Loan Types and Programs

FIXED RATE MORTGAGE 

The most widely used programs are the 30 year and 15 year fixed loans.30-year fixed rate mortgages offer the lowest monthly payments of any of the common fixed-rate loans. 15-year fixed rate mortgages have a shorter life. Because the loan is shorter, you’ll pay less than half the total interest of a 30-year mortgage.

However, because you repay the loan in half the time, the monthly payments will be greater.With a fixed rate mortgage, you know exactly what your principal and interest payment will be each month for the life of your loan. It won’t change because your interest rate doesn’t change.  If interest rates go up, you’re protected with a fixed rate mortgage.  But you won’t benefit if rates go down.

The two variable factors of the loan payment are the “property taxes and the homeowners’ insurance.” Unfortunately, there is no way to lock those in.  You can always take advantage of falling rates by refinancing. Fixed rate mortgages might be right for you if:

•     Want the security of a fixed principal and interest payment; 
•     Think that interest rates will go up; 
•     Are on a fixed or limited budget.

ADJUSTABLE RATE MORTGAGE (ARM)

Compared to fixed rate mortgages, an ARM offers a lower interest rate to start, so your monthly payments are generally lower. But the interest rate moves up and down with the market based on an index. Some of the more common indices include; U. S. Treasury Bills, Cost of Funds Index (COFI) and the London Interbank Offered Rate (LIBOR). 

Most ARMS have an initial fixed rate period where the interest rate doesn’t change, followed by the rest of the loan’s lifetime period where the rate is adjusted at prearranged intervals. Many ARMS have “caps” that limit how much your interest rate can change per period, as well as for the life of the loan.              


An Adjustable Rate Mortgage might be right for you if:

 •    You want more property than you can qualify for now with a fixed rate;
 •    You are confident your income will increase or rates will not go up much;
 •    You plan on selling or refinancing within five years of buying your home. 

INTEREST ONLY MORTGAGE

This is an alternative way of arranging a mortgage and works differently from a Principal & Interest  mortgage payment. Your monthly repayments to the lender are only made up of interest and do not go towards reducing your principal balance.Interest-only mortgages are for borrowers who have a good reason for preferring the lower initial required payment and are prepared to deal with the consequences.

BI-WEEKLY MORTGAGE

This is not a financing plan; it’s more of a mortgage payoff acceleration program. Typically,  your loan will begin as a 30 or 15 year fixed mortgage loan.  What’s different is that half of the monthly payment amount is made every two weeks. In this way, you make the equivalent of 13 months worth of payments every year. 
The term of your loan will be reduced by 5 to 8 years, providing a substantial decrease in total interest and loan payment costs. 

MORTGAGE LOAN PROGRAMS

There are many types of loan programs available today. In an effort to simplify our presentation, we will focus on the five most popular:  


1) A Conventional Loan is one that meets the underwriting guidelines of the “Secondary Market” such as Fannie Mae & Freddie Mac among others. Fannie and Freddie tend to be more conservative and impose governed limitations on certain aspects of the loan such as loan amount, down payment, mortgage insurance, and so forth. A “conventional mortgage” simply refers to any mortgage loan that is not insured or guaranteed by the federal government. A 3% minimum down payment will help reduce your loan amount if you qualify. 

 2) Government Loans are mortgage loans that are backed by the federal government. The Federal Housing Administration (FHA) does not make or guarantee loans; it simply insures them. The insurance removes or minimizes the default risk lenders face when buyers put down less than 20 percent.


FHA loans are becoming popular again. It has been around for a long time, since June 27, 1934. Without further approval from the FHA, its approved lenders are authorized to:

•    Take loan applications 
•    Process loan applications 
•    Close loans If your credit is less than perfect,

FHA might be the loan for you. You may qualify for an FHA loan even though you’ve had financial problems. The following represent a few benefits of an FHA loan:

•    Your average credit score can be lower than those for a conventional loan. 
•    You can obtain an FHA loan two to three years from the date of your bankruptcy discharge and or a    
   

     Foreclosure, as long as you've maintained good credit since the occurrence(s).                                                                                                                                                                                                                                          •    3.5% minimum down payment will help reduce your loan amount if you qualify. 


Due to the recent mortgage crisis and credit crunch, most lenders are requiring that borrowers have a minimum middle credit score of 620 to 640. This will vary based on the lender's discretion and is subject to change without notice. In many markets, the rates and terms are excellent especially for borrowers with less than stellar credit.

