Basic mortgage loan information for clients.

Editor's Note: Most people generally agree that real estate is one of the best ways to develop personal wealth. However, many first-time and potential homebuyers lack information about the best way to finance a new home and the types of financing available. This article provides some simple explanations and comparisons to help NSA members answer queries from their clients.

Before going into an explanation of the different types of mortgages, practitioners should make sure that their clients understand the meaning of certain terms. The following real-estate terms should be part of any home buyer's glossary:

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Loan Terminology

Adjustable Rate Mortgage (ARM). An ARM is a type of loan in which an initial interest rate is given for a fixed period of years (3, 5, 7 or 10). After that, the interest rates may vary (i.e., will be adjusted), based on a specific index, such as 30-year Treasury bills or Cost of Funds Index. Usually, an ARM can be adjusted no more than two percent in one year with a maximum of six percent over the term of the loan. Thus, if the initial rate for the ARM was 4 percent and if interest rates rise, the ARM can go as high as 10 percent.

When this article was written, the interest rate for a 3-year ARM was 3 7/8 percent, a 5-year ARM was 4 3/4 percent, and a 7-year ARM was 4 7/8 percent. Homebuyers usually are required to give a 20 percent down payment, but lenders will agree to loans with down payments as low as 3 percent. In these cases, private mortgage insurance (PMI) is required to protect the investment. This, of course, increases the homebuyer's monthly payment.

Conventional Mortgage. This is the most popular type of home financing. These loans are not insured by the VA and FHA (explained below) and can be for 10, 15, 20, 25 or 30 years. The most common loan period is 30 years.

A conforming conventional mortgage is one that goes up to $322,700. Rates for such a loan are around 5 1/2 percent at present. A non-conforming or jumbo conventional mortgage is one that exceeds $322,700. Rates for such loans are currently in the vicinity of 5 5/8 percent. The down payment requirements are similar to ARMs, as described above.

FHA Insured Mortgage. These loans, available through…