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Next to looking for a house and actually buying the property, mortgage financing is the most important part of buying a new home. Although most homes finance using one of a few major financing options, there are a wide variety of mortgage loans available for the home buyer seeking creative home loan financing. Work with your realtor, Mike Williams, to review your financing options and take out a loan that is right for you. Below are some of the more common loan programs you're likely to see:
- 30 Year Fixed Rate Program
- The 30 year fixed mortgage loan is repaid by the borrower with 360 equal monthly payments over a period of 30 years. Since the borrower's payments are 'fixed', the borrower can expect to make the same monthly payment for the entire term of the loan. A 30 year mortgage loan is the most common type of home financing program and is available for conventional, jumbo, FHA and VA loans.
- 15 Year Fixed Rate Program
- The 15 year fixed mortgage loan is repaid by the borrower with 180 equal monthly payments over a period of 15 years. Since the borrower's payments are 'fixed', the borrower can expect to make the same monthly payment for the entire term of the loan. A 15 year mortgage loan is not the most common home financing program but is frequently used by those seeking a shorter term. 15 year home loan programs are available for conventional, jumbo, FHA and VA loans.
- ARM - Adjustable Rate Mortgages
- ARM loans are most widely known for their low starting interest rate. The low interest, usually an "introductory" rate - is used to calculate the mortgage payment for a specified period of time. Once the introductory period is over, the interest rate is adjusted periodically according to a predetermined rate index. The most common ARM index is the "one year Treasury bill" rate. Typically, the rate will be added to a preset margin and the resulting rate used to calculate your new mortgage payment until the next rate adjustment milestone is reached. Although there are many ARMs available, the most common is the One Year ARM. This means that the rate is adjusted every year (annually). Also, however, there are ARMs ranging from 3 to 10 years. Often, an ARM is used to "get into" a home that you might not otherwise qualify for under conventional financing due to present income. The hedge here is that your income will increase in the future and you will be able to handle a larger loan payment if rates go up. Also, at some point - you may find it beneficial to convert to a Fixed Rate Mortgage… thus, ARMs may be a good instrument for "swing loans."
- Jumbo Loan Programs
- Jumbo loans are mortgage loans that are larger than the Fannie-MAE and Freddie-MAC limits. Since these two Federal agencies will not purchase loans larger than the current limit (just over $322K as of January, 2003) - they will often carry a somewhat higher interest rate in order to make them ore attractive to loan investors.
- FHA Loan Programs
- FHA mortgage loans are insured by the Federal Housing Administration, which is a division of the Department of Housing and Urban Development. Although the actual funds are provided by the lenders - the FHA sets the underwriting guidelines to be more lenient than conventional guidelines that are not federally insured. This allows lower income borrowers with less creditworthiness to qualify for homes they might not otherwise be able to buy. The FHA will typically insure 15 and 30 year fixed rate home loans as well as one year Adjustable Rate Mortgages (ARM)s. There is a limit to how much the FHA will insure but these limits differ by county. You may want your real estate sales agent to assist you in determining what options you have using FHA loans.
- VA Loan Programs
- The Department of Veterans Affairs provides loan guarantees for former members of the armed forces. The big advantage of a VA loan is that no down payment is required. The VA will typically guarantee the more popular 15 and 30 year fixed loan programs.
- Balloon Payment Loan Programs
- A balloon mortgage loan has a short term, typically 5 or 7 years, but with a monthly payment calculated using a 30 year rate table. When the short term is up, if the loan carrier hasn't sold the home - they have the option of converting the loan at prevailing market rates for the remainder of a 30 year term minus the short term that they opted for. Thus, a 5/25 conversion would recalculate the loan payment based on prevailing money market conditions for the 30 year term and the payment would then remain at the new rate for the remainder of the loan… in this example, the 25 years.
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