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 A wide selection of
mortgages is available to you nowadays. Your challenge is to select
the loan terms that are most favorable to your situation.
If, for example, you anticipate
living in your home for many years, the interest rate may be the main
factor for you. If you expect to keep the house for only a short
period of time, the closing costs may be more important to you.
If you want to have ended any
mortgage debt by the time you are facing your children's college bills
or your own retirement, you may wish to consider a shorter term loan
such as a 15-year fixed-rate mortgage. If your own retirement is
years away, you may be less inclined toward a shorter-term loan,
preferring to extend payments over a longer period of time through
taking on a 30-year mortgage loan.
How important to you is the
certainty of a fixed mortgage payment each month? If you want to make
sure your mortgage payment remains the same each month, then you'll
want to focus on various fixed-rate loans. If you are
comfortable with periodic changes to your mortgage interest rate, then
you may be inclined to consider adjustable-rate mortgages.
Fixed-Rate
Mortgage Loans
The interest rate may be your
main consideration if you expect to stay in your house for a long
time. With a fixed-rate mortgage, you can be sure that your interest
rate will stay the same for the entire life of your loan. Fixed-rate
mortgages are available in a variety of repayment terms, with 15, 20,
and 30 years the most common.
30-Year
Fixed-Rate Mortgage Loan
The easiest fixed-rate loan to
qualify for, the 30-year mortgage gives you an excellent opportunity
to keep your mortgage payments reasonable by making monthly payments
over a long period of time. This mortgage loan may be ideal if you
plan to remain in your home for years and wish to keep your housing
expense low and use any extra cash for other purposes. This loan also
provides maximum interest deduction for tax purposes.
20-Year
Fixed-Rate Mortgage Loan
The 20-year mortgage gives you
the opportunity to own your home free of debt much sooner than the
30-year mortgage loan. It often offers a lower interest rate compared
to a 30-year loan. This mortgage amortizes principal and interest over
a 20-year period, 10 years less than the traditional 30-year mortgage.
This may save you a considerable amount of total interest paid over
the life of the loan.
15-Year
Fixed-Rate Mortgage Loan
The 15-year mortgage offers a
lower interest rate than a 30-year or 20-year mortgage. Such a
shorter-term mortgage will save you a significant amount of interest
over the life of the loan. By paying off the mortgage more quickly,
you also build up equity in your home sooner. A 15-year mortgage can
let you own your home clear of debt earlier, which may be important if
you are approaching retirement or have other large expenses to cover
such as financing your children's education. However, the monthly
payments you make on a 15-year mortgage will cost you more than those
you would make on a 30-year or a 20-year mortgage loan for the same
total mortgage amount.
Adjustable-Rate
Loans
With an adjustable-rate mortgage
(ARM), the interest rate you pay is adjusted from time to time to keep
it in line with changing market rates. This means that when interest
rates go up, your monthly mortgage payments may go up as well. On the
other hand, when interest rates go down, your monthly mortgage
payments may also go down.
ARMs are attractive because they
may initially offer a lower interest rate than fixed-rate mortgages.
Since the monthly payments on an ARM start out lower than those of a
fixed-rate mortgage of the same amount, you can qualify for a larger
loan. The chief drawback, of course, is that your monthly payments may
increase when interest rates go up.
You may want to consider an ARM
if you are confident your income will rise enough in the coming years
to comfortably handle any increase in payments. You may also want to
consider an ARM if you plan to move in a few years and therefore are
not so concerned about possible interest rate increases. You may also
want to consider an ARM if you need a lower initial rate to afford to
buy the home you want.
How much your payments can
increase will depend on the terms of your mortgage. Before applying
for an ARM, be sure you know how high your monthly payments could go
-- the so-called "worst-case scenario." An ARM has two
"caps" or limits on how large an interest rate increase is
permitted: One cap sets the most that your interest rate can go up
during each adjustment period and the other cap sets the maximum total
amount of all interest adjustments over the life of the loan.
A typical ARM that adjusts
annually, for example, may cap the yearly interest rate increases at 2
percent, meaning that the adjusted interest rate can never be more
than 2 percent higher than the previous year. And such an ARM may have
a lifetime rate cap of 6 percent, meaning that the highest adjusted
interest rate you can ever be required to pay is no more than 6
percent above the original rate. So, if you are looking at an ARM with
a current introductory rate of 5 percent, a lifetime cap of 6 percent
tells you that the highest interest rate you could ever pay would be
11 percent. Only you can determine if you would feel comfortable
paying this interest rate sometime in the future.
Some ARMs offer a conversion
feature, which allows you to convert from an adjustable-rate to a
fixed-rate loan at only certain times during the life of your loan.
Ask your lender about this feature when researching ARMs.
