| Mortgage Lending » Types of Loans Available |
Types of Loans Available
Fixed Rate MortgagesPrint
The most common type of mortgage program where your monthly payments for interest and principal never change. Property taxes and homeowners insurance may increase, but generally your monthly payments will be very stable. Fixed-rate mortgages are available for 30 years, 20 years, 15 years and even 10 years. There are also "bi-weekly" mortgages, which shorten the loan by calling for half the monthly payment every two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 "months" worth, every year.) Fixed rate fully amortizing loans have two distinct features. First, the interest rate remains fixed for the life of the loan. Secondly, the payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term. The most common fixed rate loans are 15 year and 30 year mortgages. During the early amortization period, a large percentage of the monthly payment is used for paying the interest . As the loan is paid down, more of the monthly payment is applied to principal . A typical 30 year fixed rate mortgage takes 22.5 years of level payments to pay half of the original loan amount. Adjustable Rate MortgagesPrint
These loans generally begin with an interest rate that is 2-3 percent below a comparable fixed rate mortgage, and could allow you to buy a more expensive home. However, the interest rate changes at specified intervals (for example, every year) depending on changing market conditions; if interest rates go up, your monthly mortgage payment will go up, too. However, if rates go down, your mortgage payment will drop also. There are also mortgages that combine aspects of fixed and adjustable rate mortgages - starting at a low fixed-rate for seven to ten years, for example, then adjusting to market conditions. Ask your mortgage professional about these and other special kinds of mortgages that fit your specific financial situation Interest Only MortgagesPrint
What Is An Interest-Only Mortgage? If the borrower exercises the interest-only option every month during the interest-only period, the payment will not include any repayment of principal. The result is that the loan balance will remain unchanged. For example, if a 30-year loan of $100,000 at 6.25% is interest only, the required payment is $520.83. In contrast, borrowers who have the same mortgage but without an IO option, would have to pay $615.72. This is the "fully amortizing payment" – the payment that would pay off the loan over the term if the rate stayed the same. The difference in payment of $94.88 is “principal”, which go to reduce the balance. For What Types Of Borrowers Are Interest-Only Mortgages Suitable? Pay Principal When Convenient: Borrowers with fluctuating incomes may value the flexibility the IO mortgage gives them. When their finances are tight, they can make the IO payment, and when they are flush they can make a substantial payment to principal. Ask yourself whether you are disciplined enough to make the payment to principal when you aren’t obliged to. Buy More House: It is common for families to begin with a "starter house", then move into a more expensive house as their incomes rise. This process of "trading up" carries high transaction and moving costs. You can avoid these costs by skipping to the second house now. In the short term, this will cause a cash flow strain, but the IO mortgage may make it manageable. Ask yourself whether you are comfortable with the risk that the expected higher income won’t materialize. Invest the Cash Flow: For most homeowners, paying down mortgage debt is the most effective way to build wealth. Nonetheless, some may build wealth more rapidly by investing excess cash flow rather than paying down their mortgage. For this to succeed, their return on investment must exceed the mortgage interest rate, since that rate is what they earn when they repay their mortgage. A valid example is the young borrower with a long time horizon who invests in a diversified portfolio of common stock. This should generate a yield of 9% or more over a long period. Another are business owners who might earn a high return investing in their own businesses. Ask yourself whether you really will invest the excess cash flow, as opposed to spending it; and whether you have a firm basis for believing that your investments will yield a return higher than the mortgage rate. I don't recommend it as a wealth-building strategy for most borrowers. See Is Unused Home Equity a Missed Fortune? Quick Capital Gain: An interest-only (IO) is the instrument of choice in a quick turnover situation if you are trying to maximize the amount of house you can buy, and are limited by your income. The IO option lowers the required initial payment, which allows you to qualify for a larger loan amount. This is why buyers in markets undergoing strong price appreciation, who are looking for quick capital gains, gravitate to IOs – or to their big brother, the flexible payment (option ARM), which has even lower payments in the first year than an IO. See Questions About Option (Flexible Payment) ARMs. The more expensive the house they can buy, the larger the expected capital gain. However, if you don’t need an IO to qualify for the house you want to buy, it is not the best choice in a quick turnover situation. See Is Interest-Only Best For a Quick Turnover? Allocate Cash Flow to Second Mortgage: John Doe finances his home purchase with an 80% fixed-rate mortgage (FRM) at 5.5%, and a 20% HELOC at 7.75%. The FRM is IO, and Joe uses all his available