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What Kind of Loans are Available?
There are a lot of different options in lending today and it can be a little overwhelming if you are new to the Home Buying Process. I Will begin by listing brief descriptions of the most common financing options. Conventional loans
The Conventional loan is a fully documented loan that will generally have the lowest rate that is available. These loans are generally available to people with credit scores over 600 and good job stability and assets. The loans are frequently sold to Fannie Mae.
30 year fixed - This is a loan which is paid in 360 equal monthly payments with a fixed rate interest. It is a great option if you have found the home of your dreams and don’t anticipate moving for a long time. It is also the lowest minimum monthly payment you can get in a fixed rate long term loan.. The good thing about these loans is that they can be prepaid without penalty. This means that you can make extra payments to principal when you can, and can make the minimum payment when you can’t. If you can make extra principal payments you can get your loan paid off more quickly and you can potentially save big bucks in interest payments.
15 year fixed - Generally the rate is a little lower (around 1/4 of a percent) than a 30 year fixed rate loan, but the payment is higher. All of the extra payment goes toward the principal so that the loan is paid in full in 15 years. Its a great option if you know you can afford the payment, you will save a huge amount.
Interest Only - The lowest payment you can get is the interest only loan. Lenders have been pushing this product because you can qualify for the highest loan amount with this loan. The loans are fixed usually for 3 or 5 years at a low rate and then they convert to whatever fixed rate is available when they expire. They do not reduce the principal balance at all, and they count on appreciation to give the homeowner some equity. The problem with these loans is that if rates go up you may not be able to afford the house when the payment changes. If the market changes, it may be difficult to sell or refinance. People who go this way have to be careful to keep their credit scores up and watch the rates. Then they should be aware that they may have to refinance if the rates start to climb.
One, three and five year Adjustable Rate Mortgages -The adjustable rate loan has been around for a long time. The difference between this and the interest only loans, is first of all that there is principal reduction, and secondly that these loans are typically 30 year loans which can be held until paid off, while the interest only loans frequently have balloons (where the loan must be paid in full in 5, 10, or 15 years). The ARM loans are tied to various different indices’s, such at the Treasury Bill (commonly known as the T bill), or the LIBOR (London Interbank Offered Rate) or the the COFI (the 11th District cost of funds index). There is a set charge added to the Index which is called the margin, and that is how the rate is calculated. For example the margin may be 2.75%, the Index (eg:T bill) may be 5% so the rate would be 7.75%. Depending on the loan some will adjust yearly, every six months or some even adjust monthly.
One Hundred Percent Loans -The VA offers a 100% loan to veterans, but there are charges which add up to as much as 3% of the loan amount. They are known as the Funding Fee and it varies depending on the length and nature of the individual borrower’s Service. Veterans that have served active duty during a war have the lowest cash due at closing. See VA below for more information on VA loans.
- 80/20 LOAN -This is an interesting new option for 100% financing available to the strong credit borrower. Basically it is an 80% first mortgage at the standard 30 year fixed rate and a 20% second mortgage for the down payment, usually a 15 year loan at a higher rate (around 2 points over the 30 year rate.) When you factor in the PMI (private mortgage insurance) that you do not have to pay, it is very close to the same payment as 95% LTV loan with regular PMI. Here is an example of how an 80/20 loan compares to a 5% down loan: (I have rounded the payments to the nearest dollar)
+ COMPARISON BETWEEN AN 80/20 100% LOAN AND A 5%DOWN CONVENTIONAL LOAN.
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100% Finance Option (Conventional 80/20 Loan) Sales Price: $400,000 |
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80% first mortgage= $320,000 |
@ an interest rate of 5.875% |
principal & interest= $1,892 |
$1,892.00 |
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* 20% Second= $ 80,000 |
interest rate of 7.275%* |
principal & interest =$547.00 |
$547.00 |
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Payment |
$2,439 |
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Down payment $0.00 |
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ยท 95% Finance Option (Conventional 5down payment downpayment) Sales Price: $400,000 |
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95% first mortgage= $380,000 |
@ an interest rate of 5.75% |
principal & interest= $2,217 |
$2,217.00 |
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PMI @ .78% .00078 x $380,000=$2,964 PMI yearly premium $2,964/12=$247 per month |
$247.00 |
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Payment |
$2,464 |
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Down payment $20,000 and it actually costs $25 more a month! |
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*interest rates were good as of Aug 23, 2005 and are used as an example only. Rates change daily so it will be necessary to check rates when you are ready to get a loan!
Make a spreadsheet and compare your options!!!
80/15/5 - This is like the 100% option above but requires a 5% down payment. Lenders will sometimes offer this to people whose credit is not quite strong enough to qualify for 100% financing but are almost there. It has the same benefit in that it avoids which wihch will be as much as $250/month on the $400,000 purchase described above.
80/10/10 - As you may guess this is another way to avoid that PMI Insurance. It has a 10% down payment, an 80% first mortgage and a 10% second mortgage. The rates vary daily and you need to see which makes the most sense at any given moment. Again, the various programs are all credit driven.
FHA - FHA is the financing option that was designed to help people who are a little credit challenged. The minimum credit score to qualify for a FHA loan is normally 580 and the buyer is required to make a 3down payment downpayment. The difference between FHA and conventional loans is primarily that the mortgage insurance (known as PMI with conventional loans) is called MIP (for mortgage insurance premium) in FHA loans, and the Buyer must pay the mortgage insurance premium in advance at the closing table. This MIP payment can be added to the loan amount and financed and it amounts to 1.5% of the loan amount. The monthly premium is .5% per year paid monthly (200,000 loan x .005= $1000/12= $83.34 per month.).
VA
Non Qualifying
Stated Asset
Stated Income
Hard Money Loans
B and C Paper
How to Find a Lender
* How much can I afford?
* Credit
* Loan Application
* Loan Underwriting
* Fees Associated with Loans
* Loan Calculators
