Money Matters

Mortgage Types

Helping Families Finance Their Home

Now more than ever, homebuyers need to make smart decisions how to finance their next Maryland, Northern Virginia or Washington D.C. home. This article is provided to help you walk through the maze of mortgage products available on the market today. If at anytime you feel overwhelmed by this information, the Sold by Sisler Team is here to take the mystery out of the different types of loans available today. Contact us today for a complete homebuying assessment.

Conventional and Government Mortgage Loans

So which loan program is right for you and your homebuying situation? This article will help you determine which loan product best fits your financial needs. Of course, when we meet to perform a complete homebuying analysis, we will review all your mortgage options as well.

All mortgage loans other than an FHA, VA or an RHS loans are called conventional loans.

FHA Loans

The Federal Housing Administration (FHA), which is part of the U.S. Dept. of Housing and Urban Development (HUD), administers various mortgage loan programs. FHA loans have lower down payment requirements and are easier to qualify than conventional loans. FHA loans cannot exceed the statutory limit for your area. Because the statutory limit varies from location to location, please contact us to determine what the maximum FHA loan amount is for the greater Northern Virginia, D.C. or Maryland areas.

VA Loans

VA loans are guaranteed by U.S. Dept. of Veterans Affairs. The guaranty allows veterans and service persons to obtain home loans with favorable loan terms, usually without a down payment. In addition, it is easier to qualify for a VA loan than a conventional loan. Lenders generally limit the maximum VA loan to $203,000. The U.S. Department of Veterans Affairs does not make loans, it guarantees loans made by lenders. VA determines your eligibility and, if you are qualified, VA will issue you a certificate of eligibility to be used in applying for a VA loan.

VA-guaranteed loans are obtained by making application to private lending institutions. If you are interesting in obtaining a VA-guaranteed loan, contact us we will help with the process

For more information on loans from the Veterans Administration, we recommend you request pamphlets published by the VA.

State and Local Housing Programs

Many states, counties and cities provide low to moderate housing finance programs, down payment assistance programs, or programs tailored specifically for a first time buyer. These programs are typically more lenient on the qualification guidelines and often designed with lower upfront fees. Also, there are often loan assistance programs offered at the local or state level such as MCC (Mortgage Credit Certificate), which allows you a tax credit for part of your interest payment. Most of these programs are fixed rate mortgages and have interest rates lower than the current market. For more information on these types of financing options, contact us today.

Conforming Loans

Conventional loans may be conforming and non-conforming. Conforming loans have terms and conditions that follow the guidelines set forth by Fannie Mae and Freddie Mac. These two stockholder-owned corporations purchase mortgage loans complying with the guidelines from mortgage lending institutions, packages the mortgages into securities and sell the securities to investors. By doing so, Fannie Mae and Freddie Mac, like Ginnie Mae, provide a continuous flow of affordable funds for home financing that results in the availability of mortgage credit for Americans.

Fannie Mae and Freddie Mac guidelines establish the maximum loan amount, borrower credit and income requirements, down payment, and suitable properties. Fannie Mae and Freddie Mac announces new loan limits every year.

The 2007 conforming loan limits for first mortgages remain at the limits set in 2006:

One-family: $417,000

Two-family: $533,850

Three-family: $645,300

Four-family: $801,950

The 2007 loan limit for second mortgages is $208,500. The sum of the original loan amounts of the first and second mortgages cannot exceed $417,000.

Jumbo Loans

Loans above the maximum loan amount established by Fannie Mae and Freddie Mac are known as 'jumbo' loans. Because jumbo loans are bought and sold on a much smaller scale, they often have a little higher interest rate than conforming, but the spread between the two varies with the economy.

If you are looking for a jumbo loan and need more information or advice, we invite you to contact us for more information on rates and fees.

Fixed Rate Mortgages

With fixed rate mortgage (FRM) loan the interest rate and your mortgage monthly payments remain fixed for the period of the loan. Fixed-rate mortgages are available for 40, 30, 25, 20, 15 years and 10 years. Generally, the shorter the term of a loan, the lower the interest rate you could get.

The most popular mortgage terms are 30 and 15 years. With the traditional 30-year fixed rate mortgage your monthly payments are lower than they would be on a shorter-term loan. But if you can afford higher monthly payments a 15-year fixed-rate mortgage allows you to repay your loan twice as faster and save more than half the total interest costs of a 30-year loan.

The payments on fixed rate fully amortizing loans are calculated so that at the end of the term the mortgage loan is paid in full. During the early amortization period, a large percentage of the monthly payment is used for paying the interest. As the loan is paid down, more of the monthly payment is applied to principal.

