Financing Options

Definitions

30 Year Fixed Rate Program

30 year fixed mortgage is a type of mortgage loan that is repaid by the borrower making 360 equal monthly payments over a period of 30 years. Since the borrower’s payments are ‘fixed’, the borrower can expect to make the same monthly payment for the entire term of the loan. A 30 year mortgage loan is the most widely accepted program used to finance a residential purchase, and is available for conventional, jumbo, FHA and VA loans.

15 Year Fixed Rate Program

A 15 year fixed mortgage is a type of mortgage loan that is repaid by the borrower making 180 equal monthly payments over a period of 15 years. Since the borrower’s payments are ‘fixed’, the borrower can expect to make the same monthly payment for the entire term of the loan. A 15 year mortgage loan is the most widely accepted program used to finance a residential purchase, and is available for conventional, jumbo, FHA and VA loans.

1, 3,5, 7, 10 Year Adjustable Rate Loan Programs

An Adjustable Rate Mortgage (ARM) is a mortgage loan that is most widely known for its low starting interest rate (when compared to the 30 & 15 year mortgage loans). This ‘low’ introductory rate is used to calculate the mortgage payment for a specified period of time. Once this introductory period is over, the interest rate is adjusted periodically based on a preselected index. The most commonly used index is the yield on the one-year Treasury Bill. The new interest rate is determined by adding this index to a set margin (which is determined by the lender). Although there are a variety of adjustable rate mortgage programs available,the most common program is the One Year Adjustable Mortgage (one Year ARM). The interest rate on the one year ARM is adjusted once each Year, for 30 years. APR’s on variable rate loans are subject to increase but may decrease from year-to-year, the borrower should be prepared to handle an increase in his/her monthly payment (should the index rate increase).

Jumbo Loan Programs

A jumbo mortgage is a mortgage loan which is larger than the limits set by Fannie Mae and Freddie Mac ($322,700 as of 1/1/2003). Since these two agencies will not purchase these types of loans, they usually carry a higher interest rate (to enhance their value and marketability to investors).

FHA Loan Programs

An FHA mortgage loan is insured by the Federal Housing Administration(a division of the Department of Housing and Urban Development (HUD)). Although mortgage lenders provide the mortgage funds, the FHA sets underwriting standards for approving applicants. In many cases, FHA underwriting guidelines are more lenient than conventional (not government insured or guaranteed) underwriting guidelines. This

leniency makes it easier for borrowers to qualify for a mortgage loan (low down payment requirements and a higher monthly debt allowance). FHA limits the types of loan programs it insures, but it will insure the more popular 30 year fixed, 15 year fixed and one year adjustable loan programs. However, borrowers are limited to the amount that they can borrow using an FHA-insured mortgage. Applicable loan limits differ by county, so contact your local HUD office for specifics.

VA Loan Programs(Dept. of Veterans Affairs)

A VA mortgage loan is a mortgage loan that is guaranteed by the Department of Veterans Affairs (DVA). One of the biggest advantages of using a VA loan is that the borrower can finance the purchase of a property with no-money down. However, VA loans are restricted to individuals qualified by military service. The DVA will guarantee the more popular 30 year fixed, 15 year fixed loan programs.

5/25, 7/23 Balloon Programs

A balloon mortgage loan is a type of mortgage loan that has a short term (typically 5 or 7 years), but the monthly payment is computed using a 30 year term. When a borrower uses a balloon loan, he/she will make the monthly payment for the scheduled loan term (5 or 7 years). When this loan term is over, the borrower is required to pay off the remaining balance in one lump-sum payment. If the borrower decides not to sell the property after the loan term is over, the borrower has the option to refinance the mortgage with a new one. A 7/23 balloon mortgage gives the borrower the option to convert to a fixed rate program (for a nominal fee) after the initial term (7 years) is over. If the conversion feature is used, the interest rate for the remaining term of the loan (23 years) will be adjusted once to reflect market conditions, then remain fixed for the remainder of the loan term.

• Conventional home mortgages

• FHA-VA home financing

• Jumbo

• Stated Income

• Non-income Verifying

• ARM / Balloon

• Imperfect Credit

• Cash-out Refinance

• Debt Consolidation

• Home Equity Line

• Second Mortgage

• Home Improvement

• Primary Residence Financing

• Condominium Mortgages

• Vacation Home

• Second Home Mortgages

• Manufactured Home

• Investment Home

• Foreign National

• Zero-Down Programs

• Closing Cost Financing

• Down Payment Assist.

• Construction Loans

• Construction/Perm

• Lot Loans

MORTGAGE TYPE

Conventional

Fixed- Interest Rate

Fixed 15, 20, 25, 30 years- Maturity

Fixed over term of the loan- Payments

Adjustable Rate or Adjustable Mortgage Loan (ARM or AML)

Interest rate is pegged to a rate over which the lender has no control. For example, the weekly average yield on U.S. Government securities, adjustated to a constant maturity of 1, 3, or 5 years. Starting rate may be lower than on conventional rate because borrower shares risk of rising rates with lender. Fixed, but sometimes can be extended in lieu of increase in monthly payment when interest rate rises. May change when interest rate changes or only a specified intervals, such as annually or every 30 to 5 years. If payments do not increase with interest rates, result may be negative amortization (see GPM below), or an extension of the maturity. These mortgages may take many forms. To protect yourself, shop around for favorable terms, including limits on the increase in rate permitted in any one year and over the whole term, and limits on payment increases and negative amortization.