One important thing to know when
comparing ARMs is that the interest rate changes on an ARM are always
tied to a financial index. A financial index is a published number or
percentage, such as the average interest rate or yield on Treasury
bills. The most common types of ARMs are listed below.
CD-Indexed
ARMs (Certificate of Deposit)
These ARMs adjust to a
Certificate of Deposit (CD) index. After an initial six-month period,
the initial rate and payments adjust every six months. These ARMs
typically come with a per-adjustment cap of 1 percent and a lifetime
rate cap of 6 percent. Some of these ARMs offer an option to convert
to a fixed-rate mortgage at specified interest adjustment dates.
Treasury-Indexed
ARMs
These ARMs are indexed to the
weekly average yield of U.S. Treasury securities adjusted to a
constant maturity of six months, one year, or three years. Depending
on which three of these security index schedules you choose, the
interest rate on your ARM will adjust once every six months, once each
year, or once every three years. Per-adjustment caps and lifetime rate
caps vary, depending on the type of Treasury-indexed ARM you choose.
Some of these ARMs offer an option to convert to a fixed-rate mortgage
at specified interest adjustment dates.
Cost
of Funds-Indexed ARMs
Cost of Funds-indexed (COFi)
ARMs are indexed to the actual costs that a particular group of
institutions pays to borrow money. The most popular index of this type
is the COFi for the 11th Federal Home Loan Bank District. COFi ARMs
can adjust every month, every six months, or every year and the
per-adjustment caps and lifetime rate caps vary, depending on the type
of COFi ARM you choose. Some of these ARMs offer an option to convert
to a fixed-rate mortgage at specified interest adjustment dates.
LIBOR-Based
ARMs
The London Interbank Offered
Rate (LIBOR) is the interest rate at which international banks lend
and borrow funds in the London interbank market. You may choose an ARM
that adjusts to the LIBOR every six months. This six-month LIBOR ARM
typically has a per-adjustment period cap of 1 percent and is offered
with either a 5 percent or a 6 percent lifetime rate cap. It can offer
the option to convert to a fixed-rate mortgage.
Initial
Fixed-Period ARMs
You may wish to look into a
special type of ARM that doesn't adjust your interest rate until
several years after you take out the loan. These loans offer you
several years of fixed payments before there is an interest rate
change. You can get a three-, five-, seven-, or ten-year fixed-period
ARM. This means your interest rate would be the same for the first
three, five, seven, or ten years and then, at the end of your chosen
fixed-rate period, your interest rate would adjust every year. This
type of ARM protects you against rapid interest rate increases in the
early years of your loan.
Two-Step
Mortgage®
The Two-Step is a special type
of ARM because it adjusts only once - either at seven years or at five
years. After that initial adjustment, the mortgage maintains a fixed
rate for the remaining 23 or 25 years of a 30-year mortgage repayment
term. For example, if your initial interest rate were 8 percent, you
would pay that rate for the first seven (or five) years. Then, for the
remaining 23 (or 25) years, you would pay an interest rate that is
indexed to the value of the 10-year U.S. Treasury security on the
adjustment date. This new rate can never be more than 6 percentage
points higher than your old rate. There are no limits on how much
lower the adjusted interest rate can be.
The Two-Step, then, provides the
benefit of initial low rates with the stability of longer term
financing. If you continue living in your home beyond the loan
adjustment date, the Two-Step offers the assurance of a fixed rate for
the remaining term of the loan. At the adjustment date, there is no
additional refinancing cost, no forms to complete, and no
re-qualification necessary.
Government
Loans
The Federal Housing
Administration (FHA), the U.S. Department of Veterans Affairs (VA),
and the Rural Housing Services (RHS) are three agencies that offer
government-insured loans. To obtain these loans, you apply through a
lender that is approved to handle them. All require that the
properties being purchased meet certain minimum standards.
Here is some more information
about various government loan programs:
FHA
Loans
With FHA insurance, you can
purchase a home with a very low down payment (from 3 percent to 5
percent of the FHA appraisal value or the purchase price, whichever is
lower). FHA mortgages have a maximum loan limit that varies depending
on the average cost of housing in a given region.
VA
Loans
The VA guarantee allows
qualified veterans to buy a house costing up to $203,000 with no down
payment. Moreover, the qualification guidelines for VA loans are more
flexible than those for either FHA or conventional loans. If you are a
qualified veteran, this can be an attractive mortgage program. To
determine whether you are eligible, check with your nearest VA
regional office.
RHS
Loans
The Rural Housing Service, a
branch of the U.S. Department of Agriculture, offers low-interest-rate
homeownership loans with no down payment requirements to low- and
moderate-income persons who live in rural areas or small towns.
