Which Product is Right for Me?
There are quite a few different loan products available in today’s market for the home buyer. The problem is understanding what is available and whether it’s a good fit for you.
The following is a listing of basic products that most lenders have available for their customers.
· Conventional Fixed Loans
· Conventional ARM Loans
· Government Loans
· New Construction Loans
· Rehab Loans
· 2nd Mortgages
Conventional Fixed Loans: this product offers terms from 10 years to 40 years with an interest rate that remains fixed for the entire life of the mortgage. You may need a minimum of 5% down. The seller can help by contributing towards your closing costs and prepaid items but that amount is limited by the down payment you make.
Conventional ARM Loans: this product offers terms usually for 30 years. The interest rate can be fixed for one, three, five, seven or ten years. Following the fixed period for the interest rate, the rate will then adjust up or down a specified percentage amount and change every 6 months to as much as every three years. Normally the adjustment is annual by no more than 2% and no more than 6% adjustment over the life of the loan. ARM stands for adjustable rate mortgage. This mortgage is tied to an index that changes with the economy including the LIBOR, Prime Rate, Treasury and CD's.
Government Loans: this category includes the United States Department of Agriculture’s Rural Home/Guarantee loan program, FHA (Federal Housing Administration) and VA (Veteran’s Administration) loan products. Most of these products are only available for a term of 30 years and are fixed for the life of the loan. There are some exceptions. FHA and VA also offer a 1 year ARM product and in some areas FHA offers a 3/1 ARM and a 5/1 ARM. This means the rate is fixed for 3 years then turns into a one year ARM which will adjust annually. The 5/1 ARM will remain fixed for 5 years then turn into a one year ARM which will adjust annually. FHA requires a 3.5% down payment and up front mortgage insurance premium, paid at closing or added to the loan, as well as a monthly private mortgage insurance premium. VA offers 100% financing with a funding fee due to the VA at the closing. This fee is paid in lieu of any private mortgage insurance. It is a one time fee paid in cash at closing or financed with the mortgage over the term of the loan. The Rural Home product also offers 100% financing with specific income and property guidelines. This program has a guarantee fee paid at closing or financed into the loan and a very small monthly private mortgage insurance requirement.
New Construction Loans: this loan is used for stick built construction and modular homes that have been built in factories and trucked to the housing site. The rate is usually higher than the current conventional rate because it involves some amount of risk to the lender. The term normally runs anywhere from six months to 12 months during the construction phase after which time a certificate of occupancy is provided by the local building official and the construction note becomes a permanent mortgage. During the construction phase the bank sends a construction inspector to view the progress and money is released as work is completed on site.
Rehab Loans: this type of mortgage is used on existing housing that is in need of major or minor rehabilitation. The product used most is the FHA 203k rehab loan. The buyer actually gets a loan to purchase a house and to rehab it all rolled into one loan program. It is different from all other loans because the money is used for a purchase and rehab and because it involves more risk the rate is slightly higher. The homeowner or a contractor rehabs the property and money is released as specific jobs are completed. The time frame for completion runs from six months to one year.
2nd Mortgages: this product usually is used to access any equity in a home. A borrower can choose to get a home equity line of credit that is available for withdrawal through a checking account set up for this loan product. As money is needed, the home owner writes a check . The mortgage payment is usually interest only for a specified amount of time then the payment turns into a more traditional installment loan with principal and interest due until the loan is paid in full. The interest rate is based on the prime rate. Another type of 2nd mortgage product is a fixed home equity loan. Equity in a house is taken out and the home owner receives the entire amount to use as needed. Each month the homeowner repays the second mortgage in the form of a principal and interest payment set for a specific term until the loan is paid in full. The rate is usually fixed.
Borrowers may get frustrated shopping around for a loan product and interest rate. But the effort put into this first step will pay off as you will be informed as to the products available to you. Your lender will run a credit report and verify income and assets to help guide you to the product that is best for you.
If you are a first time buyer, be sure to ask for any program that may benefit you. Usually the rates are lower than the current market rate with the first time homebuyer programs. And, you may find other benefits such as down payment assistance. Take all the time you need to make an informed decision. This will be one decision you will have to live with for many years so shop around for the product that best suits you.