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TYPES OF MORTGAGE LOANS A wide selection of mortgages are available to you today. Your challenge is to select the loan terms that are most favorable to your situation. If you can't extrapolate all the data Carolyn will help you find the right solution. If, you anticipate living in your home for many years, the interest rate may be the main factor for you. If you expect to keep the house for only a short period of time, the closing costs may be more important to you. If you want to have zero mortgage debt by the time you are facing your children's college bills or your own retirement, you may wish to consider a shorter term loan such as a 15-year fixed-rate mortgage. If your own retirement is years away, you may be less inclined toward a shorter-term loan, preferring to extend payments over a longer period of time through taking a 30-year mortgage loan. How important to you is the certainty of a fixed mortgage payment each month? If you want to make sure your mortgage payment remains the same each month, then you'll want to focus on various fixed-rate loans. If you are comfortable with periodic changes to your mortgage interest rate, then you may be inclined to consider adjustable-rate mortgages. If you know you'll be living in the house for only a couple of years, you may want a five or seven year fixed.
30-Year Fixed-Rate Mortgage Loan 20-Year Fixed-Rate Mortgage Loan 15-Year Fixed Rate Mortgage Loan HELOC (Home Equity Line of Credit) Adjustable-Rate Loans CD-Indexed Arms (Certificate of Deposit) Treasury-Indexed Arms Cost of Funds-Indexed ARMs Libor-Based Arms Initial Fixed-Period Arms Government Loans FHA Loans VA loans State and Local Loan Program Balloon Loans Affordable Housing Loans Fannie Mae's Community Home Buyer's Program ® Fannie 97 ® Fixed-Rate
Mortgage Loans The interest rate may be your main consideration if you expect to stay in your house for a long time. With a fixed-rate mortgage, you can be sure that your interest rate will stay the same for the entire life of your loan. Fixed-rate mortgages are available in a variety of repayment terms, with 15, 20, and 30 years the most common. 30-Year
Fixed-Rate Mortgage Loan The easiest fixed-rate loan to qualify for, the 30-year mortgage gives you an excellent opportunity to keep your mortgage payments reasonable by making monthly payments over a long period of time. This mortgage loan may be ideal if you plan to remain in your home for years and wish to keep your housing expense low and use any extra cash for other purposes. This loan also provides maximum interest deduction for tax purposes. 20-Year
Fixed-Rate Mortgage Loan The 20-year mortgage gives you the opportunity to own your home free of debt much sooner than the 30-year mortgage loan. This mortgage amortizes principal and interest over a 20-year period, 10 years less than the traditional 30-year mortgage. This may save you a considerable amount of total interest paid over the life of the loan. 15-Year Fixed-Rate Mortgage Loan The 15-year mortgage offers a lower interest rate than a 30-year or 20-year mortgage. Such a shorter-term mortgage will save you a significant amount of interest over the life of the loan. By paying off the mortgage more quickly, you also build up equity in your home sooner. A 15-year mortgage can let you own your home clear of debt earlier, which may be important if you are approaching retirement or have other large expenses to cover such as financing your children's education. However, the monthly payments you make on a 15-year mortgage will cost you more than those you would make on a 30-year or a 20-year mortgage loan for the same total mortgage amount.
