Before you are ready
to make an offer on a home, you need to have your financing in order. Your
agent will refer you to a lender who is usually part of her or his team.
Your lender will help you get pre-qualified for your loan and will
recommend the right type of loan based on your circumstances. Furthermore,
your lender will make the entire loan process smooth by guiding you
through the paperwork maze.
report was written to help you understand the basic differences between
the types of available loans. This should help you determine the best type
of loan for your circumstances. Talk to your real estate agent! She or he
will explain any questions you have, including how the process works. Most
importantly, your agent will refer you to a favorite lender who will
FHA Loans are insured
by the Federal Housing Authority and require a small down payment,
typically in the 2.5 to 5 percent range. FHA loans are very popular with
first time homebuyers who do not have a lot of cash to use as a down
payment. Most FHA buyers are in the $150,000 purchase range.
FHA loans have several
advantages and disadvantages. They require a small down payment and
usually allow for higher debt-income ratios (itís easier to qualify).
Also, FHA loans are assumable (you can assume someone elseís FHA loan and
vice versa). However, you must pay dual insurance on FHA loans. Since FHA
loans are considered higher risk, you have to first pay an up-front MIP
(mortgage insurance premium) one-time fee in the case of loan default.
Also, a second MIP is factored into your monthly payments. Finally, since
FHA loans are considered a higher risk, the interest rates are usually
higher than conventional loans.
VA Loans are
guaranteed by the Veteranís Administration. You must be in the military,
or a veteran, to qualify. The largest benefit of VA loans is you donít
need a down payment, and very little cash to move in. On the downside, VA
loans require a funding fee that is typically ďrolled intoĒ the loan. This
means your mortgage can be substantially higher than the value of your
home. If you plan to live in the home for a short period of time, you run
the risk of losing money when you sell. In this scenario your mortgage
obligation could be higher than the market value of your home.
Furthermore, VA lenders typically require very tough inspections, which
can bog down the home buying process.
Conventional loans are
the most popular type of loans.
Generally, the more
you put down, the less of a risk you are to lenders. If you put down at
least 20% of the purchase price of the loan, you wonít have to pay PMI
(private mortgage insurance that lenders require to protect themselves in
case you default). Also, if you put down at least 20%, you are likely to
get a lower interest rate. If you put down less than 20%, you will be
required to pay the PMI, which will be built in to your monthly mortgage
typically pay all of their own closing costs. Furthermore, the appraisal
process focuses entirely on the market value of the home, not necessarily
the condition it is in.
Fixed rate versus
adjustable rate loans
When you choose your
loan, you will have the option of getting a fixed or adjustable interest
rate. The advantage of fixed-rate loans is the ability to lock in a low
interest rate (if interest rates are currently low) for the lifetime of
the loan. Thereís a lot of security knowing your payments will be the same
year after year!
If interest rates are
high, consider an adjustable rate mortgage (ARM). The interest rates on
your loan adjust up and down, depending on the index the rate is tied to.
With an ARM, if interest rates go up, your mortgage payments will go up
(there IS a cap on how much they can go up each year). Conversely, if
interest rates go down, so will your mortgage payments. The advantage of
an ARM is interest rates are currently high, you can make mortgage
payments based on current interest rates in hopes that eventually interest
rates will fall. Once they fall, you can refinance your adjustable rate
mortgage into a fixed mortgage and lock-in lower interest rates for the
lifetime of the loan. On the downside, if interest rates continue to rise
after you get an adjustable rate mortgage, the monthly payments can become
Term of the loan: 30
year vs. 15 year
Loans typically come
in 10, 15, 20 or 30 year terms. By far, 30-year loans are most common. The
advantage of a longer-term loan is the much lower mortgage payments spread
out over 360 months. The downside is the higher amount of interest you
will have to pay over the lifetime o the loan. Shorter term loans are will
save you a lot of money interest. However, the monthly payments are much
higher (typically 15 year mortgage payments are 25% higher than 30 year
I hope this
informational report was informative. As your local real estate
professional, I am available to answer any questions you have about the
best type of loan for your circumstances. You can call me at any time for
advice, and please remember that you are under no obligation or pressure
of any kind. I would very much like to help you.