Published on: Dec 14, 2015 15:41:33
There are a variety of options available to buy a home. Depending on the buyer’s financial picture, possibilities exist to save money over the short-term, while long-term options provide more stability. In addition, terms such as non-conforming and conforming are crucial to overall expenses.
FICO scores and LTV (loan to value) are additional determining criterion for buying a home. For example, conforming loans require a minimum score of 620, while non-conforming varies with lower scores. Here is a mortgage review starting with the most popular instruments followed by riskier options.
Fixed rate or FRM is the most common real estate loan secured by homeowners. It comes with a set or locked-in interest rate that remains constant over the term. The length is usually 30 years while 20, 15, or 10 years are available. They can be either conforming and non-conforming.
Adjustable or ARM is considered a variable rate mortgage. This loan vehicle was created to offer borrowers more flexibility. However, there are inherent risks involved such as new rates based on the current LIBOR. The terms vary greatly with this type of loan that is written as 10/1, 3/3, 5/5, and 5/1. The first is the number of years interest rates remain constant. The second number denotes how often the interest rate is adjusted, which is generally higher.
For properties over a specific purchase price threshold, a jumbo loan is required. Interest rates will be fixed and are higher than the less expensive MLS listings. Lengths are similar to the fixed loan counterpart. This is considered non-conforming because there are no guarantees for defaults, which requires maintaining mortgage insurance and making larger down payments.
This is the first government loan available to buy a home. The FHA caters to first time real estate borrowers with less stringent guidelines. Examples include the amount of income, down payment, and maintaining residence in the property for the duration of the loan. Interest rates are fixed with lower down payments in the 3% percent range. In addition, they are conforming and backed by the government against defaults.
Veterans and surviving spouses can obtain a VA loan with a fixed rate term of 30 years. It is conforming and cannot be a jumbo. FICO scores and down payments are required, although the criterion is very lenient. The biggest factor is the ability to pay the loan as agreed.
The latest craze in the real estate loan market is a reverse instrument. This is an age restricted option that assists homeowners that are over 62. Retirees that plan on staying in their home will find this a good option. The loan is repaid if they sell the property or reverts to the lender upon their death. There are no monthly payments and access to equity in the form of cash to use at their discretion.
Interest only, balloon, and predatory loan instruments have the highest risk for borrowers. Interest only loan payments are applied to the interest, while principals are static. Balloon loans have a specific time length that mandates the borrower pay the balance in full at the end of the term. Predatory loans are illegal, but still exist. This scenario is perpetrated by lenders that overstate home values, buyer income, and other material facts on loan documents. While the first two options may have value for some borrowers, the latter should be avoided at all costs.
Borrowers may not realize there are more than the most common fixed and adjustable loans choices. The length of promissory notes provides them with control over monthly payments. A caveat is homeowners can pay loans off sooner by making interim payments or including an additional amount. For example, payments can be made bi-weekly instead of once per month. When payments are received with additional money, it is applied to the principal balance.