State
and Local Loan Programs
A number of states sponsor
programs to help first-time home buyers qualify for mortgages. Local
housing agencies also offer attractive loan terms to eligible home
buyers in some areas. These programs typically offer very attractive
loan terms (low down payment or low interest rate) to first-time home
buyers who meet specified income guidelines. Some state and local
programs may also offer down payment and closing cost assistance.
Balloon
Loans
Balloon loans offer lower
interest rates for shorter term financing, usually five, seven, or ten
years. At the end of this term, they require refinancing or paying off
the outstanding balance with a lump-sum payment. Balloon mortgages may
be suitable if you plan to sell or refinance your home within a few
years and want a fixed, low monthly payment. The advantage they offer
is an interest rate that is lower than that of a fully amortizing
fixed-rate mortgage. For example, your initial interest rate may be
7.5 percent, and you would pay that rate for the first five, seven, or
ten years (depending on the term of your balloon loan). Then, your
entire outstanding loan balance would be due to the lender or you
might have to pay a fee to refinance your loan at the prevailing
interest rate. However, ask about all the conditions for a refinance
option at the end of the balloon term. With some balloon mortgages,
the lender doesn’t guarantee to extend the loan past the balloon
date. If you don’t feel you will be able to meet all the
refinance conditions or think the balloon term may be up before you
are ready to move, this type of loan may not be appropriate for you.
Affordable
Housing Loans
For households of modest means,
the greatest barriers to homeownership are coming up with the down
payment and closing costs and managing housing expenses that often are
higher than those of the qualifying guidelines allowed in traditional
mortgage lending.
Fannie Mae, in cooperation with
housing providers, offers low- and moderate-income households mortgage
loan options that help overcome common barriers to homeownership.
These mortgage loans offer flexible underwriting ratios, allowing you
to use more of your monthly income toward housing costs than other
mortgage loans allow. Also, these loans require less cash at closing
and for a down payment, making it easier to get into a home sooner.
Fannie
Mae's Community Home Buyer’s Program®
Fannie Mae's Community Home
Buyer’s Program provides financing for low- and moderate-income home
buyers who represent a good credit risk but who might not qualify for
home financing based on traditional lending criteria. Generally, if
your household income is no more than 100 percent of your area median
income, you are eligible for this type of loan. However, if the home
you buy is in certain geographical areas, there is no income limit to
be eligible for this program.
The Community Home Buyer’s
Program builds flexibility into the lender’s standard lending
requirements. This increases your purchasing power and decreases the
total amount of cash needed to purchase a home.
The same flexibility also allows
you to build a nontraditional credit history. For example, if you do
not have a credit history that is reflected in a credit report, your
demonstrated willingness and ability to repay on a timely basis may be
documented by verifications from utility companies, current and
previous landlords, and other sources of credit or service where you
were, or still are, required to meet a regular financial obligation.
3/2
Option®
An important feature of the
Community Home Buyer’s Program is the 3/2 Option. The 3/2 Option
makes it easier for you to accumulate the minimum down payment
necessary to obtain a mortgage. By taking advantage of the 3/2 Option,
you can buy a home with a 3 percent down payment of your own funds
instead of the 5 percent down payment usually required by lenders. The
remaining 2 percent of the down payment can be supplied by a relative
as a gift, or it can come from a nonprofit organization or a state,
federal, or local government program in the form of a grant. To be
eligible for the 3/2 Option, your household income, in most cases, may
not exceed 100 percent of your area median income.
Fannie
97®
The Fannie 97 mortgage lets you
buy a house for as little as a 3 percent down payment. This type
of mortgage may be ideal for the borrower who has enough income to
handle the monthly mortgage payments but has difficulty accumulating
cash for the down payment. The mortgage is available only to
home buyers earning up to 100 percent of the area median income, with
exceptions for certain high-cost areas and where the loan is made in
connection with a federal, state, or local government program, where
income limits are legislatively imposed. The mortgage is
available with either a 25-year or 30-year term. With Fannie 97,
closing costs may be paid by gifts from family members or by grants or
loans from nonprofit organizations or government agencies.
FannieNeighbors®
FannieNeighbors provides added
flexibility to the CHBP by removing the income limit if you are
purchasing a home within a designated central city or eligible census
tract.
A central city is defined by the U.S. Office of Management &
Budget (OMB) to be the largest city in a metropolitan area and other
additional cities that have populations of at least 250,000 or meet
certain criteria for employed residents living in a city. A census
tract is defined as an area with a population that is at least 50
percent minority or an area that has a median income at or below 80
percent of the median family income for the Metropolitan Statistical
Area (MSA).
However, the income limit is not removed if you are using
FannieNeighbors with the 3/2 Option or Fannie 97.
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