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Finding the Best Mortgage Loan Program |
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LESSON
6: Finding the Best Mortgage Loan Program
Which do you select first: the loan program or the lender? In most cases,
it's best to decide on the type of loan that will best meet your
financial goals, then find a reputable lender who can deliver that option
to you at a competitive cost.
If you're looking for a very new type of loan option, or a relatively
obscure one, you may only have a few lenders to choose from. For a more "main-stream" mortgage program, you'll have lots of
lender choices.
Mortgage Terminology
Loan programs fall into all kinds of categories, and some have several
different names. It's helpful to understand some basic terminology
before begin to consider today's abundant choices.
Conventional vs. Non-Conventional: Conventional loans
are simply loans that are not insured by the Federal Housing Administration
(FHA) or guaranteed by the Department of Veterans Affairs (VA). The non-conventional
financing backed by the FHA and VA offers lower down payments and special
terms to those who qualify.
Conforming vs. Non-Conforming: Often confused with the
above terms, conforming really refers to whether a loan meets certain
guidelines established by the Federal National Mortgage Association (FNMA; "Fannie Mae"), and the Federal Home Loan Mortgage Corporation
(FHLMC; "Freddie Mac"). These guidelines apply to loan limits,
the borrower's credit history and type of income, and characteristics
of the property being financed, among other things. If all the guidelines
are met, the loan "conforms" and qualifies for a lower interest
rate and lower costs compared with non-conforming loans that pose a higher
risk to lenders.
Jumbo Loans: These are non-conforming loans because they
exceed the loan limits set by Fannie Mae/Freddie Mac. As of this writing,
the limit was $275,000 for single-family homes (except in Alaska, Hawaii
and the Virgin Islands, where it's $412,500). Mortgage loans over
those amounts are"jumbos," which carry higher interest rates.
(Note that limits may be changed, usually increased, annually; ask us
or a mortgage lender for current limits.)
COMMON LOAN QUESTIONS
It seems every couple of months, a new approach to home financing is introduced
to the market. Generally, though, you'll choose from some variety
of the following mortgage loan types:
Fixed-rate mortgage: The interest rate on these loans
remains the same for the life of the loan, as does the monthly payment.
The 30-year fixed-rate mortgage is by far the most commonly chosen loan
type because its low monthly payments allow buyers to purchase more home
for their income. Even though the long-term interest expense is high (compared
with shorter-term loans), the early years of a 30-year loan reward borrowers
with a sizable mortgage-interest tax deduction. For a conventional loan,
if you make less than the standard 20% down payment, you will likely have
to pay for private mortgage insurance (PMI), until your equity in the
home reaches 20%.
Also available: 20-year and 15-year fixed-rate mortgages offering lower
interest rates and faster payoffs, but higher payments. Both FHA and VA
offer 30-year and 15-year loans, with low or no down payment required.
Fixed rates are a good choice when rates have been stabilized at a relatively
low level or when they're beginning to rise.
Adjustable-Rate Mortgage (ARM): These loans start at
a rate that's usually lower (sometimes substantially) than fixed
rates. However, the rate on an ARM will change according to a predetermined
formula based on some financial market index (e.g., Treasury bills). The
rate changes at certain intervals (after 1, 3, 5, 7 or 10 years, on a
set schedule, then annually). As the rate changes, so will the monthly
payment and interest costs of the loan. ARMs have "caps" that
limit how much the rate can adjust annually and over the life of the loan.
ARMS are a good choice when rates have been relatively high or when they
are dropping. An ARM may also be a good choice if you don't expect
to keep the loan for more than a few years -- you can benefit from the
low initial rate (and payments) before it adjusts upwards.
Two-Step Mortgage. A 30-year loan that starts at a lower-than-fixed rate
and adjusts once, to whatever the fixed market rate is at the 5-, 7- or
10-year mark. A 7/23 loan, for example, is a two-step mortgage with a
rate adjustment at the 7-year mark.
Like an ARM, a two-step loan offers the benefit of a low initial rate,
and may be a good choice for borrowers who do not expect to hold the loan
full term or who know their income will increase to cover larger payments
(in the event the adjusted rate is significantly higher).
Assumable mortgage: FHA, VA and some ARM loans can be
assumed by a new buyer with the approval of the lender. In this case,
the buyer agrees to pay off the seller's equity with a down payment,
then takes over responsibility for the seller's loan at the interest
rate it was originally issued with. Buyers may arrange for a second mortgage
(sometimes offered by the seller) to help cover the down payment, which
may be substantially higher than 20% if the seller has owned the home
for a number of years.
Assuming a loan is a good choice if its interest rate is lower than current
market rates or if your credit isn't quite up to snuff for getting
a new loan. In addition, you may save on closing costs compared with a
new loan.
Balloon mortgage. Offered by some lenders, balloon mortgages are also
offered by some sellers who agree to "take back" a loan from
their buyers. The borrowed amount is amortized over a 30-year period,
keeping payments relatively low for, say, 5 or 7 years, at which point
the balance of the loan is due in a lump sum.
You may want to choose a balloon mortgage if you expect a large sum of
cash to come your way by the end of the mortgage term, or if you expect
to be able to refinance at a reasonable rate by that time.
Built-Up Mortgage: Cash-poor buyers can get into a home
without paying private mortgage insurance (PMI) with a built-up mortgage.
These are loans that involve two trusts and a smaller-than-20% down payment.
For example, an 80-10-10 loan requires a 10% cash down payment with a
10% second trust to subsidize the 80% first mortgage. There are even 80-15-5
loans where the buyer only needs a 5% down payment. These mortgage programs
help save buyers money each month by avoiding PMI.
Other mortgage choices: You may encounter a variety of
other loan choices that could meet your needs. Be sure to get a detailed
explanation of terms and obligations before making your final decision.
Remember, rates aren't everything; compare the total costs of the
loan, including discount points and various lender's fees, before
making your final decision.
PICKING A LENDER
When looking for a lender, there are several non-financial characteristics
your should consider:
1. The lender's track record of closing loans, providing professional
service and delivering the loan within the good-faith estimate can be
much more valuable than a low interest rate.
2. If you're looking at a special form of financing, find out how
many of that type of "non-conventional" loan the lender has
brokered. Not all loan officers work with VA loans, or construction loans
or wrap-around loans. These are specialty programs where experience comes
at a price.
3. Consider the depth of a lender's program offerings. If for some
reason your first mortgage choice falls through, you'll need more
than a one-program lender to give you options. The idea is to avoid having
to transfer your loan from one lender to another because the first lender
doesn't work out.
4. Closing the loan is much more important than finding the lowest cost.
It doesn't matter how much you "would have" saved on
a mortgage if it never goes to settlement because the lender couldn't
meet your needs.
ANY QUESTIONS? We'd be happy to answer your specific questions about
your particular situation.
This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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About The Action Group
JOE THYNE I joined the military on April 27, 1988 on my 17th birthday (with a waiver signed by my parents). In my military career, I progressed through the ranks first as an E-1 (Private) up to an E-5 (Sergeant).
Read More
Fort Hood Relocation
You've suddenly been reassigned to Fort Hood and now you need answers! Relocating to a new area can be a harried and stressful time. We're here to help you! Read More
Pre-Qualify for a Mortgage
Ready to buy a home? Let us help you find the best lender to assist you in qualifying for a mortgage loan. Read More
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