When it comes to paying for a home, buyers today have an almost unlimited number of financing options from which to choose.
Here are some of the financing options at your disposal:
A conventional loan is an indebtedness or mortgage made between a lending institution and a borrower without a third party participant, such as VA or FHA. Most types of conventional loans are paid off in equal monthly payments spread over 15, 25, or 30 years. The interest rate stays the same for the life of the loan. Therefore the monthly principal and interest payment also remains constant. Terms of a conventional loan vary among lenders, but basically a loan can be obtained with as little as 5% down payment. When the down payment is less than 20% it is, in most cases, necessary for the loan to have private mortgage insurance to protect the lender. Example: The buyer purchases a $300,000 home. Typically, the lender will require a down payment of $60,000 or 20% of the purchase price. Assuming 7% market rate; $240,000 loan amount; 30 years, $1,597.92 monthly payment. With private mortgage insurance, however, the lender would lower the down payment requirement to 5%, or $15,000 which increases the monthly payment. Lenders refer to private mortgage insurance as “PMI”. Advantage: Fixed rate financing is straight forward and easy to understand. Using private mortgage insurance normally adds up-front costs but new PMI plans allow premiums to be financed or paid monthly.
The VA does not lend money; VA guarantees a portion of the loan. Thus the lenders who originate the loans feel comfortable with their risk. Qualified veterans can take out loans up to the current limits with no down payment. VA-guaranteed loans can be combined with second mortgages and are assumable upon qualifying by any future buyer. Example: The veteran agrees to buy a home for $235,000. With no down payment, the loan amount is $239,700 (includes a minimum 2% VA Funding Fee) for 30 years, and say the VA interest rate is 7%, plus “points”. The monthly payment for the $239,700 loan will be $1,595.92. Advantage: No down payment is necessary.
FHA does not lend money; FHA insures loans against default. This makes lenders willing to finance home purchases on favorable terms. With an FHA loan, the down payment can be as low as 2.25% of the purchase price. Points (prepaid interest) may be charged by the lender. Purchasers can choose different rate and point combinations. FHA charges an up-front Mortgage Insurance Premium (M.I.P.) fee. (There is no “up-front” premium on condos.) FHA charges a monthly M.I.P. of .5%. Example: The buyer of a $200,000 home would make a down payment of approximately $4,500, resulting in a base loan amount of $195,500 and a total loan amount of $198,432 including the financed M.I.P. At a rate of 7%, the monthly principal and interest would be $1,321.37 plus $81.46 for the monthly M.I.P., for an adjusted payment of $1,402.83. Advantage: Low down payment and low interest rates. Fixed or adjustable rates are available. Especially designed for first-time home buyers.
Many lenders today are willing to assist buyers with the closing costs. In exchange for paying a higher interest rate, a lender may forgo its normal charges plus pay other closing costs on behalf of the buyer. These plans vary widely, so study them carefully. The advantage is that less cash is required to close. This is offset by higher monthly payments due to the higher interest rates.
A balloon mortgage is typically a loan which must be paid off after a certain period. The advantage they offer is an interest rate that is lower than a mortgage that is made for 30 years. Balloons may range in duration from 5-to-7 or 10 years. If the 30-year fixed rate quote was 7%, the 7-year balloon may be as low as 6.5%, providing lower payments for the 7-year period. One point to consider, however, is that the investor typically does not guarantee to extend the loan past the balloon date even though most balloon plans contain provisions for optional refinancing. Long & Foster Realtors is not a mortgage lender. These examples are for illustration only and were provided by Prosperity Mortgage Company, a Long & Foster affiliated company. The exact terms of any financing are subject to the requirements of the investors in each specific case. Choosing the “best” method depends on the circumstances of the individual. I will be happy to fully explain the home buyer’s options for financing.
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