With housing in the forefront of the news right now, everyone is well aware of the volatility in the mortgage rate market. Just a year ago we were at historically low rates, averaging down under 3 percent, but now with Fed rate hikes and treasury yields jumping, we're seeing rates all the way up to 7 percent at times. With rate lability, it's more important than ever to understand what loan products are available to you if you intend to enter the market in the years to come. 

Conventional Mortgages

Conventional mortgages are loans that are not government backed and are under a certain loan amount based on average home prices in an area. In Boston, that is a loan amount of up to $724,500. The majority of mortgages nationwide fall into the conventional category. These loans can be further broken into two different categories.

Conforming Loans

Conforming loans are those that meet all the underwriting requirements of the government agencies Fannie Mae and Freddie Mac that purchase conforming loans. One of the major requirements for these loans are loan limits, therefore conforming conventional loans also have a maximum total lending amount that varies based on location. There are many rules in the additional underwriting guidelines of which some examples would be maximum debt to income ratios, number of owner occupied vs investor units in a condominium or home owner association, and percentage of commercial interest for mixed use developments.

Nonconforming

Nonconforming loans do not meet the requirements set forth by Fannie Mae and Freddie Mac. A subset of nonconforming loans is the jumbo loan. Jumbo loans do not adhere to the loan limits described by Fannie Mae or Freddie Mac. 

Within the conventional loans, both conforming and nonconforming, are fixed rate mortgages and adjustable rate mortgages. 

Pros:

• Conventional loans allow for lower down payments for owner occupants
• Conforming loans often offer lower mortgage rates than nonconforming loans (they are considered safer to the lender as they can be sold to the government)

Fixed- Rate Mortgages

You may have heard of the 30 year fixed rate mortgage, as we often use this as a benchmark to compare year over year. This is a mortgage rate that does not change over the course of 30 years. It remains fixed, just as the name would suggest. Fixed rate mortgages are commonly offered in repayment periods of 10-30 years. 

Pros:

• Fixed rate loans stay the same throughout the loan lifetime, allowing for payment consistency
• Fixed rate loans are a great hedge against inflation. The purchaser will make the same payment in year 29 as they did in year 1.

Adjustable-Rate Mortgages

Another popular loan type, especially in high and falling rate climates, is the adjustable rate mortgage. These rates come in many different configurations with a wide variety of time periods, but are expressed as a 7/1 ARM (seven year fixed, then changing yearly after), 5/6 ARM (five years fixed, then changing every 6 months after), etc. Typically rates are lower for the shorter fixed rate period (a 7/1 ARM rate would be higher than a 5/1 ARM rate). ARMs are available as either conforming or jumbo. 

Pros:

• Adjustable rate loans often offer lower mortgage rates for the initial time period 
• Adjustable rate loans are a great option for those who do not intend to stay past the initial period of time
• Adjustable rate loans are a great option in high rate climates

Interest Only Mortgages

Private lenders can also offer interest only loans. These loans allow you to pay only the monthly interest on the loan (no principal) for a predetermined amount of time. Interest-only loans are often structured like an ARM, and the interest rate changes after a set period of time (and thus the payment varies as well). After the predetermined period of time has passed, the borrower either owes the lump sum of the loaned money or will begin making payments on principal as well as interest. These loans often have strict qualification criteria, requiring significant savings, a low debt-to-income ratio, and good credit. 

Pros:

• Interest only loans allow for smaller payments than a conventional loan that includes principal and interest
• Rates are often lower for interest only loans

Government-Sponsored Enterprises

Government sponsored loans are obtained through private lenders but insured by the US Government. The most common government sponsored loan is the FHA loan. These are loans given by private lenders but backed by the Federal Housing Administration. These loans often allow lower down payments and have less strict credit requirements to qualify. 

Pros:

• FHA loans have less strict qualification criteria such as lower credit scores and higher debt to income ratios, allowing more people access to mortgages
• A lower percent down can be used for an FHA loan

Another well known government backed loan is the VA loan, which is available to military members and their families. These loans are ensured by the Department of Veteran Affairs. They often do not require a down payment, and don’t charge PMI (although there may be an upfront fee at closing depending on the percent of the down payment). 

Pros:

• VA loans have less strict qualification criteria
• No down payment is required for VA loans
• No PMI is charged for VA loans

The city of Boston itself often offers loan products that offer down payment assistance and have less strict qualification requirements to allow low- to moderate- income buyers a chance in the market. 

Interest rates and the mortgage lending process can be complicated at times, and it is always best to consult with an expert to determine what products might suit you best.