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Know
All of Your Mortgage Options
You've finally made that big
decision to buy a home. For most people,
it's the single largest financial
investment they will ever make as
well as the ultimate, traditional
fulfillment of a common dream - to
be a homeowner. But do you have to
have a traditional mortgage as well?
Not anymore. With all of the mortgage
options on the market today, you owe
it to yourself to investigate all
the possibilities available to you.
There are seven major types to be
aware of.
30 Year Fixed Rate Program
- A Traditional Mortgage
This is the kind of loan that your
parents may have had and that many
people still have today. A 30-year
fixed mortgage is a type of mortgage
loan that is repaid by the borrower
(you) making 360 equal monthly payments
over a period of 30 years. Since your
payments are "fixed,"
you can expect to make the same monthly
payment for the entire term of the
loan. A 30-year mortgage loan is the
most widely accepted program used
to finance a residential purchase,
and is available for conventional,
jumbo, FHA and VA loans.
15-Year Fixed Rate Program
A 15-year fixed mortgage is a type
of mortgage loan that is repaid by
making 180 equal monthly payments
over a period of 15 years. Since your
payments are "fixed,"
as with the 30-year plan, you will
have the same monthly payment for
the entire term of the loan. The only
real difference between the two types
of loans is that, depending on your
down payment, your monthly payment
during the 15-year mortgage will normally
be higher than the 30-year.
One, Three, Five, Seven, Ten
Year Adjustable Rate Loan Programs
An Adjustable Rate Mortgage (ARM)
is a mortgage loan that is most widely
known for its low starting interest
rate (when compared to the 30- and
15-year mortgage loans). This "low"
introductory rate is used to calculate
the mortgage payment for a specified
period of time. Once this introductory
period is over, the interest rate
is adjusted periodically based on
a pre-selected index. The most commonly
used index is the yield on the one-year
Treasury Bill (T-Bill). The new interest
rate is determined by adding this
index to a set margin (which is determined
by the lender).
Although there are a variety of adjustable
rate mortgage programs available,
the most common program is the One
Year Adjustable Mortgage (one-year
ARM). The interest rate on the one-year
ARM is adjusted once each year, for
30 years. Since APR's on variable
rate loans are subject to increase
or decrease from year-to-year, you
will need to be prepared to handle
any increases in your monthly payment
as time goes by.
Jumbo Loan Programs
A jumbo mortgage is a mortgage loan
which is larger than the limits set
by Fannie Mae and Freddie Mac, the
two largest governmental providers
of home loans. The current limit for
Fannie Mae and Freddie Mac loans is
approximately $252,700 (as of 1/1/2000).
Since these two agencies will not
purchase these types of loans, jumbo
loans usually carry a higher interest
rate (to enhance their value and marketability
to those lenders who will carry them).
FHA Loan Programs
An FHA mortgage loan is insured by
the Federal Housing Administration
[a division of the Department of Housing
and Urban Development (HUD)]. Although
mortgage lenders provide the mortgage
funds, the FHA sets underwriting standards
for approving applicants. In many
cases, FHA underwriting guidelines
are more lenient than conventional
(not government insured or guaranteed)
underwriting guidelines. This leniency
tends to make it easier for borrowers
to qualify for a mortgage loan (low
down payment requirements and a higher
monthly debt allowance). The FHA limits
the types of loan programs it insures,
but it will insure the more popular
30-year fixed, 15-year fixed and one-year
adjustable loan programs. However,
borrowers are limited to the amount
that they can borrow using an FHA-insured
mortgage. Applicable loan limits differ
by county, so contact your local HUD
office for specifics.
VA Loan Programs Through the
Department of Veterans Affairs
A VA mortgage loan is a mortgage loan
that is guaranteed by the Department
of Veterans Affairs (DVA). One of
the biggest advantages of using a
VA loan is that you can finance the
purchase of a property with no-money
down. However, VA loans are restricted
to individuals qualified by military
service. The DVA will guarantee the
more popular 30-year fixed and 15-year
fixed loan programs. To see if your
military service qualifies you for
a VA loan, you can reach the DVA online.
5/25, 7/23 Balloon Programs
A balloon mortgage loan is a type
of mortgage loan that has a short
term (typically five or seven years),
but the monthly payment is computed
using a 30-year term. When you use
a balloon loan, you make the monthly
payment for the scheduled loan term
(five or seven years). When this loan
term is over, you are required to
pay off the remaining balance in one
lump-sum payment. If you decide not
to sell the property after the loan
term is over, you have the option
to refinance the mortgage with a new
one.
To understand what the numbers mean,
here is an example of a 7/23 balloon
program. A 7/23 balloon mortgage gives
you the option to convert to a fixed
rate program (for a nominal fee) after
the initial term (7 years) is over.
If the conversion feature is used,
the interest rate for the remaining
term of the loan (23 years) will be
adjusted once to reflect market conditions,
then remain fixed for the remainder
of the loan term. Although this type
of loan makes it easier to get into
a home due to the smaller initial
payments, you need to keep in mind
that larger balloon payment coming
up in five or seven years. Since most
people normally do not have the kind
of cash on hand to pay off a mortgage
in such a short period of time, most
must choose to refinance, sometimes
being left with a much higher interest
rate than they had during the first
few years. Overall, this kind of arrangement
can either prove convenient, or can
prove quite costly in the long term.
It all depends on your personal financial
situation.
Whichever mortgage program you end
up choosing, doing so after you have
researched all of your options is
the wise choice. Ending up with a
traditional 30-year fixed mortgage
is fine - if that's the
option that you know is best for you. |
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