 Fixed
Rate Mortgages |
Loans are amortized over a 10, 15, 20, 25, 30 and 40 year
terms. Monthly payments and interest rate remains the same
over the entire life of the loan. Advantages and disadvantages
of each:
30-Year: In the first 23 years of the
loan, more interest is paid off than principal, meaning
larger tax deductions. As inflation and costs of living
increase, mortgage payments become a smaller part of overall
expenses.
20-year: Interest rates are usually much
lower than 30 year loans and can save a considerable amount
of interest costs since mortgage is paid off 10 years earlier.
15-year: Loan is usually made at a lower
interest rate. Equity is built faster because early payments
pay more principal. Interest savings are significant when
compared to a 30-year loan. This is ideal for those close
to retiring.
If you have a fixed rate loan and the interest rate drops
significantly, you may want to refinance. Experts are in
agreement that refinancing is a smart move if you can get
an interest rate that is 1 point less than your current
rate and you plan to remain in the house for at least 18
more months.
|
| Adjustable
Rate Mortgages (ARMs) |
The interest rate and monthly payment
remains the same for a fixed period (1, 3, 5, 7 or 10 years)
and then the rate can rise at fixed intervals. This increase
can be anywhere from .05 to 2.00 percent per increase. There
is a cap on the margin that determines the highest rate the
interest can go.
The major advantage of this type of loan is that homebuyers
can get a lower rate for a certain period of time, and then
refinance when fixed rates get better. Consumers are drawn
to these types of loans because (1) they usually offer a lower
initial interest rate than a fixed mortgage, and (2) the lower
interest rate may qualify many consumers for a larger loan.
Fixed rate vs. ARM: Fixed rate mortgages are predictable since
the monthly payment never changes. Since the monthly payments
associated with ARMs are lower in the beginning, they make
home ownership more affordable and may allow borrowers to
qualify for a larger loan; however, one should make sure that
his or her income will increase in the coming years per the
cap set in the mortgage agreement. ARMs are also a good idea
for those planning to sell their home in the next few years
since increasing interest rates won't affect these homeowners.
|
| Balloon
Loans |
Balloon loans offer a lower interest
rate for a period of 5, 7 or 10 years. At the end of the term,
a lump sum payment of the outstanding balance is due or you
must refinance the loan. These loans are good for those who
plan to sell their homes in 5, 7 or 10 years or plan to refinance
at these times.
|
| Buydowns |
The interest rate and monthly payment
remain the same for a specific period, then the rate and payment
increase one, two or three times, depending on whether the
loan is a 1/1, 2/1 or 3/1 type. After all of the permitted
increases have occurred, the loan stays fixed at the new rate
for the life of the loan. In order to "buy the rate down"
to a lower interest rate, one is typically charged a fee.
The basic advantage of a buydown loan is that it offers a
lower rate and monthly payment for the first few years of
the loan. These loans are ideal for those who cannot qualify
for a fixed rate loan or a lower monthly payment.
|
| Conforming
and Jumbo Loans |
Conforming loans refer to loan amounts
that conform to government service standards as determined
by Fannie Mae and Freddie Mac (the original government agencies,
set up in the early 1940s, established to help people finance
new homes). Conforming loans range in amount from $1 to $227,150.
Although not all conforming loans are serviced by these government
agencies, the mortgage industry has adopted the term to express
loan amounts in this range.
A jumbo (non-conforming) loan refers to those loan amounts
outside of the "conforming" range or, above $227,150.
Government Loans
The federal government guarantees government loans. There
are three government agencies that offer loans:
|
| Federal Housing Administration (FHA): |
Offer loans to homebuyers and requires
only 3 to 5 percent as down payment. The maximum amount of
the loan is based on the average cost of living in a specific
region and you do not have to have perfect credit to qualify.
The FHA will cover up to 97.75% of the purchase price. To
qualify, your debt-to-income ratio cannot exceed 41% and the
homes selling in your city or town should not sell for more
than $180,000.
|
| U.S. Department of Veterans Affairs
(VA): |
Offers loans to qualified military veterans,
who can borrow up to $203,000 with no down payment required.
The seller might pay closing costs. VA loans can be used to
make home improvements and refinance an existing loan as well
as to purchase a home.
|
| Rural Housing Services (RHS): |
Offers low interest rate loans to people
with low or moderate income and who live in small towns or
rural areas.
|
| Affordable
Housing Loans |
These loans are for those with low to
moderate incomes. Usually to qualify, your total household
income cannot be more than the median income in the area where
you live. The down payments, closing costs, and income requirements
are lowered to help those who otherwise would not be able
to purchase a home.
|
| Fannie
Mae's Community Home Buyer's Program: |
Provides loans to those with good credit,
but who do not meet other criteria to qualify for a traditional
mortgage loan.
|
| 3/2
Option: |
A 5 percent down payment is usually required
to purchase a home; however, this option allows borrowers
to put down only a 3 percent down payment, while a relative,
government agency or nonprofit organization puts down the
other 2 percent
|
| Fannie
97: |
| Provides loans to those with enough income
to pay a monthly mortgage payment, but not enough money to
make the initial down payment. Borrowers can put down only
3 percent as down payment; and closing costs can be provided
by a relative, government agency or non-profit organization.
Loan must be for either a 25 or 30-year term. |
