Yvette M. Palmer, Associate Broker Local Expertise for Santa Cruz River Valley

Types Of Mortgage Loans

Explore Your Home Loan Options in Santa Cruz Valley

When it comes to deciding how to finance your loan, it’s smart to consider all options and figure out which loan type is right for your situation. Learn the basic information of different loan products so you’re prepared to make an informed decision about your mortgage. In applying for a mortgage, many consumers assume that they will deal with the same lender until either selling the house or paying off the mortgage. However, loans and the rights to service them are commodities that can be bought and sold, so keep track of who's currently holding and servicing your mortgage.

USDA Loan

  • Purpose: Designed for homebuyers in rural and some suburban areas.
  • Key Features: No down payment required, lower mortgage insurance costs, backed by the U.S. Department of Agriculture. 
  • Best For: Buyers in eligible rural areas with moderate to low income.
View Guidelines

Conventional Loan

  • Purpose: Standard home loan not insured by the government. 
  • Key Features: Can be conforming (meets Fannie Mae/Freddie Mac limits) or non-conforming (jumbo). Typically requires a higher credit score and down payment than government-backed loans. 
  • Best For: Buyers with strong credit and a stable financial profile.

Construction-to-Permanent Loans

  • Purpose: Finance the building of a new home and convert to a permanent mortgage after completion. 
  • Key Features: Single closing, funds released as construction progresses.
  • Best For: Buyers building a custom home.

Fixed-Rate Mortgage

  • Purpose: A loan where the interest rate stays the same for the life of the loan. 
  • Key Features: Stable monthly payments, predictable long-term costs.
  • Best For: Buyers who want certainty in their mortgage payments.

FHA 203(k) Rehab Loan

  • Purpose: Allows buyers to purchase a home and include renovation costs in a single FHA loan. 
  • Key Features: Can finance structural repairs, modernizations, or improvements. 
  • Best For: Buyers purchasing fixer-uppers who want to roll repair costs into the mortgage.

Reverse Mortgage

  • Purpose: For homeowners 62+ to convert home equity into cash. 
  • Key Features: No monthly mortgage payments required; loan is repaid when the borrower sells the home or passes away. 
  • Best For: Seniors looking to supplement retirement income while staying in their home.

Interest-Only Loans

  • Purpose: Allows the borrower to pay only interest for an initial period.
  • Key Features: Lower initial payments, but principal repayment begins later. 
  • Best For: Buyers who want low early payments and expect higher income in the future.

HELOC (Home Equity Line of Credit)

  • Purpose: Allows homeowners to borrow against the equity in their home. 
  • Key Features: Works like a credit line—borrow what you need, up to a limit. 
  • Best For: Homeowners with existing equity who need flexible funds for renovations, home improvements, or other major expenses.

FHA Loan

  • Purpose: Insured by the Federal Housing Administration. 
  • Key Features: Low down payment (as low as 3.5%), more flexible credit requirements, requires mortgage insurance premiums (MIP).
  • Best For: First-time buyers or borrowers with lower credit scores or limited savings.
View Guidelines

Jumbo Loan

  • Purpose: A loan that exceeds conforming loan limits set by Fannie Mae and Freddie Mac. 
  • Key Features: Not backed by government agencies, stricter credit requirements, larger down payments, and slightly higher interest rates.
  • Best For: Buyers purchasing high-value homes that exceed standard loan limits.

Variable or Adjustable-Rate Mortgage (ARM)

  • Purpose: Interest rate changes over time based on market conditions.
  • Key Features: Often starts with a lower initial rate (“teaser rate”) that adjusts after a fixed period. 
  • Best For: Buyers who plan to move or refinance before rates adjust.

Purchase Money Mortgage

  • Purpose: A mortgage taken out at the time of buying the home. 
  • Key Features: Often used interchangeably with a standard mortgage; can also refer to seller-financed loans. 
  • Best For: Buyers needing financing directly for a home purchase.

State or Local Housing Authority Loans

  • Purpose: Offered by state or local agencies to help first-time or low-to-moderate income buyers. 
  • Key Features: Often come with low interest rates, down payment assistance, or tax incentives. 
  • Best For: First-time buyers in specific regions who qualify for local programs.

