When it comes to paying for a home, don’t be intimidated by the word “mortgage”.
A mortgage is simply a loan made to help you finance a home. It indicates that a
specific amount of money will be loaned at a specific interest rate for a specific
period of time (the term of the loan). In addition, you agree to make timely payments
throughout the life of the loan.
Here are the main mortgage options ones you should know about:
Conventional Mortgage
A conventional mortgage is a loan to purchase property made between a lending institution
and a borrower without a third-party participant, such as the FHA or VA. Most types
of conventional loans are paid off over 15, 25, or 30 years.
Terms of a conventional loan vary among lenders, but basically a loan can be obtained
even without a down payment. When the down payment is less than 20%, it is often
necessary for the loan to have private mortgage insurance (PMI) to protect the lender.
Private mortgage insurance (PMI) is insurance written by a private company that
protects the lender from losses in the event the borrower defaults on the mortgage.
Borrowers are required to pay the premium for private mortgage insurance. Private
mortgage insurance limits a lender's exposure to financial loss resulting from loan
default.
Conventional mortgages can be conforming or non-conforming. The conforming loan
limit, for 2006 is set at $417,000 for single-family homes ($625,500 in Alaska and
Hawaii). Mortgages larger than this amount, or that have other features that put
them outside Fannie Mae and Freddie Mac criteria, are called non-conforming or jumbo
loans.
In addition, conventional mortgages can have a fixed rate or adjustable rate.
Fixed-Rate Mortgages
Fixed-rate mortgages give you the security of knowing your monthly principal and
interest payment will not change over the life of the loan. This type of conventional
mortgage also protects you from rising interest rates. No matter how high market
interest rates go, your mortgage rate remains the same. Prosperity Mortgage offers
a variety of fixed-rate products, with loan terms ranging from 10 to 30 years. Fixed-rate
mortgages are best for people who:
- Prefer regular payments with no surprises
- Are on limited or fixed incomes
- Plan to stay in their homes a long time
- Are buying a home at a time when interest rates are comparatively low
Adjustable Rate Mortgages
An adjustable-rate mortgage (ARM) has an interest rate that is fixed for the first
one to 10 years and then adjusts periodically based on financial market conditions.
During the initial fixed period, an ARM has a lower interest rate than a comparable
fixed-rate mortgage, so you’ll save on your monthly payments during the early years
of your loan term. Because this type of conventional mortgage offers lower upfront
monthly payments, it can help you:
- Buy a more expensive home. Because your maximum loan amount is based on the initial
monthly payments, you may be able to borrow more.
- Manage your cash flow in a high-rate environment. If you are buying a home at a
time when interest rates are comparatively high, an ARM can help you avoid making
high monthly payments right away.
- Plan for future income growth. An ARM can help you keep your payments low while
your income increases during the loan’s fixed period.
- Potentially improve your credit standing. The lower initial rate can make your payments
easier to manage, helping you improve your credit and expand your financing opportunities
if you make timely payments on your mortgage loan and other credit obligations.
- Save money if you expect to move or refinance. If you plan to move or refinance
before the end of the loan’s initial fixed period, you can take advantage of an
ARM’s lower payments without worrying about future rate increases.
After the initial fixed-rate period, the remainder of the loan term is divided into
adjustment periods of one year or six months, depending on the ARM product you choose.
At the end of each adjustment period, the interest rate may change based on prevailing
market conditions.
VA Loan
If you or your spouse is a qualified veteran, you can apply for a VA loan guaranteed
by the Department of Veteran Affairs. Under this program, eligible veterans can
receive a mortgage loan up to $417,000 with no down payment. Higher loan balances
may require a down payment.
FHA Loan
With an FHA loan, the Federal Housing Authority insures federally qualified lenders
against any default payments by the borrower. While the down payment can be as low
as 2.25% of the purchase price, the FHA charges the borrower an up-front mortgage
insurance premium (MIP) fee. Prepaid interest, called points, may also be charged
by the lender.
Financed Closing Costs
Many lenders today are willing to assist buyers with closing costs. In exchange
for paying a slightly higher interest rate, a lender may build into the mortgage
its normal charges plus pay other closing costs up to a specified amount. These
plans vary widely, so study them carefully.
Balloon Mortgage
A balloon mortgage is a loan that offers a low interest rate for a set period of
time, typically 5, 7, or 10 years. At the end of that time period, the balance is
due in full to the lender or refinanced by the borrower.
For more information on mortgages, visit Prosperity Mortgage.