With bi-weekly mortgage plan you pay half of the monthly mortgage payment every 2 weeks. It allows you to repay a loan much faster. For example, a 30-year loan can be paid off within 18 to 19 years.

Balloon Loans

Balloon loans are short-term fixed rate loans that have fixed monthly payments based usually upon a 30-year fully amortizing schedule and a lump sum payment at the end of its term. Usually they have terms of 3, 5, and 7 years.

The advantage of this type of loan is that the interest rate on balloon loans is generally lower than 30- and 15- year mortgages resulting in lower monthly payments. The disadvantage is that at the end of the term you will have to come up with a lump sum to pay off your lender, either through a refinance or from your own savings.

Balloon loans with refinancing option allow borrowers to convert the mortgage at the end of the balloon period to a fixed rate loan -- based upon the outstanding principal balance -- if certain conditions are met. If you refinance the loan at maturity you need not be requalified, nor the property reapproved. The interest rate on the new loan is a current rate at the time of conversion. There might be a minimal processing fee to obtain the new loan. The most popular terms are 5/25 Balloon, and 7/23 Balloon.

Adjustable Rate Mortgages Or ARM’s

Variable or adjustable loan is loan whose interest rate, and accordingly monthly payments, fluctuates over the period of the loan. With this type of mortgage, periodic adjustments based on changes in a defined index are made to the interest rate. The index for your particular loan is established at the time of application.

Well-known ARM indexes that are tied to ARM Loans include:

  • Constant Maturity Treasury (CMT)
  • Treasury Bill (T-Bill)
  • 12-Month Treasury Average (MTA or MAT)
  • Certificate of Deposit Index (CODI)
  • 11th District Cost of Funds Index (COFI)
  • Cost of Savings Index (COSI)
  • London Inter Bank Offering Rates (LIBOR)
  • Certificates of Deposit (CD) Indexes
  • Bank Prime Loan (Prime Rate)
  • Fannie Mae's Required Net Yield (RNY)
  • National Average Contract Mortgage Rate

For a complete review how Adjustable Rate Mortgages work, contact us and we will schedule an appointment for a thorough homebuying review.

Most ARMs have an interest rate caps to protect you from enormous increases in monthly payments. A lifetime cap limits the interest rate increase over the life of the loan. A periodic or adjustment cap limits how much your interest rate can rise at one time.

Examples:

1. The initial interest rate is 4.5%, the index is 7%, and the margin is 3%,

then the new interest rate = 7% + 3% = 10%.

If the lifetime cap is 5% then

the actual new interest rate will be 4.5% + 5% = 9.5%.

2. The initial interest rate is 6%, the index is 5%, and the margin is 3%,

then the new interest rate = 5% + 3% = 8%.

If the periodic cap is 1% then

the actual new interest rate will be 6% + 1% = 7%.

Your mortgage disclosure will tell you the exact index to be used, whether the weekly or monthly value applies, the lead-time for your index, the margin, and any caps.

With most ARMs, the interest rate can adjust every month, every three or six months, once a year, every three years, or every five years. The interest rate on negatively amortized loans can adjust monthly. A loan with an adjustment period of 6 months is called a 6-month ARM, with an adjustment period of 1 year is called a 1-year ARM, and so on.

Most ARMs offer an initial lower interest rate than the fully indexed rate (index plus margin) during the initial period of the loan, which could be one month or a year or more. It is also known as teaser rate. Because of recent news about these types of loans, qualification is now rigid. All ARMs are available with 30-year terms and some with 15- or 40-year terms. Adjustable rate mortgages generally have a lower initial interest rate than fixed rate loans.

Other types of mortgages include the following: Convertible ARMs, Graduated Payment Mortgages, Negative Amortization Loans and Buydown Mortgages.

What’s Best For Your Needs?

With a variety of different loan programs available, it is important to choose the type of loan that will best suit your needs. The right type of mortgage chiefly depends on how long you plan on staying in the house and the amount of monthly payment you can comfortably afford.

If you don't plan to stay in your house for at least 5 to 7 years, it will be reasonable to consider an Adjustable Rate Mortgage, Balloon Mortgage or Two-Step Mortgage. ARMs traditionally offer lower interest rates during the early years of the loan than fixed-rate loans. A Two-Step Mortgage will give you a lower interest rate than a 30-year mortgage for the first five or seven years. A Balloon Mortgage offers lower interest rates for shorter term financing, usually five or seven years. Because of a lower interest rate it is easy to qualify for these type of mortgages. However don't accept the ARM unless you can afford the maximum possible monthly payment.

Generally, you can start to consider 15 or 30 year fixed rate mortgages if you plan to stay in your home for more than seven years. For a no-cost mortgage pre-qualification, contact the Sold By Sisler Team today.


Questions? Just Ask!