Valley Real Estate

jack pearce and al leonard

Home Financing - Your Mortgage

What Type of Mortgage Is right for You?

Today, the 30-year fixed-rate mortgage is still the most common way to buy a home, but it's just one of many financing options available. You need to be at least as diligent in you choice of lender as you are in your choice of home to buy! Remember, your lender may be your financial partner for the next 30 years.

Mortgage lending in the US is a highly competitive trillion dollar industry and your options will seem endless. When you're shopping for a loan, interest rates alone only tell you part of the story. You have to decide what type of loan is right for you and you need to compare the endless variety of fees lenders will charge.

Your HomeTeam, Jack Pearce and Al Leonard, can recommend reputable lenders to pre-qualify you prior to any serious house hunting. It's important you know exactly what you can afford.

Fixed-Rate Mortgage.

With a fixed-rate mortgage, your interest rate stays the same for the entire length of the mortgage, which may be 10, 15, 30 or even 45 years. Your monthly payment, which includes both principal and interest never changes. This makes it easier to adopt a budget. Initially, interest rates may be higher than with other types of loans, but you're guaranteed that the rate of interest and total monthly amount you pay will never go higher.

You should note that often your homeowners insurance and property taxes are included in your monthly payment and paid by the lender when due. See "impound account." These fees may rise over the term of the loan due to increases in insurance premiums and property reassessments, resulting in an increase in your monthly payments. However, the principal and interest portion of your loan will never change.

Adjustable Rate Mortgage (ARM).

An ARM is sometimes called a "variable rate" or "floating rate" mortgage because the interest rate, after a fixed period of usually 2 to 5 years, will float or change periodically up or down, once or twice a year thereafter.

Because you are sharing the risk of the loan with the lender, initially, the interest rate on an ARM will be significantly lower than the interest rate on a fixed rate loan. This may allow you to qualify for a larger loan than a fixed rate would allow. However, when the lower initially fixed rate begins to float with the market depending on the "index" used, the interest rate may end up being much higher than a fixed rate mortgage would have been, and your monthly payments may be far more difficult to meet.

Some protection from run away inflation should be written into the the loan called a "cap." A cap is a limit to the amount your interest rate can rise. A cap should protect both the periodic rise as well as the total rate increase over the life of the loan. Note that "caps" will also protect the lender in the same way from "deflation."

The initial "teaser" rate of an adjustable rate mortgage may make it hard to resist, but this type of loan is not for everybody. To help you decide if it's right for you see the Consumer Handbook on Adjustable Rate Mortgages, Publications and Educational Resources, from The Board of Governors of the Federal Reserve System. Here, you will find a frank discussion of both the advantages and disadvantages of ARMs.

Conventional Mortgage.

A conventional type of mortgage is not insured by either the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA), but the underlying terms and documentations meet the funding criteria as established by Fannie Mae and Freddie Mac, two "Government Sponsored Entities" who buy the loan and guarantee payment of the loan should the borrower default.

Fannie Mae and Freddie Mac both have low down-payment programs available but, to help protect the mortgage lender should you fail to make payments (default) on your loan, it will probably be necessary for you to buy private mortgage insurance (PMI) if your down payment is less than 20%.

Loans which do not fall under the guidelines of Fannie Mae and Freddie Mac are called non-conforming loans. Two such categories of non-conforming loans are 'jumbo loan' and 'sub-prime loans.' See below.

Jumbo Loan.

Currently conventional loans as prescribed by Fannie Mae and Freddie Mac must be less than $417,000. (There are so called "high cost areas" where the limit is higher. Ask your lender.) They will not guarantee a loan for any amount larger. So if you're in the market for a very large home you may need to borrow considerably more. This type of loan is called a jumbo loan and is simply a regular loan for a larger amount, but because the lender has no third party guarantee, a larger down payment may be required. Jumbo loans usually carry a slightly higher rate of interest because of the added risk to the lender.

Jumbo Loans are known as "non-conforming" loans because they fail to meet bank criteria for funding.

Subprime Loan.