HELOC (Home Equity Line of Credit) Home Equity is the difference between what your house is worth and what you owe on it. An equity line of credit allows you to use your "equity" as collateral for a loan of your choosing. Typically they are adjustable loans indexed to the prime rate monthly. Adjustable-Rate
Loans With an adjustable-rate mortgage (ARM), the interest rate you pay is adjusted from time to time to keep it in line with changing market rates. This means that when interest rates go up, your monthly mortgage payments may go up as well. On the other hand, when interest rates go down, your monthly mortgage payments may also go down. ARMs are attractive because they may initially offer a lower interest rate than fixed-rate mortgages. Since the monthly payments on an ARM start out lower than those of a fixed-rate mortgage of the same amount, you can qualify for a larger loan. The chief drawback, of course, is that your monthly payments may increase when interest rates go up. You may want to consider an ARM if you are confident your income will rise enough in the coming years to comfortably handle any increase in payments. You may also want to consider an ARM if you plan to move in a few years and therefore are not concerned about possible interest rate increases. You may also want to consider an ARM if you need a lower initial rate to afford to buy the home you want. How much your payments can increase will depend on the terms of your mortgage. Before applying for an ARM, be sure you know how high your monthly payments could go -- the so-called "worst-case scenario." An ARM has two "caps" or limits on how large an interest rate increase is permitted: One cap sets the most that your interest rate can go up during each adjustment period and the other cap sets the maximum total amount of all interest adjustments over the life of the loan. A typical ARM that adjusts annually, for example, may cap the yearly interest rate increases at 2 percent, meaning that the adjusted interest rate can never be more than 2 percent higher than the previous year. And such an ARM may have a lifetime rate cap of 6 percent, meaning that the highest adjusted interest rate you can ever be required to pay is no more than 6 percent above the original rate. So, if you are looking at an ARM with a current introductory rate of 5 percent, a lifetime cap of 6 percent tells you that the highest interest rate you could ever pay would be 11 percent. Only you can determine if you would feel comfortable paying this interest rate sometime in the future. Some ARMs offer a conversion feature, which allows you to convert from an adjustable-rate to a fixed-rate loan at only certain times during the life of your loan. Ask Carolyn about this feature when researching ARMs. One important thing to know when comparing ARMs is that the interest rate changes on an ARM are always tied to a financial index. A financial index is a published number or percentage, such as the average interest rate or yield on Treasury bills. The most common types of ARMs are listed below. CD-Indexed ARMs
(Certificate of Deposit) These ARMs adjust to a Certificate of Deposit (CD) index. After an initial six-month period, the initial rate and payments adjust every six months. These ARMs typically come with a per-adjustment cap of 1 percent and a lifetime rate cap of 6 percent. Some of these ARMs offer an option to convert to a fixed-rate mortgage at specified interest adjustment dates. Treasury-Indexed
ARMs These ARMs are indexed to the weekly average yield of U.S. Treasury securities adjusted to a constant maturity of six months, one year, or three years. Depending on which three of these security index schedules you choose, the interest rate on your ARM will adjust once every six months, once each year, or once every three years. Per-adjustment caps and lifetime rate caps vary, depending on the type of Treasury-indexed ARM you choose. Some of these ARMs offer an option to convert to a fixed-rate mortgage at specified interest adjustment dates. Cost of
Funds-Indexed ARMs Cost of Funds-indexed (COFi) ARMs are indexed to the actual costs that a particular group of institutions pays to borrow money. The most popular index of this type is the COFi for the 11th Federal Home Loan Bank District. COFi ARMs can adjust every month, every six months, or every year and the per-adjustment caps and lifetime rate caps vary, depending on the type of COFi ARM you choose. Some of these ARMs offer an option to convert to a fixed-rate mortgage at specified interest adjustment dates. LIBOR-Based ARMs The London Interbank Offered Rate (LIBOR) is the interest rate at which international banks lend and borrow funds in the London interbank market. You may choose an ARM that adjusts to the LIBOR every six months. This six-month LIBOR ARM typically has a per-adjustment period cap of 1 percent and is offered with either a 5 percent or a 6 percent lifetime rate cap. It can offer the option to convert to a fixed-rate mortgage. Initial Fixed-Period ARMs You may wish to look into a special type of ARM that doesn't adjust your interest rate until several years after you take out the loan. These loans offer you several years of fixed payments before there is an interest rate change. You can get a three-, five-, seven-, or ten-year fixed-period ARM. This means your interest rate would be the same for the first three, five, seven, or ten years and then, at the end of your chosen fixed-rate period, your interest rate would adjust every year. This type of ARM protects you against rapid interest rate increases in the early years of your loan. Government