Graduated Payment (GPM)

Fixed- Interest Rate

Fixed- Maturity

Low at start, increase gradually as predetermined during first 5 or 10 years, then level out.- Payments Because of lower starting payment, may appeal to young borrowers who anticipate increased income in future years. CAUTION: early payments may not cover interest due. Unpaid interest is added to outstanding principal, increasing the debt. This is called NEGATIVE AMORTIZATION, and borrowers may get a shock if they decide to sell in a few years and discover reduced equity in the property. However, some GPMs may include arrangements to prevent negative amortization.

Graduated Payment Adjustable

Adjustable as in ARM or AML

Fixed, usually up to 30 years

Similar to GPM. During first 10 years may be less than required to fully amortize loan. Adjusted within that period and every five years thereafter to insure full payment.

Federal savings and loan and mutual savings banks were authorized in July 1981 to offer this mortgage which combines graduated payments with adjustable interest rates. Payment adjustments may be quite large because of these two areas of change.

Renegotiable Rate (RRM)

Fixed for 3 to 5 years, then renegotiated Short-term loan (3to 5 years) but amortized over longer term, usually up to 30 years. Payments will change as interest rate changes.

Short-term loan is automatically renewable; but if new interest rate is not acceptable, the borrower must either refinance or sell the property. The interest rate increases permitted each year and over the life of the loan may be limited.

Shared Appreciation

Fixed- Interest Rate

Fixed- Maturity

Fixed- Payment

In return for lower interest rate the borrower agrees to share with the lender a percentage of any increase in the value of the home–at specified future dates or when it is sold, whichever occurs first. This plan may appeal to a first-time homebuyeras a way to make the purchase affordable. But remember, increase in value must be shared with the lender,; sharing a decrease in value may or may not be part of the agreement.

Wraparound (WRAP)

Fixed- Interest Rate

Fixed- Maturity

Fixed- Payment

The lender combines an existing mortgage on the property (bearing a lower rate) with a new mortgage for the balance needed (at a higher rate) to provide a lower overall cost to the borrower. This is possible only if the existing mortgage is assumable by the buyer. (All FHA and VA mortgages are assumable.)

Balloon Payment

Fixed or adjustable

Fixed. Traditionally 5 years but may be shorter or longer.

Fixed, usually based on 20 to 30-year amortization, but at the end of term debt will not be fully paid. Borrower must pay off remaining "balloon" balance or refinance at prevailing rates. Because of short term and balloon payment, the down payment may be as little as 5 percent

.

Reverse Annuity (RAM)

May be adjustable May be fixed with refinancing option. Loan due when home is sold or upon death of borrower. This plan calls for periodic payments to homeowners based on a loan against their equity in a home. It is designed to appeal to older persons who may be having difficulty living on reduced incomes.

Shared Equity

Varied- Interest Rate

Varied.- Maturity

Varied.- Payment

Buyers co-purchase home with family member or investor, sharing down payment and leasing back portion of the property. A fair market rent is paid by the home buyer on the investor’s part of the home. Tax benefits are created for co-buyer. Utlimate profits are shared when property is sold or buy-out may be arranged.

"Take Back"

Usually fixed

Usually short term.

Usually a high down payment. May call for balloon payment at maturity. This is a loan by the seller of the property who agrees to take the mortgage in order to facilitat the sale.

Federal Housing Administration

(FHA) insured

Usually negotiated. Usually more favorable because of protection afforded lender. Points are negotiable but usually paid by seller.

Fixed.

Fixed or graduated, depending on FHA options.

Available from lenders approved by FHA. Properties to be mortgaged must meet FHA requirements. Also "handyman’s" specials may be mortgaged to include rehabilitation costs.

Veterans Administration (VA) guaranteed

Interest set by VA. Veteran may not pay points.

Fixed, usually 25-30 years.

Fixed or graduated, depending on VA options.

Terms are eased because of VA gurantee. No or low down payment. Veterns should check with VA for eligibility requirements and for other assistance related to housing.

Buy-Down

Interest rate is reduced for a specific period or sometimes for the life of the loan.

Fixed. Fixed for the term of the buy-down; usually increased thereafter.

A seller or home builder pays an amount to a lender "up front" who then gives buyers a below market interest rate for the period covered by the buy-down. Through this arrangement the interest rate may increase after the buy-down period ends.

Assumable

Varied.- Interest Rate

Varied.- Maturity

Varied.- Payment

An assumable mortgage is an already existing mortgage (usually at a lower interest rate) that is taken on by the buyer. Usually the lender will have to approve the buyer. Most VA and FHA mortgages are assumable.

Special Mortgage Plans

There are special government programs designed to assist home buyers available in many areas; occasionally a city or state will sell tax exempt bonds to raise funds for lower interest rate mortgages to qualified persons. In addition, HUD (U.S. Department Housing and Development) can provide information on various financial assistance programs of the Federal government. The local HUD or VA office number can be found in your local telephone directory.