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| Financing and Mortgage |
HOME FINANCING OPTIONS
— Fixed-Rate
A fixed-rated mortgage comes with an interest rate that remains the same for the life of the loan. The life or term of a mortgage is 30 years by industry standards, but 15 and 20-year term loans are also available.
Shorter term loans come with cheaper interest rates. A 15-year mortgage’s interest rate is typically one-quarter to one-half percent lower than a 30-year mortgage. Both the cheaper rate and the shorter term mean you’ll also pay less over the life of the loan than you would if you borrowed the same amount of money with a long term loan.
Monthly payments of a shorter term loan, however, are generally higher than the same loan for a long term because the larger payments of the short term loan are necessary to repay the debt sooner.
A long-term loan with smaller monthly payments can be easier to budget, but if you have a stable salary that allows you to afford the larger monthly outlay, the shorter term loan could be to your advantage. Whatever term you choose, fixed rate mortgages protect you from the risk of rising interest rates. Of course, since you are locked in to a given rate, you could end up with a rate higher than the going rate, should rates fall.
— Adjustable-Rate Mortgages
Adjustable-rate mortgages or ARMs come with interest rates that adjust up or down, depending upon current economic trends. An ARM’s rate is based on a money market index. The one-year U.S. Treasury bill is commonly used because its yield is similar to the 30-year U.S. Treasury bill used to set rates on 30-year fixed mortgages. ARMs might also be tied to other indexes, including certificates of deposit (CDs) or the London Inter-Bank Offer Rate (LIBOR) rates, among other regularly published indexes.
To come up with the ARM rate, the lender will add a “margin,” usually two to four percentage points, to the index. Initially, the ARM rate is lower than the fixed rate, from about a quarter point to two points or more, depending upon the economy. The date when the first adjustment occurs (from six months to many years) and how often the rate adjusts, depends upon the terms of the loan. After the first adjustment occurs, subsequent adjustments can occur every six months, once a year, or during larger periods. The adjustment period is disclosed in the loan.
ARMs generally have limits or “caps” on how high it can adjust during each adjustment period as well as over the life of the loan. The caps protect you from drastic market changes, but ARMs don’t offer the stability of a fixed rate loan. ARMs’ lower initial rate, however, can help you qualify for a larger loan or start you off with smaller payments than you’d have to pay for the same mortgage with a higher fixed rate. And if index rates fall with an ARM, of course, so does your monthly mortgage.
ARMs could also be a good choice for someone who knows his or her income will rise and at least keep pace with the loan rate’s periodic adjustment cap. If you plan to move in a few years and are not concerned about the possibility of a higher rate, an ARM also could be a good choice.
Most lenders are now requiring that you use an escrow account. The lender automatically will place a portion of the homeowner’s monthly note into an account specifically designated to pay for insurance and taxes, and the mortgage company is responsible for paying the annual bills from that account.
Types of loans can include:
— Conventional
This is the traditional 15 or 30-year home loan. Variations include jumbo loans (loans for more than $417,000), conforming loans (loans under $417,000) and adjustable rate mortgages (ARMs).
— FHA Loans
The Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD), administers various mortgage loan programs. FHA loans have lower down payment requirements and are easier to qualify than conventional loans. FHA loans cannot exceed the statutory limit. Among the reasons cited by FHA for this option, include:
Learn more at www.hud.gov/buying/index.cfm.
— Fixed-Rate
A fixed-rated mortgage comes with an interest rate that remains the same for the life of the loan. The life or term of a mortgage is 30 years by industry standards, but 15 and 20-year term loans are also available.
Shorter term loans come with cheaper interest rates. A 15-year mortgage’s interest rate is typically one-quarter to one-half percent lower than a 30-year mortgage. Both the cheaper rate and the shorter term mean you’ll also pay less over the life of the loan than you would if you borrowed the same amount of money with a long term loan.
Monthly payments of a shorter term loan, however, are generally higher than the same loan for a long term because the larger payments of the short term loan are necessary to repay the debt sooner.
A long-term loan with smaller monthly payments can be easier to budget, but if you have a stable salary that allows you to afford the larger monthly outlay, the shorter term loan could be to your advantage. Whatever term you choose, fixed rate mortgages protect you from the risk of rising interest rates. Of course, since you are locked in to a given rate, you could end up with a rate higher than the going rate, should rates fall.
— Adjustable-Rate Mortgages
Adjustable-rate mortgages or ARMs come with interest rates that adjust up or down, depending upon current economic trends. An ARM’s rate is based on a money market index. The one-year U.S. Treasury bill is commonly used because its yield is similar to the 30-year U.S. Treasury bill used to set rates on 30-year fixed mortgages. ARMs might also be tied to other indexes, including certificates of deposit (CDs) or the London Inter-Bank Offer Rate (LIBOR) rates, among other regularly published indexes.
To come up with the ARM rate, the lender will add a “margin,” usually two to four percentage points, to the index. Initially, the ARM rate is lower than the fixed rate, from about a quarter point to two points or more, depending upon the economy. The date when the first adjustment occurs (from six months to many years) and how often the rate adjusts, depends upon the terms of the loan. After the first adjustment occurs, subsequent adjustments can occur every six months, once a year, or during larger periods. The adjustment period is disclosed in the loan.
ARMs generally have limits or “caps” on how high it can adjust during each adjustment period as well as over the life of the loan. The caps protect you from drastic market changes, but ARMs don’t offer the stability of a fixed rate loan. ARMs’ lower initial rate, however, can help you qualify for a larger loan or start you off with smaller payments than you’d have to pay for the same mortgage with a higher fixed rate. And if index rates fall with an ARM, of course, so does your monthly mortgage.
ARMs could also be a good choice for someone who knows his or her income will rise and at least keep pace with the loan rate’s periodic adjustment cap. If you plan to move in a few years and are not concerned about the possibility of a higher rate, an ARM also could be a good choice.
Most lenders are now requiring that you use an escrow account. The lender automatically will place a portion of the homeowner’s monthly note into an account specifically designated to pay for insurance and taxes, and the mortgage company is responsible for paying the annual bills from that account.
Types of loans can include:
— Conventional
This is the traditional 15 or 30-year home loan. Variations include jumbo loans (loans for more than $417,000), conforming loans (loans under $417,000) and adjustable rate mortgages (ARMs).
— FHA Loans
The Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD), administers various mortgage loan programs. FHA loans have lower down payment requirements and are easier to qualify than conventional loans. FHA loans cannot exceed the statutory limit. Among the reasons cited by FHA for this option, include:
- Easier to qualify - Because FHA insures your mortgage, lenders are more willing to give loans with lower qualifying requirements so it’s easier for you to qualify.
- Less than perfect credit - Even if you have had credit problems, such as bankruptcy, it’s easier for you to qualify for an FHA loan than a conventional loan.
- Low down payment – FHA has a low 3 percent down payment, and that money can come from a family member, employer or charitable organization. Other loans don’t allow this.
- Costs less - Many times, FHA loans have competitive interest rates because the loans are insured by the Federal Government. Always compare an FHA loan with other loan types.
Learn more at www.hud.gov/buying/index.cfm.
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