Loans The Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA), and the Rural Housing Services (RHS) are three agencies that offer government-insured loans. To obtain these loans, you apply through a lender that is approved to handle them. All require that the properties being purchased meet certain minimum standards. Here is some more information about various government loan programs: FHA Loans With FHA insurance, you can purchase a home with a very low down payment (from 2.25 percent to 3 percent of the FHA appraisal value or the purchase price, whichever is lower). FHA mortgages have a maximum loan limit that varies depending on the average cost of housing in a given region. The VA guarantee allows qualified veterans to buy a house costing up to $417,000 with no down payment. Moreover, the qualification guidelines for VA loans are more flexible than those for either FHA or conventional loans. If you are a qualified veteran, this can be an attractive mortgage program. State and
Local Loan Programs A number of states sponsor programs to help first-time home buyers qualify for mortgages. Local housing agencies also offer attractive loan terms to eligible home buyers in some areas. These programs typically offer very attractive loan terms (low down payment or low interest rate) to first-time home buyers who meet specified income guidelines. Some state and local programs may also offer down payment and closing cost assistance. Balloon
Loans Balloon loans offer lower interest rates for shorter term financing, usually five, seven, or ten years. At the end of this term, they require refinancing or paying off the outstanding balance with a lump-sum payment. Balloon mortgages may be suitable if you plan to sell or refinance your home within a few years and want a fixed, low monthly payment. The advantage they offer is an interest rate that is lower than that of a fully amortizing fixed-rate mortgage. For example, your initial interest rate may be 7.5 percent, and you would pay that rate for the first five, seven, or ten years (depending on the term of your balloon loan). Then, your entire outstanding loan balance would be due to the lender or you might have to pay a fee to refinance your loan at the prevailing interest rate. However, ask about all the conditions for a refinance option at the end of the balloon term. With some balloon mortgages, the lender doesn’t guarantee to extend the loan past the balloon date. If you don’t feel you will be able to meet all the refinance conditions or think the balloon term may be up before you are ready to move, this type of loan may not be appropriate for you. Affordable Housing Loans For households of modest means, the greatest barriers to homeownership are coming up with the down payment and closing costs and managing housing expenses that often are higher than those of the qualifying guidelines allowed in traditional mortgage lending. Fannie Mae, in cooperation with housing providers,
offers low- and moderate-income households mortgage loan
options that help overcome common barriers to
homeownership. These mortgage loans offer flexible
underwriting ratios, allowing you to use more of your
monthly income toward housing costs than other mortgage
loans allow. Also, these loans require less cash at
closing and for a down payment, making it easier to get
into a home sooner. Fannie Mae's Community Home
Buyer’s Program® Fannie Mae's Community Home Buyer’s Program provides financing for low- and moderate-income home buyers who represent a good credit risk but who might not qualify for home financing based on traditional lending criteria. Generally, if your household income is no more than 100 percent of your area median income, you are eligible for this type of loan. However, if the home you buy is in certain geographical areas, there is no income limit to be eligible for this program. Carolyn can advise you of the median income in your area. The Community Home Buyer’s Program builds flexibility into the lender’s standard lending requirements. This increases your purchasing power and decreases the total amount of cash needed to purchase a home. The same flexibility also allows you to build a nontraditional credit history. For example, if you do not have a credit history that is reflected in a credit report, your demonstrated willingness and ability to repay on a timely basis may be documented by verifications from utility companies, current and previous landlords, and other sources of credit or service where you were, or still are, required to meet a regular financial obligation. The Fannie 97 mortgage lets you buy a house for as little as a 3 percent down payment. This type of mortgage may be ideal for the borrower who has enough income to handle the monthly mortgage payments but has difficulty accumulating cash for the down payment. The mortgage is available only to home buyers earning up to 100 percent of the area median income, with exceptions for certain high-cost areas and where the loan is made in connection with a federal, state, or local government program, where income limits are legislatively imposed. The mortgage is available with either a 25-year or 30-year term. With Fannie 97, closing costs may be paid by gifts from family members or by grants or loans from nonprofit organizations or government agencies. Return to contents |
