Wow. . . there are a lot of choices!
Stacy understands that selecting the type of mortgage to best suit your needs is not a simple undertaking. The right mortgage will depend on many different factors, including your financial situation and how you expect it to change in the future, how long you'd like to remain in your home, and whether you are comfortable with the possibility of the mortgage payment changing.
For example, a 15-year fixed-rate mortgage can save you thousands of dollars in interest payments over the loan’s entire term, but monthly payments will be greater. With an adjustable-rate mortgage, you may initially have a lower monthly payment, but your payments could increase when the interest rate changes.
Stacy will gladly recommend a mortgage professional who can help you find the right mortgage.
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Fixed-Rate Mortgages
Fixed-rate mortgages, the most common type, offer consistently stable monthly payments. Your property taxes and homeowner's insurance may increase, but your monthly payments typically will not fluctuate.
You have the option of choosing a 30-year, 20-year, 15-year or 10-year repayment plan. You also may shorten the loan through a biweekly mortgage, allowing you to make the equivalent of an extra month's payment per year. In selecting the length of your repayment, remember that a shorter loan carries higher payments and builds equity faster, but accrues less interest.
Adjustable-Rate Mortgages
The interest rate on an adjustable-rate mortgage (ARM) is dictated by changing market rates. When interest rates rise, your monthly payments will increase. When interest rates go down, your monthly payments will decrease accordingly.
ARMs often provide a lower initial interest rate than fixed-rate mortgages, attracting people who need lower payments early in a loan in order to qualify. ARMs also can benefit people who plan to move or refinance in the near future. Or those who expect their incomes to increase in the coming years.
Before applying for an ARM, find out how high your monthly payments can go throughout the loan’s life. An ARM includes two caps or limits on interest-rate increases. One cap states the boundary for how high the interest rate can increase during each adjustment period. The other cap sets the maximum total amount of all interest adjustments over the mortgage’s entire term.
An ARM’s rate typically changes once or twice a year. There also usually is a lifetime cap on both the individual rate adjustments and the total amount the rate can change over the loan’s life. By applying the terms of the caps to your mortgage payments, you can anticipate the worst-case scenario before applying for an ARM, and determine whether this figure would be manageable.
Reverse Mortgages
A reverse mortgage is a special type of loan made to senior homeowners. It has a reversed payment system. Instead of monthly payments by the borrower to the lender, the lender makes monthly payments to the borrower.
This mortgage allows seniors to convert the equity in their homes to cash for living expenses, home improvements, in-home health care or other needs. Under a reverse mortgage, older homeowners can remain in their homes and maintain or improve their standard of living without taking on a monthly mortgage payment.
You must meet certain criteria —at least 62 years or older; and own the home outright or nearly so. Homes also must be clear of tax liens. Seniors don't have to meet income or credit requirements.
Borrowers typically have the option of receiving the reverse mortgage's proceeds in the form of a lump-sum payment, fixed monthly payments for life, or a line of credit. A reverse mortgage's interest rate is usually an adjustable rate that fluctuates monthly or yearly. However, the size of monthly payments that borrowers receive doesn't change.
Balloon Mortgages
Balloon loans are short-term mortgages with some of the features of a fixed-rate mortgage. They have low interest rates, but without the benefit of full amortization. Balloon mortgages are typically 5-, 7- or 10-year loans. They can be beneficial to those who anticipate selling or refinancing their homes in a short period of time.
As opposed to a 30-year fixed-rate mortgage, balloon loan payments only cover part of what you've borrowed during the loan’s term. At the end of the term, you're required to pay off the loan's balance by refinancing or making a lump-sum payment.
Many companies offer a conversion feature at the end of the loan's term. For example, the loan may convert to a 30-year fixed loan at the 30-year market rate, plus a certain percentage point. To qualify for a conversion, you usually need to be in good standing with the payments on the balloon loan. Balloon mortgage programs with conversion options are also called “7/23 convertibles” or “5/25 convertibles.”
