Types of Loans
June 24th, 2008 Posted in Mortgage UpdatesTrying to decide on the type of financing to use is one of the major challenges facing home buyers today. The options can be confusing to say the least. In order to help you make an informed decision, here are brief descriptions of some of the current financing options available.
Financing Options
There are many times of financing options available to homebuyers. Here are some of the most common:
Fixed Rate Mortgage
The interest rate on a fixed rate mortgage stays the same throughout the term of the loan, usually 15 or 30 years. This means the principal interest portion of your payment remains the same. Payments are stable but initial rates tend to be higher than adjustable rate loans and often cannot be assumed by a subsequent buyer.
Balloon Mortgage
A balloon mortgage is a loan that must be paid off after a certain period. The advantage they offer is an interest rate that is lower than a mortgage that is made for 30 years.
Adjustable-Rate Mortgage (ARM)
This interest rate is linked to a financial index, such as a Treasury security or a cost of funds, so your monthly payments can vary up or down over the life of the loan, usually 25 to 30 years. Interest rates can change monthly, annually, or every 3 or 5 years. Some ARM’s have a cap on the interest rate increase, to protect the borrower.
Other terms relating to adjustable-rate mortgages:
Adjustment period: The length of time between interest rate changes. An example would be one year ARM-interest changes annually.
Cap: The limit on how much an interest rate or monthly payment can change at each adjustment or over the life of the loan.
Conversion clause: A provision in some loans that enables you to change an ARM to a fixed rate loan, usually after the first adjustment period. This may require additional fees.
Index: A measure of interest rate changes used to determine changes in the loan’s interest rate over the term of the loan.
Margin: The number of percentage points a lender adds to the index rate to calculate the ARM’s interest rate at each adjustment.
VA Loan
The VA does not lend money; it guarantees a portion of the loan so that lenders who originate the loan feel comfortable with their risk. Qualified veterans can obtain loans up to $417,000 with no down payment. VA-guaranteed loans can be combined with second mortgages and are assumable upon qualifying by any future buyer. Currently this is the only true 100% financing option available.
FHA Loan
FHA does not lend money or make a loan; rather, it insures loans. The down payment can be as low as 2.25%. Either buyer or seller may pay discount points. FHA charges an up front Mortgage Insurance Premium that can be financed in the mortgage amount or paid in cash. The borrower must also pay an annual Mortgage Insurance Premium which is collected monthly.
Nehemiah Grant
The Nehemiah Program is the nation’s largest privately funded downpayment assistance program, helping thousands of people achieve their dream of homeownership. Nehemiah Corporation of America “Nehemiah” one of America’s largest and most respected community developed corporations, administers The Nehemiah Program. The Nehemiah Program provides gift funds to qualified homebuyers who purchase participating homes using an eligible loan program, such as a Federal Housing Administration (FHA) loan. The max grant is 6% of the sales price and there is a fee of $499 for the service. These grants can be used in conjunction with FHA loans to help the buyer with down payment and closing costs.
Seller Assisted Second Mortgage
The seller of the house lends the buyer enough to make up the difference between the purchase price and the down payment plus first-mortgage balance (a commercial lender may also make this kind of loan). The terms including the interest rate are based on buyer/seller agreement. It is often a short-term (5 to 15 year) loan; sometimes “interest only” payments until the term date when the balance is due in full. A buyer can then refinance the home.
Assumable Mortgage
Buyer “takes over” or assumes the mortgage obligation of the seller (with concurrence of the lender). The interest rate doesn’t change and is sometimes lower than current rates. Often the loan fees are less as well.
* All information contained herein is subject to change at anytime without notice.
Please let me know if I can be of any assistance as you look for your new home and consider financing options.
