Home Financing Options

Finding the right home for you and your family is just the first step. Some fortunate few are able to pay for their house with cash, but many or most will use some sort of home financing option. Within this section, you will find everything you need in order to pay for your biggest investment.

Fixed-Rate

A fixed-rate mortgage comes with an interest rate that remains the same for the life of the loan. Industry standards state that the life or term of a mortgage is 30 years, but 15, 20 and 40-year term loans are also available.

Shorter term loans come with cheaper interest rates. A 15-year mortgage’s interest rate is typically one-quarter to one-half percent lower than a 30-year mortgage. Both the cheaper rate and the shorter term mean you’ll also pay less over the life of the loan, but the monthly payments are generally higher for the shorter term loans than for the long.

A long-term loan with smaller monthly payments can be easier to budget, but if you have a stable salary that allows you to afford the larger monthly outlay, the shorter term loan could be to your advantage. You can also accept lower monthly payments with a longer term mortgage and then pay extra payments to principle when your budget allows for it.

Adjustable-Rate Mortgages

Adjustable-rate mortgages or ARMs come with interest rates that adjust up or down, depending upon current economic trends. An ARM’s rate is based on a money market index. The one-year U.S. Treasury bill is commonly used because its yield is similar to the 30-year U.S. Treasury bill used to set rates on 30-year fixed mortgages. ARMs might also be tied to other indexes, including certificates of deposit (CDs) or the London Inter-Bank Offer Rate (LIBOR) rates, among other regularly published indexes.

To come up with the ARM rate, the lender will add a “margin,” usually two to four percentage points, to the index. Initially, the ARM rate is lower than the fixed rate, from about a quarter-point to two points or more, depending upon the economy. The date when the first adjustment occurs and how often the rate adjusts, depend upon the terms of the loan. After the first adjustment occurs, subsequent adjustments can occur every six months, once a year, or during larger periods. The adjustment period is disclosed in the loan.

ARMs generally have limits or “caps” on how high it can adjust during each adjustment period as well as over the life of the loan. The caps protect you from drastic market changes, but ARMs don’t offer the stability of a fixed rate loan.

ARMs could also be a good choice for someone who knows his or her income will rise and at least keep pace with the loan rate’s periodic adjustment cap. If you plan to move in a few years and are not concerned about the possibility of a higher rate, an ARM also could be a good choice.

Most lenders are now requiring that you use an escrow account, and they will place some of your monthly payment into an account to pay for insurance, taxes, home owner’s associations, etc.

Conventional Mortgages

Before there were other options, the only type of mortgage loan issued was conventional. The lender was typically a local bank, a savings and loan, or a credit union. Today, different financial providers can offer a conventional loan for either a 15- or a 30-year term, under $417,000. Jumbo loans for more than $417,000 usually carry higher interest rates.

FHA Loans

The Federal Housing Administration (FHA), which is part of the HUD, offers various mortgage loan programs. FHA loans have lower down payments and are easier to qualify than conventional loans. FHA loans cannot exceed the statutory limit.

FHA loans are usually easier to qualify, even if you have less than perfect credit because FHA insures your mortgage, enticing other lenders to loan you money. The loans usually carry competitive insurance rates because they are protected by the Federal Government and the down payment is only 3.5 percent. You can learn more at www.hud.gov/buying/index.cfm.

Veterans Administration (VA)

VA loans are partially guaranteed through the Veterans Administration. The VA recently expanded its qualifying criteria to include more veterans, so all vets should contact the VA for the most current information. va.gov