Conforming or Jumbo? The government pitches in
There are two quasi-governmental finance agencies, The Federal National Mortgage Association (FNMA, or "Fannie Mae") and the Federal Home Loan Mortgage Corporation (FHLMC, or "Freddie Mac"), whose only purpose is to ensure the nationwide availability for funds for home mortgages, thereby enabling a higher percentage of home ownership. They do this by buying mortgages from mortgage bankers, which replenishes the money supply and encourages more home-loan lending. Their current limit on mortgages is $300,700. A conforming loan is a first mortgage up to that amount, and a jumbo loan is a first mortgage greater than that amount.
Since mortgages under $300,700 can be sold to a low-cost source, they will naturally cost less to you the borrower. Conforming loans, particularly fixed-rate loans, are generally cheaper.
Free Lunch: there ain't no such thing
You have seen advertisements for loans starting as low as 4%, haven't you? You have seen the same for "no-point, no fee" loans. Or how about adjustable-rate loans that are convertible to a fixed-rate loan? Are these great deals? They might be, depending on your circumstances and needs. But please ask careful questions of any lender. There are fabulous features to every loan, but no loan has all the best features. (If it did, everyone would get that one loan.) What is right for you? Please take the time to understand these programs, what they do and what they don't offer, and you'll be able to help us help you better.
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Cost/Interest Rate: The Tradeoff
The incidental costs of a loan (appraisal, title insurance, escrow fees, processing) will be about the same no matter which program you choose (even a no-point, no-fee loan; see below to learn why). Points, the money the broker and lender earn for putting the loan together can vary even with the same loan program, depending on the starting rate you choose. For instance, if you get a new loan at 8% interest and one point, you might be able to get that same loan at 7.5% interest and two points. (One point equals 1% of the loan amount. Points are also known as an origination fee.) When we use the term cost below, we mean the total of points and incidental costs.