cash flow to pay down the balance on the HELOC. This makes sense because of the higher rate on the HELOC, and the possibility of future rate increases. Payment Responsive to Principal Reduction: On most IO loans, whether fixed or adjustable rate, the monthly mortgage payment will decline in the month following an extra payment. This is the only type of mortgage that has this feature. On a conventional FRM, the payment never changes while on ARMs, the payment doesn't change until the next rate adjustment. Some borrowers find this feature extremely convenient. For example, a home purchaser who must close before his existing house is sold may want to use the proceeds of the sale, when it occurs, to reduce the payment on the new mortgage. On many but not all IOs, a large extra payment reduces the payment in the following month On some IOs, however, the payment doesn't change until the anniversary month, and on others it does not change until the end of the IO period. If you are contemplating an interest-only loan and find immediate payment adjustments in response to extra payments a highly desirable feature, ask about it. See When Will Extra Payments Reduce Monthly Payments? What Hazards Should You Watch Out For? Borrowers can immunize themselves against most deceptions by remembering one critical fact. If two mortgages are identical except that only one has an interest-only option, lenders view that one as riskier. The reason is that, after any period has elapsed, the loan with the IO option will have a larger balance. Deception 1: An interest-only loan carries a lower interest rate. Lenders usually charge a higher rate for an identical loan with an interest-only option, for reasons indicated above. I have never seen a price sheet in which a lender quotes a lower rate on an identical loan with an IO option, though I am told it happens; this is not a perfect market. The deception arises from comparisons of apples and oranges. Most interest-only loans are adjustable rate mortgages (ARMs), and ARMs have lower rates than fixed-rate mortgages (FRMs). ARMs with the IO option have lower rates than FRMs because they are ARMs, not because they are IO. Deception 2: An interest-only loan allows the borrower to avoid paying for mortgage insurance. Since loans with an IO option are riskier to the lender, the option cannot cause the disappearance of mortgage insurance. Any IO loans with down payments less than 20% that don’t carry mortgage insurance from a mortgage insurance company are being insured by the lender. The borrower is paying the premium in the interest rate rather than as an insurance premium. Deception 3. On an ARM with an interest-only option, the quoted interest rate is fixed for the interest-only period. It may or may not be. The interest-only period is the period during which you are allowed to pay interest only, usually 5 or 10 years. The period for which the initial rate holds can be as long as 10 years or as short as one month. Where the initial rate period is 3, 5, 7 or 10 years, the interest-only period is likely to be the same. Where the initial rate period is a month, 6 months or a year, the interest-only period will probably be longer. These are the cases where deception is most likely to arise. Deception 4. It is less costly to amortize an interest-only loan. This is patently ridiculous, but some variant of it keeps popping up in my mail. There is no magic connected to amortizing an interest-only loan. A borrower who takes an interest-only option but decides to make the fully amortizing payment instead will amortize in exactly the same way as the borrower who takes the same mortgage without the option. Read Does an an Interest-Only Amortize Faster? What Information Do You Need To Assess An IO Mortgage? While future interest rates are not known, we can make assumptions about what will happen to rates; these are called interest rate scenarios. Usually, we focus on rising rate scenarios, because those are the ones we worry about. For any given scenario, we can calculate exactly how high the rate and mortgage payment will go, and when it will get there. This is scenario analysis. We can also calculate the total cost over any period specified by the borrower. In assessing ARMs with an IO option, borrowers will want to compare scenarios with and without the option. When ARM rates are much lower than FRM rates, shrewd borrowers may take an ARM but make the payment that they would have had to make had they taken an FRM. By paying the balance down faster, the cost imposed by rising rates in the future is reduced. Hence, it is useful to perform scenario analysis based on the assumption that the borrower pays at the FRM rate for as long as that payment is larger than the ARM payment. This is an alternative to an IO, and based on the opposite premise. Where an IO attempts to minimize the borrowers payments in the early years, for any of the reasons noted earlier, the FRM payment option is designed to pay down the balance as much as possible in the early years. Home Equity LinePrint
