The Only Names You Need To Know In Real Estate

Financing Options

Fortunately for buyers, there are a variety of mortgages to choose from. It is in your best interest to investigate each of them to determine which is best for you. You probably won’t qualify for all of them. In fact, you may only qualify for one. But if you do qualify for more than one, you may save yourself money (and worry) in the long run if you do your homework before signing on the dotted line.

  • Fixed-Rate Mortgages
  • Adjustable-Rate Mortgages
  • The Convertible ARM
  • FHA, VA and Conventional Loans

Fixed Rate Mortgages

– Consider a fixed rate mortgage if either of the following describes you:
– You plan on living in your new home for many years.
– You are not a risk-taker and prefer the stability of knowing how much your payment will be each month. Since most home loans are for a period of 30 years, if you want a payment you can count on for that long of a period of time, a fixed rate mortgage may be what works best for you. Once your loan amount and interest rate are calculated and locked in, a fixed rate mortgage will guarantee that you will have the same payment over the life of the loan. Making extra payments to principal will allow you to pay your loan off sooner.
– This may not always be the best choice, however. If interest rates are very high at the time you take out your loan, with a fixed rate mortgage you’ll be stuck with that high interest for the life of the loan (unless you choose to refinance). Conversely, if interest rates are very low, you’ll come out the winner with interest rates that will stay low no matter how high interest rates go in the future.

The following are the advantages and disadvantages of the varying lengths and terms of fixed-rate mortgages:

15-Year Fixed-Rate:

  • Pay off the loan in half the time of a 30-year loan.
  • Equity builds up more quickly than in a 30-year loan.
  • Payments are higher (which may be a problem if you lose your job or become unable to work).

20-Year Fixed-Rate:

  • Pay off the loan in 2/3 the time of a 30-year loan.
  • The overall interest paid is considerably less than for a 30-year loan.

30-Year Fixed-Rate:

  • The most common choice, especially for first-time homebuyers, as it’s the easiest of the fixed-rate loans to qualify for.
  • Monthly payments are lower than for 15-year and 20-year loans. This can prove especially helpful if you do not have a lot of “padding” between the amount you can afford to spend and the monthly payment for your desired property.
  • More desirable if you plan on staying in the same home for years, since equity builds more slowly than for shorter-term loans.
  • For income tax purposes, this term provides the maximum interest deduction.

Adjustable-Rate Mortgages (ARMs)
If you are more comfortable in taking a risk with your money or if interest rates are very high at the time you take out your loan, an adjustable-rate mortgage (ARM) may be the solution for you. You might also choose this type of loan if your planned ownership of the property is short-term or if you expect your income to increase to cover any potential rise in the interest rate. Generally, the interest rate when you take out your loan will be lower than a fixed-rate mortgage. Please note that this is true initially, not necessarily long-term. Since an ARM rate rises and falls depending on the prevailing interest rate, your mortgage payment will rise and fall accordingly. If your income is not sufficient to cover the highest possible payments, then this option is not for you. On the positive side, the lower initial payments will allow you to qualify for a larger loan than if you choose a fixed-rate. The downside is that your payments will increase if/when the rates go up. Typically, ARM interest rates are tied to a specific financial index and your payment will be based on the index your lender uses plus a margin, generally of two to three points. Get the formula used by your lender in writing and make sure you understand what it means. Fortunately, the amount an ARM can increase is limited. There are “caps” on how much your lender can increase your rate, both for a period of one year and for the life of the loan. Plan ahead, and have your lender calculate what the maximum payment would be if your rate went to the highest amount allowed by the cap for your particular mortgage. If you are not confident you’ll be able to pay that amount on a monthly basis, perhaps you should reconsider this type of loan.

Convertible ARMs
If neither the fixed-rate or the adjustable-rate mortgage seems like the best option, perhaps the convertible ARM will be right for you. This alternative combines the initial advantage of an ARM with a fixed rate after a predetermined number of years. Obviously, this type of mortgage has more advantages when the initial interest rate is low and the future rate is not guaranteed.

