Payback Time

Finding a Loan that's Right for You

Down Payments

Most mortgages require a cash down payment that gives you equity in the home and somewhat protects the lender if you are unable to repay the loan. Loans with down payments of less than 20% of the purchase price may carry a slightly higher interest rate and/or may require mortgage insurance, which is added to your monthly payment. If you lack the cash required for at least a 20% down payment, or want to leverage your cash, mortgages that require a lower down payment may be right for you.

Points and Closing Costs

Lenders usually charge “points” as a cost for creating your loan. One point equals 1% of the mortgage amount. Points can also be paid to reduce your interest rate. Closing costs are fees incurred in making your mortgage, including credit reports, appraisal fees, title insurance, etc. Generally, points and closing costs are also cash payments you make at the time you close your loan and are in addition to your down payment. While 2.5-3% of the loan amount is a good budgetary figure for points and closing costs, this varies widely by lender and mortgage type. Mortgages are available which minimize these up-front cost for cash-strapped buyers.

Fixed Rate Mortgage

As we consider the possibility of buying or building a new home, we’re filled with excitement, anticipation and visions of how we’ll be better off and our families stronger in our new home. Unfortunately, these feelings usually seem to disappear for most of us as we consider HOW we’re going to finance what is usually the single biggest purchase of our lifetime. When considering the many loan programs that are available, you may find yourself overwhelmed. This article is aimed at simplifying and emystifying some of the various programs available and will help you decide which program is the correct one for you based on your specific situation and the current market conditions. You should always consult your loan officer for a professional, in-depth analysis and recommendation of Which Loan is Right for You . . . One of your first considerations involves the amount of cash you’ll need for the down payment, points and closing costs at the time you close your loan.

This is the most widely known and popular loan program available. Your monthly payment is calculated based on the initial interest rate and never changes for the life of the loan. A fixed rate mortgage is considered the most conservative loan available because there is no risk that changing market conditions will affect your monthly payment.

This loan is probably right for you if you don’t plan to move or refinance for at least 10 years, if you want to pay your home off sooner rather than later, if you can afford a higher payment, if you’re concerned about your ability to qualify for another loan in the future, if you’re close to retirement or if you want to enter retirement without a mortgage payment or if you just feel comfortable knowing that your payment won’t change no matter what.

Adjustable Rate Mortgages

It’s a word that strikes fear into the hearts of many borrowers, but ARM’s can be very advantageous in keeping your payments low for a fixed period of time (anywhere from 1 month to as long as 10 years). For example, your payments with a “3/1 ARM” are fixed for the first 3 years and then subject to change annually.

Most ARM’s have a low initial rate, sometimes as much as 4% below the current market rate for fixed loans. As a rule, the lower the initial rate, the shorter the time before the loan makes its first interest rate adjustment. Because the initial start rate is low, following the fixed period these loans usually adjust up (but could go down if rates have fallen sharply). For more information about ARM loans, visit www.HerHome Magazine.com/resources.asp.

ARM loans may be right for you if you need to qualify for the largest loan possible with your current income, if you are confident your income will increase over the next several years, if you only plan on staying in the home for 3-5 years, or if you want to free up some additional cash for other types of investments, 401K, stocks, college savings plans, paying off debt, etc.

Balloons

These are typically in the form of 5-year balloons and 7-year balloons and are also commonly referred to as “2-step loans.” In these loans, your monthly payment is calculated the same as a 30-year loan, but they may require you to completely pay your remaining balance (virtually the entire initial amount financed) in a single payment after the initial 5 or 7 years. Or, they may contain a conversion option for the remaining term.

This loan may be suitable if you will sell the home or refinance on or before the balloon payment date, if you have temporarily relocated, or if you are certain you will not stay in the home beyond the initial period. You can typically expect to see a lower interest rate than on many ARM’s since the lender is not making any commitment to lend beyond the initial term; however, in rare instances, some balloon loans offer a “conditional right to reset,” which effectively provides for an extension beyond the initial fixed period.

Fixed-Time Buyer Loans

These loans are designed to make qualifying for a home easier and more affordable than what has typically been available. While some of these programs are only available for the purchase of your first home, some will allow homeowners who have previously owned a home to take advantage of these programs as well.

The downside to these loans is that they may be subject to income limitations, property value limitations and geographic restrictions. Loans offering subsidized rates may also contain “recapture” provisions.

The benefits to these loans are that they are available on both fixed and ARM programs; they have reduced down payment and reserve requirements. Typically, these loans allow for easier qualifying and may also allow “grant” money for down payment and closing costs and the possibility of below-market interest rates. These loans can be a great asset for those just starting out or getting their feet under them. Some programs only require as little as $500 out of pocket in order to close while still others allow you to finance more than 100% of the purchase price to include your closing costs into the loan amount.

Interest-Only Loans

This “option” is available on both fixed and ARM loan programs and can be a very
powerful cash management tool in your family’s finances. Many people incorrectly think an interest-only (I/O) loan means that you can only pay the interest due and, therefore, you cannot pay your loan down: FALSE. The advantage of this type of loan is its flexibility, in that, you can elect to pay just the interest due on the loan and not the principle each month. This option results in monthly payments that are considerably less than a fully amortizing, fixed-rate loan.

This loan may not be right for you if you have a tendency to stretch yourself to the limits (as homeowners may buy more than they can afford).

This loan may be just what you’re looking for if you live in an area experiencing strong appreciation or growth in real estate values, if you want to free up additional cash for other investments, college funds, debt payment, or if you simply like the idea of having payment options and being in control of how you pay your mortgage down.