|
Conventional Mortgages
Conventional mortgages are not insured or subsidized by the
government. Most lenders require a down payment of at least 20% on a
conventional loan, but offer them with lower down payments if the buyer
purchases private mortgage insurance (PMI). PMI protects the lender if
the home owner defaults on the mortgage.
Conventional mortgage loans are generally fully amortizing. This means
that the regular principal and interest payment will pay off the loan in
the number of payments stipulated on the note.
Mortgages are described by the length of time for repayment and whether
the interest rate is fixed or adjustable. Most conventional mortgages
have time frames of 15 to 30 years and may be either fixed-rate or
adjustable. While most mortgages require monthly payments of principal
and interest, some offer bi-weekly payment options.
Home buyers who can afford the higher monthly payment sometimes prefer a
15-year conventional mortgage over a 30-year mortgage. Interest rates on
15-year mortgages usually are a little lower than 30-year rates. In
addition, a home buyer financing a home purchase with a 15-year mortgage
will repay principal much faster and will pay far less interest over the
life of the loan.
The 30-Year
Fixed Rate Mortgage
With a 30-year fixed rate mortgage, the homebuyer pays off the principal
and interest on the loan in 360 equal monthly payments. The monthly
payment for principal and interest remains the same during the full loan
period.
The 15-Year
Fixed Rate Mortgage
The 15-year fixed-rate mortgage is paid off in 180 equal monthly
payments over a 15-year-period. A 15-year mortgage typically requires
larger monthly payments than a 30-year loan and allows an individual to
pay off a mortgage in half the time as well as save on interest. For
example, monthly principal and interest payments on a $100,000 mortgage
at 7.25 percent interest are $682 when repaid over 30 years and $913
when repaid over 15 years. However, the buyer can save thousands of
dollars on interest charges by using the 15-year mortgage. Fifteen-year
mortgages typically carry interest rates a little lower than those for
30-year loans.
Adjustable Rate Mortgages (ARMs)
With a fixed-rate mortgage, the interest rate stays constant during the
life of the loan. But with an ARM, the interest rate changes
periodically, usually in relation to an index such as the national
average mortgage rate or the Treasury Bill rate. Payments can go up or
down accordingly.
Initial interest rates for ARMs are generally lower those for fixed-rate
mortgages. This makes the ARM easier on your payments at first than a
fixed-rate mortgage for the same amount. It also may help you qualify
for a larger loan because lenders sometimes make this decision on the
basis of your current income and the first year's payments. Moreover, an
ARM could be less expensive over a period of time than a fixed-rate
mortgage -- for example if interest rates remain steady or move down.
Against these advantages, you have to discern the risk that an increase
in interest rates would lead to higher monthly payments in the future.
It's a trade-off: you get a lower rate with an ARM in exchange for
assuming more risk.
Here Are Some Things to Consider
With An ARM:
- Is your
income likely to rise enough to cover higher mortgage payments
if interest rates go up?
- Will you be
taking on other sizable debts, such as a car loan or school
tuition, in the near future?
How long do
you plan to own this home? (If you plan on selling soon, rising
interest rates may not pose the problem they would if you plan
to own the house for a long time.)-
Can your
payments increase even if interest rates generally do not
increase?
- What index
is used to adjust the mortgage rate? Try to obtain a table
showing movements in the index over the past 10 years to see how
your mortgage payments could change.
- How often
will the mortgage be adjusted? One year? Three years? The longer
the adjustment period, the better you will be able to plan your
future expenses.
- What is the
initial mortgage rate? Does it include a special discount? Is
there an increase in your monthly payments when your rate is
adjusted for the first time?
- What is the
margin on the interest rate? The margin is the amount that the
lender adds to the index rate to calculate your mortgage rate.
For instance, if the index rate is 6 percent and the margin is 2
percent, your overall interest rate would be 8 percent.
- What limits
or caps have been placed on the periodic adjustments? One of the
most important items to discuss with your lender is the maximum
amount that your rate can increase in any single adjustment
period and over the life of the mortgage. Find out the "worst
case" scenario in the event of a sharp increase in your index
rate.
- Can
negative amortization occur? When negative amortization occurs,
the monthly payments do not cover the full amount of principal
and interest, so the amount of principal that you owe actually
increases. Find out any limits there are on negative
amortization.
- Does the
mortgage have a convertible feature? If so, is there a cost to
convert? This option allows you to change your ARM to a
fixed-rate loan at some designated time in the future.
- Is there a
prepayment penalty if you sell your house and pay off your loan
early?
Other Types of
Conventional Mortgages:
Balloon mortgages are a
non-amortizing loan. In other words, the periodic principal and interest
payments do not pay off the loan within the term. Some balloon mortgages
may have a principal and interest payment that is calculated as if it
would pay off the loan in 30 years, but the loan comes due in 5 or 7
years. Some lenders offer terms for renewal of the loan at the balloon
date if certain conditions, such as a history of timely payment, are
met. Some loans may contain provisions to be rewritten as a fixed- or
adjustable-rate amortizing loans with the monthly principal and interest
payment based on the balance remaining on the balloon payment date.
Bi-weekly mortgages
provide a way for paying off a mortgage
more quickly. With a bi-weekly mortgage, the borrower makes half the
regular monthly payment every two weeks. Because there are 26 two-week
periods in the year, the borrower makes the equivalent of 13 monthly
payments each year. This allows borrowers to complete payment on a
30-year mortgage within 16 to 22 years. The lower the interest rate, the
longer the term of the mortgage required for pay-off. To reduce the
paperwork associated with the extra payments, lenders typically require
that payments be deducted automatically from a borrower's checking
account. Bi-weekly payments may be used with either 30-year or 15-year
mortgages.
Some builders
provide concessions to buy down interest rates for one to three years or
for the term of the mortgage to help their buyers qualify for mortgages
during periods of especially high interest rates. This allows lenders to
maintain the necessary yield on the mortgage.
Shared equity loans treat the
purchase of a home as an investment that can be split between a resident
owner and an investment owner. The investment owner contributes a share
of the down payment, the monthly payments, or both, and proportionately
shares in the ownership of the home. At resale, the borrower and the
investor split the proceeds after repayment of the balance of the
mortgage. Both buyers may also share the tax benefits, but the type and
amount of tax deduction would depend on the type of agreement. Many
lenders limit this kind of loan to immediate family members.
FHA
Mortgages
The Federal
Housing Administration (FHA) operates several low down payment mortgage
insurance programs that homebuyers can use to purchase a home with a
down payment of 3 percent or less of the cost of the home. The most
commonly used FHA program is the 203(b) program which provides for
down payment assistance on one-family to four-family homes. The
maximum loan amount for a one-family home varies from $67,500 to
$152,362 depending on local median prices.
FHA loans are available from most of the same lenders who offer
conventional loans. Your loan officer can provide more details about
FHA-insured mortgages and the maximum loan amount in the area you are
looking.
VA Mortgages
If you are a veteran or active duty military
personnel, you might be able to obtain a mortgage guaranteed by the
Department of Veterans Affairs (VA). VA-guaranteed loans require little
or no down payment.
|