Types of Loans
Understanding the difference between VA, FHA and Conventional loans can help you avoid unnecessary time and expense when you try to qualify for a mortgage. Government loan options include VA (Veterans Administration) loans and FHA (Federal Housing Administration) loans. Non-government loans are usually referred to as Conventional loans. A mortgage lender can help you determine which loan type is best suited for you. The guidelines and information below will provide you with some basic advantages and disadvantages of each type of loan.

VA Loans
Veterans may qualify for a loan from the Veterans Administration. You must have suitable credit, sufficient income and a valid Certificate of Eligibility (COE) to be eligible for a VA guaranteed home loan. This is available to Service members, veterans, spouses and other eligible members. The home must be for your own personal occupancy at the time of purchase.

VA home loans can be used to buy a home or condo units in a VA approved project, build a home, purchase and improve a home, improve a home by installing energy-related features or energy efficient improvements or buy a manufactured home.

VA guaranteed loans are made by private lenders, such as banks, savings & loans, or mortgage companies to eligible veterans for the purchase of a home, which must be for their own personal occupancy. The guaranty means the lender is protected against loss if you or a later owner fails to repay the loan. The guaranty replaces the protection the lender normally receives by requiring a down payment allowing you to obtain favorable financing terms.

There are several advantages and benefits for getting a VA loan if you are eligible. You can purchase with $0 down, have lower monthly payments because no mortgage insurance is required and usually getting qualified is easier for the eligible member than other types of loans.
There are limits on the amount that you can borrow so consult with your Realtor and mortgage lender for these amounts.

FHA Loans
For many homebuyers, a Federal Housing Administration (FHA)-backed mortgage makes buying a home easier – or possible – thanks to less-rigid borrower requirements:

Low minimum down payment (currently 3.5%)
Reasonable credit expectations
More flexible income requirements
Compared with providers of conventional loans, providers of FHA loans are willing to look at the whole picture rather than dismissing a borrower for falling short on a particular criterion. In general, a property financed with an FHA loan must be the borrower’s principal residence and must be owner-occupied. This loan program cannot be used for investment or rental properties. Detached and semi-detached houses, townhouses, row houses and condos within FHA-approved condo projects are all eligible for FHA financing.

An FHA insured loan is a loan which is provided by a FHA-approved mortgage lender.

FHA mortgages and refinances of an existing FHA mortgage which was endorsed by the FHA on, or after, June 1, 2009 are subject to an upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP). FHA’s mortgage insurance programs help low- and moderate-income families become homeowners by lowering some of the costs of their mortgage loans. FHA mortgage insurance also encourages lenders to make loans to otherwise credit-worthy borrowers and projects that might not be able to meet conventional underwriting requirements, protecting the lender against loan default on mortgages for properties that meet certain minimum requirements. FHA mortgage insurance is charged both as a fee at closing as well as each month as part of your regular loan payment.

There are limits on the amount that you can borrow so consult with your Realtor and mortgage lender for these amounts.

Conventional Loans
A conventional mortgage is not backed by any federal agency, and you can obtain one from just about any lender, such as a mortgage company or a bank. This type of loan offers a lot more variety.

Conventional loans require higher down payments, which can range anywhere between 10 percent and 30 percent of the purchase price. The conventional down payment percentage may also vary based on the type of property, such as whether you are buying a single-family home or a condo.

Additionally, conventional loans can be used to finance just about any property, whereas some condo complexes (and some houses) aren’t approved for FHA or VA financing. You can finance second homes and non-owner occupied investment properties with conventional loans. If you don’t intend to occupy the property, you will have no choice but to go with a conventional loan.

You might also have to pay for mortgage insurance on a conventional loan, but many policies carry a monthly premium instead of the upfront charge. If you make a down payment of 20 percent or more on a conventional loan, you generally will not be required to carry mortgage insurance.

Conventional mortgage lenders offer some flexibility in the type of loan you can obtain. For example, a conventional lender may be able to offer you an adjustable-rate mortgage, in which your interest rate is lower for a set period at the beginning of the loan, and higher after that period ends.

Conventional mortgages also aren’t capped at a certain loan limit, assuming they are non-conforming. For those who need a true jumbo loan, a conventional mortgage will be the only way to obtain financing.