Overview
Buyers have many different needs when it comes to financing, and therefore, lenders have developed various loan programs to try and meet these needs. The options available to you depend on the amount of your down payment (3.5% FHA up to 20% or more conventional), how long you plan to live in the home, your income and credit history, where the property is located, etc. You will want to carefully walk through each option, understand the payment relative to your budget, points paid up front
Mortgages fall in to two types:
- Fixed Rate Mortgages – This is the most popular type and the interest rate remains the same for the entire life of the loan unless you refinance. The longer you finance your purchase for, the higher the interest rate. Fixed rate mortgages apply to
- Adjustable-Rate Mortgages (ARMs) – Adjustable rate mortgages all have certain similar features – an adjustment period, an index that the interest rate is measured against, a margin or percentage over the interest rate index, and a rate cap or maximum amount. The adjustment period is simply how often the rate changes. Some change monthly, some change every six months, and some only adjust once a year. ARMs are tied to indexes, which are an easily monitored interest rate that moves up and down over time.
Types of Mortgages
- Conventional – This is a traditional mortgage and is not insured by the Federal Government. Conventional loan amounts are capped at different amounts in different areas and usually require 20% down (but not in all cases).
- Jumbo – These are loans for amounts borrowed above the conforming loan limits of conventional financing and are funded by the private investment market.
- FHA – These loans are insured by (but not funded by) the Federal Housing Administration (FHA) a division of the U.S. Department of Housing and Urban Development (HUD). They are designed for first-time buyers. There are borrowing limits based on the area where you live, have additional mortgage insurance (cost), and usually are offered in 15- and 30-year options. The qualifying standards are less stringent than conventional financing and this may be a great way to get into the housing market. FHA financing usually requires a minimum of 3.5%. Closing costs that are over and above the 3.5% down payment can sometimes be financed by the seller depending on current market conditions.
- VA – For those serving or who have served in the military, the Veteran’s Administration (VA) insures (but does not fund) 15 and 30 year fixed as well as 1 year adjustable mortgages with lower down payment requirements and somewhat more lenient qualifying ratios. Some VA loans require zero down payment.
- Hybrid Mortgage (i.e ARM)– Mortgage hybrids are a cross between a fixed rate and an adjustable-rate mortgage and generally have fixed rates for the first three, five, seven or ten years and then they convert to adjustable-rate mortgages (ARMs) for the remainder of the loan term. With hybrid loans the fixed rate is established up front. Once the fixed-rate portion of the loan ends, the mortgage then functions like an ARM with rate changes and monthly payments moving up and down each year as interest levels change. The attractiveness of these types of loans is that a borrower can sometimes find a 5/1 ARM rate at up to a full percentage point below a comparable fixed rate loan, and for several years the homeowner can benefit from a lower rate.
You will want to carefully review all your options with your lender and financial advisor to ensure you are comfortable with the down payment, interest rate, and type of mortgage. - Other financing options – include paying all cash and seller financing. All cash transactions are easier to close and are often more attractive to sellers. Seller financing, on the other hand, may be an option depending on the situation, especially the seller’s circumstances and the property. These are options we will be happy to discuss with you.