A) 
VA Loans offer veterans the opportunity to purchase a home with liberal qualifying standards and no money required for down payment.Of most importance to the lenders, was that the VA guaranteed a portion of the loan to protect the lender in the case of default by the borrower. FHA underwriting guidelines (for the most part) are applied to these loans. 

B) 
USDA Loan is a Government insured 100% purchase loan. These Loans are only offered in rural areas and serviced by direct lenders that meet federal guidelines. This specialty program is designed to promote growth and improve the property tax base in the outer lying areas of large cities. Not every home or buyer will qualify for this loan. If they do qualify they will be getting one of the top mortgages, with lowest interest rates in the market today.

As a side note, USDA also offers a USDA Rural Development Direct Mortgage for people with low to very-low income. The guidelines for the “Direct” loan are quite different so you should visit this site: http://www.usda-rural-development-direct-mortgage.com/

Most mortgage lenders originate both conventional & government mortgage loans, though the governments-market share has increased markedly since the mortgage crisis got underway. In fact, many suggest that FHA lending has essentially replaced the subprime lending market. 

3) 
Construction Loans  are used to finance the building of a new home. They’re usually variable-rate loans that have interest-only payments during the construction phase. Draws are scheduled based on the stages of construction to pay the builders. A draw is an installment payment arrangement agreed to in advance by the borrower and the contractor or the builder.   

Many construction loans are construction-to-permanent, which means that when construction is complete, the loan is converted to a normal mortgage. This has the advantage of a single loan with one closing.

4) 
A Jumbo Loan is larger than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. The actual cap on jumbo loan amounts will vary from state to state. Jumbo loans cannot be funded by Fannie Mae or Freddie Mac; therefore they usually carry a higher interest rate and my require a larger down payment. 

5 )
A “No Cost” Home Loan is a loan you may have seen advertised as “no closing cost loans.” While it may appear be a good deal, you should understand what it means to use a no closing cost loan.

It does not mean you’re getting something for free. Let’s take a deeper look into no closing cost loans and whether or not you should use them.  Whenever you borrow money, somebody gets paid. The lender charges you interest, which is easy enough to understand. The real question is what about the actual costs to do a loan? Does the mortgage broker or banker get a fee or commission? Will you be responsible for any miscellaneous fees associated with the transaction?  

The answers, for the most part will be yes. Be that as it may, these loans may be advertised as no closing cost loans, however, if there’s “no closing cost,” how do the fees get paid?  In reality, the fees will get paid by virtue of a higher interest rate. Instead of paying the closing costs up front or rolling them into the loan amount (as in the case of a refinance,) you’ll pay a little bit extra over the life of your mortgage payment.                                                                                    
I suggest that you seriously consider the financial pros and cons of this type of financing option. Let’s do the math and see how it shakes out:


No-cost loan: 

Loan amount: $175,000                                                                                                                                         Loan Term: 30 Years                                                                                                                                                   Interest rate: 4.5%                                                                               

Monthly payments: $886.70 

Traditional loan:

Loan amount: $175,000                                                     
Loan term: 30 years                                                                                                                             
Interest rate: 4%
                                                                                                                                                                       
Monthly
 payment: $835.46


Monthly Increase $51.24   $51.24 x 360 months=  $18,446.40 in additional mortgage payments


Total interest paid @ 4% = $125,770.41 @ 4.5% = $144,211.33Diff. of  +$18,440.92  


Total paid for a "no cost" loan over 30 years = $36,887.32


No Cost Pros:


·    If you're short on funds to close and you can justify the cost


No Cost Cons:


 * You may think that this adds up to savings, in the long run, it's more expensive.


*  After about ten years, most no-cost mortgages begin to lose money. This is true whether it is a new 
    purchase or a refinance.

Remember, your closing cost is a fixed one-time expense. If you take a higher interest rate to cover that one-time expense you’ll continue to pay for it potentially for the life of the loan.


In summation, if you don’t plan on staying in your home for five to 7 years or plan to refinance with-in that time period, a no-cost mortgage could be exactly what you are looking for. However, if you want to buy a home today (for the long haul) then capitalize on low-interest rates, pay your closing costs upfront, pay a little extra on your mortgage each month, and live happily ever after.