Using a credit line to borrow against the equity in your home has become a popular source of consumer credit. And lenders are offering these home equity credit lines in a variety of ways. You will find most loans come with variable interest rates, some come with attractive low introductory rates, and a few come with fixed rates. You also may find most loans have large one-time upfront fees, others have closing costs, and some have continuing costs, such as annual fees. You can find loans with large balloon payments at the end of the loan, and others with no balloons but with higher monthly payments. No one loan is right for every homeowner. The challenge, then, is to contact different lenders, compare options, and select the home equity credit line best tailored to your needs. Be sure to review the home equity contract carefully before you sign it. Do not hesitate to ask questions about the terms and conditions of your financing. To help you do this, you may want to consider the following questions and to use the checklist at the end of this brochure. (We apologize that the checklist is not available on-line. To obtain a copy of the checklist, please request a free copy of the brochure by contacting: Public Reference, Federal Trade Commission, Washington, D.C. 20580; (202) 326-2222. TDD call (202) 326-2502.) Is a home equity credit line for you? If you need to borrow money, home equity lines may be one useful source of credit. Initially at least, they may provide you with large amounts of cash at relatively low interest rates. And they may provide you with certain tax advantages unavailable with other kinds of loans. (Check with your tax adviser for details.) At the same time, home equity lines of credit require you to use your home as collateral for the loan. This may put your home at risk if you are late or cannot make your monthly payments. Those loans with a large final (balloon) payment may lead you to borrow more money to pay off this debt, or they may put your home in jeopardy if you cannot qualify for refinancing. And, if you sell your home, most plans require you to pay off your credit line at that time. In addition, because home equity loans give you relatively easy access to cash, you might find you borrow money more freely. Remember too, there are other ways to borrow money from a lending institution. For example, you may want to explore second mortgage installment loans. Although these plans also place an additional mortgage on your home, second mortgage money usually is loaned in a lump sum, rather than in a series of advances made available by writing checks on an account. Also, second mortgages usually have fixed interest rates and fixed payment amounts. You also may want to explore borrowing from credit lines that do not use your home as collateral. These are available with your credit cards or with unsecured credit lines that let you write checks as you need the money. In addition, you may want to ask about loans for specific items, such as cars or tuition. How much money can you borrow on a home equity credit line? Depending on your creditworthiness (your income, credit rating, etc.) and the amount of your outstanding debt, home equity lenders may let you borrow up to 85% of the appraised value of your home minus the amount you still owe on your first mortgage. Ask the lender about the length of the home equity loan, whether there is a minimum withdrawal requirement when you open your account, and whether there are minimum or maximum withdrawal requirements after your account is opened. Inquire how you gain access to your credit line -- with checks, credit cards, or both. Also, find out if your home equity plan sets a fixed time -- a draw period -- when you can make withdrawals from your account. Once the draw period expires, you may be able to renew your credit line. If you cannot, you will not be permitted to borrow additional funds. Also, in some plans, you may have to pay your full outstanding balance. In others, you may be able to repay the balance over a fixed time. What is the interest rate on the home equity loan? Interest rates for loans differ, so it pays to check with several lenders for the lowest rate. Compare the annual percentage rate (APR), which indicates the cost of credit on a yearly basis. Be aware that the advertised APR for home equity credit lines is based on interest alone. For a true comparison of credit costs, compare other charges, such as points and closing costs, which will add to the cost of your home equity loan. This is especially important if you are comparing a home equity credit line with a traditional installment (or second) mortgage, where the APR includes the total credit costs for the loan. In addition, ask about the type of interest rates available for the home equity plan. Most home equity credit lines have variable interest rates. These variable rates may offer lower monthly payments at first, but during the rest of the repayment period the payments may change and may be higher. Fixed interest rates, if available, may be slightly higher initially than variable rates, but fixed rates offer stable monthly payments over the life of the credit line. If you are considering a variable rate, check and compare the terms. Check the periodic cap, which is the limit on interest rate changes at one time. Also, check the lifetime cap, which is the limit on interest rate changes throughout the loan term. Ask the lender which index is used and how much and how often it can change. An index (such as the prime rate) is used by lenders to determine how much to raise or lower interest rates. Also, check the margin, which is an amount added to the index that determines the interest you are charged. In addition, inquire whether you can convert your variable rate loan to a fixed rate at some future time. Sometimes, lenders offer a temporarily discounted interest rate -- a rate that is unusually low and lasts only for an introductory period, such as six months. During this time, your monthly payments are lower too. After the introductory