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| Buyer's Guide | Financing
Different
Mortgage Strategies
When it comes to paying for a home, buyers today have an
almost unlimited number of financing options from which
to choose.
Here’s a run-down on the main types of financing every
home buyer should know today. Interest rates are intended
for illustration only; ask your Long & Foster Sales
Associate or loan officer from Prosperity Mortgage Company,
a Long & Foster affiliated company, for current market
rates.
Here are some of the financing options at your disposal:
Conventional
Mortgage.
A conventional loan is an indebtedness or mortgage made
between a lending institution and a borrower without a third
party participant, such as VA or FHA. Most types of conventional
loans are paid off in equal monthly payments spread over
15, 25, or 30 years. The interest rate stays the same for
the life of the loan. Therefore the monthly principal and
interest payment also remains constant.
Terms of a conventional loan vary among lenders, but basically
a loan can be obtained with as little as 5% down payment.
When the down payment is less than 20% it is, in most cases,
necessary for the loan to have private mortgage insurance
to protect the lender.
Example:
The buyer purchases a $300,000 home. Typically, the lender
will require a down payment of $60,000 or 20% of the purchase
price. Assuming 7% market rate; $240,000 loan amount;
30 years, $1,597.92 monthly payment. With private mortgage
insurance, however, the lender would lower the down payment
requirement to 5%, or $15,000 which increases the monthly
payment. Lenders refer to private mortgage insurance as
“PMI”.
Advantage:
Fixed rate financing is straight forward and easy to understand.
Using private mortgage insurance normally adds up-front
costs but new PMI plans allow premiums to be financed
or paid monthly.
VA
Loan.
The VA does not lend money; VA guarantees a portion of the
loan. Thus the lenders who originate the loans feel comfortable
with their risk. Qualified veterans can take out loans up
to $240,000 with no down payment. VA-guaranteed loans can
be combined with second mortgages and are assumable upon
qualifying by any future buyer.
Example: The veteran
agrees to buy a home for $235,000. With no down payment,
the loan amount is $239,700 (includes a minimum 2% VA
Funding Fee) for 30 years, and say the VA interest rate
is 7%, plus “points”. The monthly payment for
the $239,700 loan will be $1,595.92.
Advantage:
No down payment necessary.
FHA
Loan.
FHA does not lend money; FHA insures loans against default.
This makes lenders willing to finance home purchases on
favorable terms.
With an FHA loan, the down payment can be as low as 2.25%
of the purchase price. Points (prepaid interest) may be
charged by the lender. Purchasers can choose different rate
and point combinations. FHA charges an up-front Mortgage
Insurance Premium (M.I.P.) fee. (There is no “up-front”
premium on condos.) FHA charges a monthly M.I.P. of .5%.
Example:
The buyer of a $200,000 home would make a down payment
of approximately $4,500, resulting in a base loan amount
of $195,500 and a total loan amount of $198,432 including
the financed M.I.P. At a rate of 7%, the monthly principal
and interest would be $1,321.37 plus $81.46 for the monthly
M.I.P., for an adjusted payment of $1,402.83.
Advantage:
Low down payment and low interest rates. Fixed or adjustable
rates are available. Especially designed for first-time
home buyers.
Lender
Funded Programs
Many lenders today are willing to assist buyers with the
closing costs. In exchange for paying a higher interest
rate, a lender may forgo its normal charges plus pay other
closing costs on behalf of the buyer. These plans vary widely,
so study them carefully. The advantage is that less cash
is required to close. This is offset by higher monthly payments
due to the higher interest rates.
Balloon
Mortgages.
A balloon mortgage is typically a loan which must be paid
off after a certain period. The advantage they offer is
an interest rate that is lower than a mortgage that is made
for 30 years. Balloons may range in duration from 5-to-7
or 10 years. If the 30-year fixed rate quote was 7%, the
7-year balloon may be as low as 6.5%, providing lower payments
for the 7-year period. One point to consider, however, is
that the investor typically does not guarantee to extend
the loan past the balloon date even though most balloon
plans contain provisions for optional refinancing.
Long & Foster®, Realtors®,
is not a mortgage lender. These examples are for illustration
only and were provided by Prosperity Mortgage® Company,
a Long & Foster affiliated company. The exact terms
of any financing are subject to the requirements of the
investors in each specific case. Choosing the “best”
method depends on the circumstances of the individual. A
Long & Foster Sales Associate will be happy to fully
explain the home buyer’s options for financing.
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