Buy-down Mortgages
Today's mortgage lenders have developed variations on the old “buy-down” method of offering an interest rate that is 2 percent below the fixed rate for the first year and 1 percent below the fixed rate for the second year. That is followed by 28 years of paying the regular fixed rate. Buy-downs now charge higher interest in the beginning of the loan to cover the future yields.
For example, if the current market rate for a fixed-rate loan is 8.5 percent at a cost of 1.5 points, the buy-down gives the borrower a first-year rate of 6.5 percent, a second-year rate of 7.5 percent and a third- through 30th-year rate of 8.5 percent. The cost would be 4.5 points.
Government Loans
Several agencies offer government-insured loans—the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA), and the Rural Housing Services (RHS). To obtain one, you must apply through an approved lender. These agencies do require certain minimum standards for a property.
Through the FHA, you can buy a home with a very low down payment, typically 3 percent to 5 percent of the FHA-appraisal value or the purchase price, whichever is lower. In addition, the FHA's applicant standards are more lenient than for conventional loans. You don't have to have a spotless credit record or a high-paying job to qualify. FHA mortgages have a maximum loan limit that varies, depending on the average cost of housing in a particular region.
The VA program allows qualified veterans to buy a house costing up to $203,000—in most cases with no down payment and at below-market interest rates. Also, the qualification guidelines for VA loans are more flexible than those for FHA or conventional loans. The VA application process is similar to that for other loans. Many can be processed and closed without waiting for credit application approval. Check with your nearest VA regional office to determine whether you are eligible.
The Rural Housing Service, a U.S. Department of Agriculture branch, offers low-interest-rate mortgages with no down-payment requirements. They are available to low- and moderate-income borrowers who live in rural areas or small towns. The RHS also offers programs for home renovations and repairs. Check with your local RHS office or lender for eligibility requirements.
Graduated Payment Mortgage
One of the key numbers in qualifying for a home is the amount of income you earn. For people who receive a straight salary, it’s pretty easy for the lender to determine that number from a current pay stub. If you work on commission, because your income can fluctuate, the amount you earn isn’t as easy to determine.
The lender will most likely average the past several years’ commissions to arrive at a predictable amount of income. If your commissions have been steadily increasing, the lender could agree to put weight on your current income from commissions. You will need to provide the lender with information on why this income is likely to continue, including documenting a stable client base, and providing commission agreements and 1099s.
Pre-Approval vs. Pre-Qualification
Before you start looking for a home, Stacy recommends considering obtaining mortgage pre-approval. Pre-approval is an official agreement by a lender specifying the exact amount for which you’ve been approved. Receiving it before making an offer demonstrates your intentions and financial ability to a seller. In order to get pre-approved, you’ll meet with a loan officer. He or she will review your credit history and may suggest a mortgage type. This process requires supplying the lender with financial information.
There’s also pre-qualification. It is an informal means to find out how much you may be able to borrow before setting a home price range. Pre-qualification can be done over the telephone by answering a few questions about income, long-term debt and the proposed down payment amount.
Down Payments and Financial Assistance
Even first-time buyers are usually aware that they’ll be required to make a down payment to secure a home. But there’s something new in the marketplace... in the past decade, the industry has developed down-payment assistance programs. They either lower the deposit dramatically or eliminate it altogether. Before making a down payment, you’ll want to investigate these programs.
While low down payments might seem attractive to cash-strapped buyers, keep in mind that the larger the down payment, the smaller the loan. This allows you to develop home equity faster. You’ll also want to consider that mortgages with less than a 20-percent down payment usually require mortgage insurance. When determining the size of a down payment, Stacy suggests you weigh the other costs involved, including closing costs and relocating expenses.
Source: California Association of REALTORs®
You can obtain up-to-date loan-type and rate information from Jeff Cosmos with Countrywide at www.jeffcosmos.com