period ends, however, your rate (and payments) increase to the true market level (the index plus the margin). So, ask if the rate you are offered is "discounted," and if so, find out how the rate will be determined at the end of the discount period and how much larger your payments could be at that time. What are the upfront closing costs? When you take out a home equity line of credit, you pay for many of the same expenses as when you financed your original mortgage. These include items such as an application fee, title search, appraisal, attorneys' fees, and points (a percentage of the amount you borrow). These expenses can add substantially to the cost of your loan, especially if you ultimately borrow little from your credit line. You may want to negotiate with lenders to see if they will pay for some of these expenses. What are the continuing costs? In addition to upfront closing costs, some lenders require you to pay continuing fees throughout the life of the loan. These may include an annual membership or participation fee, which is due whether or not you use the account, and/or a transaction fee, which is charged each time you borrow money. These fees add to the overall cost of the loan. What are the repayment terms during the loan? As you pay back the loan, your payments may change if your credit line has a variable interest rate, even if you do not borrow more money from your account. Find out how often and how much your payments can change. You also will want to know whether you are paying back both principal and interest, or interest only. Even if you are paying back some principal, ask whether your monthly payments will cover the full amount borrowed or whether you will owe an additional payment of principal at the end of the loan. In addition, you may want to ask about penalties for late payments and under what conditions the lender can consider you in default and demand immediate full payment. What are the repayment terms at the end of the loan? Ask whether you might owe a large payment at the end of your loan term. If so, and you are not sure you will be able to afford the balloon payment, you may want to renegotiate your repayment terms. When you take out the loan, ask about the conditions for renewal of the plan or for refinancing the unpaid balance. Consider asking the lender to agree ahead of time and in writing to refinance any end-of-loan balance or extend your repayment time, if necessary. What safeguards are built into the loan? One of the best protections you have is the Federal Truth in Lending Act, which requires lenders to inform you about the terms and costs of the plan at the time you are given an application. Lenders must disclose the APR and payment terms and must inform you of charges to open or use the account, such as an appraisal, a credit report, or attorneys' fees. Lenders also must tell you about any variable-rate feature and give you a brochure describing the general features of home equity plans. The Truth in Lending Act also protects you from changes in the terms of the account (other than a variable-rate feature) before the plan is opened. If you decide not to enter into the plan because of a change in terms, all fees you paid earlier must be returned to you. Because your home is at risk when you open a home equity credit account, you have three days to cancel the transaction, for any reason. To cancel, you must inform the lender in writing. Following that, your credit line must be cancelled and all fees you have paid must be returned. Once your home equity plan is opened, if you pay as agreed, the lender, in most cases, may not terminate your plan, accelerate payment of your outstanding balance, or change the terms of your account. The lender may halt credit advances on your account during any period in which interest rates exceed the maximum rate cap in your agreement, if your contract permits this practice. FHA LoansPrint
The Federal Housing Administration (FHA) was established in 1934 to improve housing standards and conditions and to provide an adequate home financing system through insurance of mortgages. Families that would otherwise be excluded from the housing market were finally able to buy the homes of their dreams. In the more than 60 years since inception of the FHA, a great deal has changed and Americans are now arguably the best housed people in the world. FHA has contributed substantially to that achievement. Today, FHA is particularly important to minority and first-time homebuyers. With the National Homeownership Strategy in place since 1995, FHA has placed a great deal of emphasis on marketing and outreach to minorities and first-time homebuyers. In 1995, FHA piloted the Safe Neighborhood Action Plan (SNAP) in 14 urban communities to improve life in HUD-assisted project areas. With volunteers from the AmeriCorp Volunteer Service, the SNAP initiative is focused on eliminating drugs and crime in high-risk urban areas. SNAP has also provided after-school programs and other organized activities for project residents. FHA has also fostered Neighborhood Network Centers in rental projects to help community residents become more self-sufficient and employable. The Centers provide opportunities to assisted housing residents for learning computer job skills. Many Centers have tutors from local colleges and area businesses and operate with locally donated computer equipment. VA LoansPrint