HomeStyle Renovation Loan (Conventional)

  • Purpose: Similar to FHA 203(k) but uses conventional financing. 
  • Key Features: Can cover purchase + renovation costs, flexible on property types. 
  • Best For: Buyers who want conventional financing for a home that needs updates.

Portfolio Loans

  • Purpose: Loans kept on a lender’s books instead of being sold to investors. 
  • Key Features: Flexible underwriting, may allow nontraditional credit or income. 
  • Best For: Borrowers with unique financial situations.

Community Seconds / Soft Second Loans

  • Purpose: Second mortgage provided by government programs or nonprofits to help with down payment. 
  • Key Features: Often forgivable after a certain number of years, low or zero interest. 
  • Best For: First-time buyers needing help with down payment assistance.

VA Loan

  • Purpose: For eligible veterans, active-duty service members, and some spouses. 
  • Key Features: No down payment, no private mortgage insurance, often lower interest rates. Backed by the Department of Veterans Affairs.
  • Best For: Military personnel and veterans.
View Guidelines

Balloon Loan

  • Purpose: A loan with smaller payments initially, with a large “balloon” payment due at the end of the term. 
  • Key Features: Usually 5–7 years, then full loan balance is due. Often used for short-term financing. 
  • Best For: Buyers planning to sell or refinance before the balloon payment is due.

Hybrid Loan

  • Purpose: Combines features of fixed-rate and adjustable-rate mortgages. 
  • Key Features: Fixed interest rate for an initial period (e.g., 5, 7, or 10 years), then converts to an adjustable rate. 
  • Best For: Buyers who want initial stability but are okay with future adjustments.

Loans with Prepayment Penalties

  • Purpose: Any mortgage where paying off the loan early may trigger a fee. 
  • Key Features: Protects lenders from losing interest income if you refinance or pay early. 
  • Best For: Buyers who plan to keep the loan long-term or want to compare cost versus flexibility.

Energy-Efficient / Green Mortgages (EEMs)

  • Purpose: Finance homes with energy-efficient improvements or new green construction. 
  • Key Features: Can include additional funds for energy-saving upgrades, sometimes lower interest rates. 
  • Best For: Buyers looking to save on utility costs or purchase an energy-efficient home.

Second / Piggyback Loans

  • Purpose: Used to avoid private mortgage insurance (PMI) or reduce down payment requirements. 
  • Key Features: Often structured as an 80/10/10 loan—80% first mortgage, 10% second, 10% down payment. 
  • Best For: Buyers with limited cash for down payment or who want to avoid PMI.

Owner Carry-Back Loan (Seller Financing)

  • Purpose: The seller finances part or all of the purchase price for the buyer. 
  • Key Features: Buyer makes payments directly to the seller instead of a traditional lender. Terms are negotiable, including interest rate, repayment schedule, and down payment. 
  • Best For: Buyers who may not qualify for traditional financing or want flexible terms; sellers who want to facilitate the sale and possibly earn interest income.

Banker vs. Broker: Which Mortgage Option is Right for You in Santa Cruz Valley?

When financing your home in Southern Arizona, understanding the difference between a banker and a mortgage broker can help you make the best decision for your budget and goals. Here are some pros and cons for you to consider when shopping for a loan.

Mortgage Broker

  • Who they are: Independent professionals who act as middlemen between borrowers and multiple lenders.
  • How they work: They gather your financial information and shop around to find loan options from a variety of banks, credit unions, or other lenders. 
  • Pros: 
    • Access to a wider variety of loan programs and lenders. 
    • Can often find competitive rates or options that a single bank may not offer. 
    • Helpful for borrowers with unique situations (e.g., lower credit scores, self-employed). 
  • Cons: 
    • May charge fees (sometimes paid by the borrower or the lender). 
    • Less direct control over the loan process compared to working with a bank.

Banker (Loan Officer / Direct Lender)

  • Who they are: Works directly for a bank or credit union. 
  • How they work: They offer loan products provided by their institution only. You work directly with them from application to closing. 
  • Pros: 
    • Direct access to the lender and potentially faster communication.
    • May have special deals or perks for existing customers. 
    • No middleman fees. 
  • Cons: 
    • Limited to the bank’s loan products. 
    • May not have the flexibility to find the absolute best rates across multiple lenders.