.

There is another distinction that needs to be made, and it's based on the size of the loan. Depending on the amount you are trying to borrow, you might fall into either the conforming or Jumbo category:

(Loan Limits by County can be found here.)

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Conforming/High-Balance Conforming Loan

A conforming loan is one that meets the underwriting guidelines of Fannie Mae or Freddie Mac, particularly where size is concerned. (Fannie and Freddie are the two government-controlled corporations that purchase and sell mortgage-backed securities.) A conforming loan falls within their maximum size limits, and otherwise "conforms" to pre-established criteria.

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Jumbo Loan

A jumbo loan, on the other hand, exceeds the conforming loan limits established by Fannie Mae and Freddie Mac. This type of mortgage represents a higher risk for the lender, mainly due to its size. As a result, jumbo borrowers typically must have excellent credit and larger down payments, when compared to conforming loans. Interest rates are generally higher with the jumbo products, as well.

Getting a new mortgage to replace the original is called refinancing. Refinancing is done to allow a borrower to obtain a better interest term and rate. The first loan is paid off, allowing the second loan to be created, instead of simply making a new mortgage and throwing out the original mortgage.

Conventional Loans

A conventional home loan is one that is not insured or guaranteed by the federal government in any way. This distinguishes it from government-backed mortgage types explained below:

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FHA Loans  

The Federal Housing Administration (FHA) mortgage insurance program is managed by the Department of Housing and Urban Development (HUD), which is a department of the federal government. FHA loans are available to all types of borrowers, not just first-time buyers. The government insures the lender against losses that might result from borrower default. Advantage: This program allows you to make a down payment as low as 3.5% of the purchase price. Disadvantage: You'll have to pay for mortgage insurance, which will increase the size of your monthly payments.

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VA Loans

The U.S. Department of Veterans Affairs (VA) offers a loan program to military service members and their families. Similar to the FHA program, these types of mortgages are guaranteed by the federal government. This means the VA will reimburse the lender for any losses that may result from borrower default. The primary advantage of this program (and it's a big one) is that borrowers can receive 100% financing for the purchase of a home. That means no down payment whatsoever.
 

Click here for information on this loan program