More than 29 million veterans and service personnel are eligible for VA financing. Even though many veterans have already used their loan benefits, it may be possible for them to buy homes again with VA financing using remaining or restored loan entitlement. Recent VA guideline changes allow for VA loan amounts up to $417,000. These loans require a 100% down payment on any amount over $417,000. Before arranging for a new mortgage to finance a home purchase, veterans should consider some of the advantages of VA home loans. The most important consideration is there is no down payment is required in most cases. It offers the flexibility of negotiating interest rates with the lender. There is no monthly mortgage insurance premium to pay, but there are limitations on buyer's closing costs. VA loans offer thirty year loans with a choice of repayment plans:
For most loans for new houses, construction is inspected at appropriate stages to ensure compliance with the approved plans, and a 1-year warranty is required from the builder that the house is built in conformity with the approved plans and specifications. In those cases where the builder provides an acceptable 10-year warranty plan, only a final inspection may be required. Rual Housing LoansPrint
Rural Development's housing programs finance new or improved housing for low- to moderate-income families and individuals who wish to live in rural areas or rural cities and towns. The purpose is to provide financing with no downpayment and at favorable rates and terms. These loans are for the purchase, construction, rehabilitation, or relocation of a dwelling and related facilities. Housing Programs offers two types of home ownership loans: guaranteed and direct loans. Under the direct loan program, individuals or families receive a loan directly from USDA. Payments are based on income, and you must not be able to obtain a homeownership loan from a bank or other conventional sources. Guaranteed loans are available to qualifying applicants whose income is too high to qualify for a direct housing loan. These are loans made by other lenders, such as banks or credit unions, and are guaranteed by Rural Development. Direct Loan Program (Section 502) Most of the loans made under the Direct Loan Program are to families with income below 80% of the median income level in the communities where they live. Since RHS is able to make loans to those who will not qualify for a conventional loan, the RHS Direct Loan program enables many more people to buy homes than might otherwise be possible. Direct loans may be made for the purchase of an existing home or for new home construction. Loan Guarantee Program (Section 502) Under the terms of the program, an individual or family may borrow up to 100% of the appraised value of the home, which eliminates the need for a down payment. Since a common barrier to owning a home for many low-income people is the lack of funds to make a down payment, the availability of the loan guarantees from RHS makes the reality of owning a home available to a much larger percentage of Americans. Mutual Self-Help Housing Program (Section 523) Technical Assistance Grants and Site Loans are provided to nonprofit and local government organizations, which supervise groups of 5 to 12 enrollees in the Self-Help Program. Members of each group help work on each other's homes, moving in only when all the homes are completed. Once accepted into the Self-Help Housing Program, each individual enrollee generally applies for a Single-Family Housing Direct Loan (Section 502). Home Repair Loan and Grant Program (Section 504) Money may be provided, for example, to repair a leaking roof; to replace a wood stove with central heating; to construct a front-door ramp for someone using a wheelchair; or to replace an outhouse and pump with running water, a bathroom, and a waste disposal system. Homeowners 62 years and older are eligible for home improvement grants. Other low income families and individuals receive loans at a 1% interest rate directly from RHS. Commercial LoansPrint
Commercial real estate loans are available on all types of income producing and commercial properties, including: Shopping centers; Motels and apartments; Office buildings; Automobile dealerships; Health care facilities; Owner occupied buildings; Manufacturing facilities and more. Funding sources in our directory can provide:
Equity Partner ProgramPrint
This program is a collateral based program that offers borrowers short-term financing on real estate they currently own, or are in contract to own at some point in the future. The typical scenario will show the borrower in title to a property with significant, verifiable equity in the property. The borrower will usually consider this program because they are either not in a financially sound condition and would therefore not be able to secure financing in their name, or they are in a financially distressed situation and will potentially lose their home if financing does not become available quickly. In both cases the only tangible qualifying component for the borrower is the equity in their real estate. We will offer the traditional first lien financing which will place us ahead of all other creditors in the event of default. Since the nature of this program is short term, one to three years on an interest only basis, we will require that financially distressed participants complete a credit building evaluation and be placed on a credit restoration program until such time that they are in a position to be refinanced into a more traditional program. Each consideration will be presented with their associated business risks and their corresponding managed solutions. |
