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| Conventional vs. Government-Backed Loans |
| What is the difference between a Conventional and
a Governments backed loan? |
| The most common types of loans are
conventional and government backed. A conventional loan is
backed by bankers, that is to say they are secured by the
lender. A government-backed loan is secured or backed by the
government; however, it is still a lender who makes the loan. To
make loans more affordable, the government got involved in the
loan business and decided to back home loans. The two most
common are the Federal Housing Authority (FHA) loans, which are
insured by the federal government and Veterans Administration
(VA) loans, which are guaranteed. The lender will generally
accept smaller down payments with these types of loans - about
3% to 5% is common. This can be of enormous benefit to people
who do not have a lot of money to put down for a down payment.
FHA loan are also assumable so somebody else can take over the
loan when you sell. This can be an added attraction to a buyer
when you sell your home. |
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| Conforming Versus Non-Conforming Loans |
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| There are conforming and
non-conforming or jumbo loans. The cut off point in
dollars from a conforming to a non-conforming loan changes
every couple of years. It is currently approximately
$333,700. The interest rate on a jumbo loan is generally
higher. Loans that meet the guidelines of the
government-backed companies such as Freddie Mac and Fannie
Mae are termed conventional loans. |
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| Fixed Rate Mortgage |
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This is the most common loan type and is very
popular when interest rates are low. Fixed rates mortgages are
especially sensible when interest rates are low. The loan is repaid over
a fixed term with monthly payments of principal and interest. The term
can be 10, 15, 20 or the ever popular 30 year term. The same percentage
interest is charged over the life of the loan. The caveat to this type
of loan is that you will probably not build up appreciable equity for
the first several years of the loan few years of the loan as the
interest in front loaded.
If you plan to stay in your home for some time a fixed rate loan may be
a better option. The big advantage of this type of loan is that you can
plan your finances, as you know that for the next few years the same
amount will be paid to the mortgage.
You should also remember that it is probable your income will rise over
the years and the mortgage amount will seem less burdensome as it
remains the same.
The disadvantages of this type of loan are that when interest rates are
high the monthly payment is high and will be high over the term of the
loan unless you refinance when rates are lower. Also when interest rates
are high you may not qualify for a fixed rate loan for the amount you
need, as the monthly payment may be too much for you to afford. If you
decide to refinance on the loan later you may be required to pay an
origination fee and point's refinanced need to be deducted from taxes
over a 20 year period, not the year of the refinance. |
| Adjustable Rate Mortgage |
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The adjustable Rate Mortgage is commonly known as an ARM.
An ARM has interest rates that fluctuate and are pegged to one-year
treasury bills or to a specific index. Different lenders tie the ARM to
different indexes.
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| Some common indexes are |
• The rate of sales on Treasury notes and bills
• The average rate for loans closed, called the Federal Housing
Finance Boards National Average contract Mortgage Rate
• The average rate paid on jumbo CDs (certificates for deposit)
• The costs of funds for the lender
The indexes are usually printed in the newspaper so be sure to check
where the rate is published if you decide to go with this type of a
loan.
The initial rate of interest tends to be quite low and then the rate
jumps up between one to two points per year. Generally there is a yearly
cap or one to two points and a lifetime ceiling cap of approximately 5
points. The interest rates can go up or down so this can be a very
viable option for people willing to gamble that interest rates will not
rise too much. Shopping for an ARM is more difficult than for a fixed
rate mortgage. You will need to study all the details of the loan.
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| Margin |
Remember, the index is not the actual percentage interest
rate you pay following the end of the term for the initial teaser rate
but it is only the first part of the calculation. The margin must be
added to this to give the actual interest rate. The margin can run
anywhere from 1 to 5%. The index plus the margin will give the actual
number in percentages that the interest defaults to at the end of the
initial term. Initial rates and terms are agreed to upfront. Be sure to
ask the true rate and today's rate. This is calculated by adding the
index and margin.
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| Teaser Rate |
The teaser rate is the initial low rate of interest you
are charged on the loan. This rate is generally lower than current
interest rate. This can be an excellent way of purchasing a home you may
not be able to get a fixed rate loan for, as the initial payments will
be lower. The bank may give you a loan at this rate but not the higher
fixed interest loan. Remember, when the bank is deciding how much they
will loan you, they look at how much you can afford each month.
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| Adjustment Interval |
Be sure to understand the adjustment interval on this
type of loan. For example, when the interval is two years, the first two
years the loan remains at the initial interest rate and then adjusts
according to the index and margin used. At the end of the second
two-year period the interest rate adjusts again according to the index
and margin used and so on until the entire term of the loan is up and
the loan is paid off.
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| Caps |
The rate caps or payment caps are the next critical piece
to examine when looking into this type of financing. A rate caps is the
maximum percent the interest rate can go up at the end of each interval.
A payment cap is the actual amount your payment can go up at the end of
each interval.
In summary when looking at an ARM you need to check out the initial
rate, true rate, adjustment interval, caps, index, and margin.
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| What are the advantages of an ARM? |
| You may qualify for a loan easier as lender uses the
gross monthly income and the monthly loan payment amount to determine
how much you qualify. The monthly amount will be less with a lower
interest rate so you may qualify for more. If you only plan to stay in
the home for a couple of years this may be an excellent choice as the
majority of benefits for the initial low interest rate will be gained
during this time. If current interest rates aver extremely high, this
may be the only loan choice available to you. Yet, if you are not a risk
taker, this may not be the best option for you. |
Types of mortgages:
 | Home equity loans are second mortgages based on the value of your house
that you own which is calculated by subtracting the total of your mortgage
from the total market value of your home. This type of loan can come
either as a loan or a line of credit.
| Reverse mortgages are second mortgages that allow you to turn the equity
of your home into income. Through a reverse mortgage you can receive a
monthly payments, a line of credit or total cash advance from your home
equity. No monthly are made on this loan until the house is sold or the
owner is deceased.
| Refinancing allows you to take out a new loan to repay an older loan
that has a higher interest rate, an adjustable rate or a term (length)
that is undesirable. |
| Construction loans cover the cost of the construction of a home, including
materials, labor, and land. The amount of this loan is based on an estimate
of the worth of the constructed home by an appraiser who studied the
materials, labor, land and value of similar surrounding houses. |
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Types of mortgages:
| A fixed rate mortgage is a loan with rate that does not change. This
means that aside from changes in insurance and taxes, whatever monthly
payment you pay the first month of your repayment will be the same as the
last month of your repayment.
| An adjustable rate mortgage fluctuates with current rates as decided by
designated indexes but begins with a low introductory rate. These rates
can change once every year, every five years or after whichever set period
of time decided by the borrower and the lender. The time between rate
changes are called adjustment periods. Adjustable rate mortgages are have
more flexible qualifying standards and are often used by those with less
than perfect credit or people who will not be staying at their home for
more than seven years. |
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When you are searching for a mortgage, the process
can seem very intimidating. The best way to pick the mortgage that is right
for you is to become informed about all of your options.
Call us today at 866-230-5633 and you'll be amazed at the loan you can
get, and the speed and service from which you will obtain it. Download our application
and authorization
form fill out, sign and fax to our office at 956-838-1754. Will process
application and call you right a way with an answer.
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