Another type of "non-conforming" loan is called the subprime loan. Borrowers who seek subprime loans usually do so because they carry a credit score below that required by the terms and conditions of a Fannie Mae or Freddie Mac guarantee. Subprime loans almost always have higher interest rates than the prime rate offered on conventional loans, and that could mean tens of thousands of additional interest dollars that will have to be paid over the life of the loan.

If you must seek a subprime loan, do so wisely. Rates and fees may vary widely from lender to lender and one lender may assess your risk differently from another. Shopping around may save you a considerable amount in both interest rates and fees.

FHA-Insured Mortgage.

In this type of loan, the Federal Government (Federal Housing Administration or HUD) insures the lender against loss in case the home buyer defaults on the loan. This program was set up so that Americans who can't afford the 10 to 20% down payment required by most lenders, can still buy a home. Many homes can be bought with FHA-insured mortgages, which allow you to purchase the home with a low down payment. You do not have to be a first-time buyer in order to qualify for an FHA loan. Here are the basics:

The borrower must meet standard FHA credit qualifications (there's no set credit score barometer, but a borrower's debt-to-income ratio is heavily considered).
The borrower is able to finance the upfront mortgage insurance premium into the loan. The borrower will be responsible for paying an annual premium.
The FHA mortgage requires a low 3.5-percent down payment, and that money can come from a variety of sources, including parent gifts and HUD down payment assistance grants.
Closing costs are also low - typically 3 percent of the total purchase price - and are usually covered by the seller in today's market. They can also be incorporated into monthly payments.
Eligible properties are one-to-four unit structures, and each state has a purchase price limit (as high as $400,000) for FHA loans.
If a buyer finds a fixer-upper, the FHA 203(k) program can help the person purchase or refinance the property, with the cost of repairs and improvements included in the loan.
FHA home mortgages aren't just for first-time homebuyers. FHA refinance loans can help people get out of toxic debt situations caused by sub-prime mortgages with high interest rates.

See FHA.com for more details

VA Loan.

The Veterans Administration Loan is guaranteed by the Department of Veterans Affairs against loss to the lender, and made through a private lender.

Interest Only Loan.

In an Interest Only Loan, the borrower has the option to pay only the interest that accrues on the loan balance each month, although he may pay more without penalty. This option exists only for a specified period of time, usually five to ten years. Because each payment only goes to pay interest, the outstanding balance (principal) of the loan does not decline with each payment.

Do not consider an interest only loan unless you a willing and able to deal with the possible consequences. In the go-go real estate market of 2000 through 2006 when homes were appreciating rapidly even if you paid nothing on the principal it was thought that you would always be able to sell the home for more you owed. However, when the market turned down in 2007 many borrowers with no interest loans found the value of there home to be far below the amount they still owed. No interest loans, along with sub prime and no-document loans, were a major cause of the world-wide economic crisis of 2008, and a problem we are still trying to correct. depreciating market.

Reverse Mortgages.

HUD (United States Department of Housing and Urban Development) created Reverse Mortgages in 1987 so that older American homeowners (over age 62) could have more financial security by taking advantage of the equity they have built up in their home over the years.

Most of this will be done for you by your real estate agent, lender, and escrow officer all working in concert to bring your new home to a successful close.

Your Mortgage - Questions and Answers

Consider The Length Of Your Loan (3)
Cash Purchase (1)
Non-Conforming Loans (1)
Market Value Considerations (1)
Assuming A Loan (3)
Bankruptcy & Credit (6)
Credit Question and Answers (10)
Non-conforming Qualification Loans (2)
Who Is Fannie Mae & How Can She Help? (5)
(HUD) Federal Housing Administration Loans (11)
Loans For Fixer-Uppers (1)
Interest Rates Considerations (13)
Interest Rate Lock-Ins (4)
Lease Options May Be An "Option" (3)
Low Cost and Low Down Payment Loans (13)
Mortgage Loan Credit Certificates (3)
What Is Negative Amortization? (3)
No Money Down Payment Loan (3)
Figuring In Gift Money (2)
Mortgage Prepayment Considerations (2)
Pre-qualification (4)
Private Mortgage Insurance May Be Necessary (4)
Should You Refinance? (3)
Reverse Mortgages (1)
Should You Consider Seller Financing? (3)
State Loan Assistance Programs (1)