If you are thinking of purchasing a home or refinancing, I have described mortgage options in terms of terms and types in this article. For more interesting mortgage info, please check out my website at
www.NHmortgages.com or feel free to email me at Renee@NHmortgages.com
TERMS – the term of a mortgage is the number of years to repay the loan
30 Year Fixed Rate Mortgage
This loan program is fixed for 30 years; your interest rate will not change during the term of the loan. This is ideal for people who plan to stay at their present property for a long period of time or just simply want the lower payment or need the lower payment to qualify for the mortgage.
20 Year Fixed Rate Mortgage
Fixed for 20 years. Your payment will be higher than 30 year fixed loan because your loan term is only for 20 years. The interest rate will not change during the term of the loan.
15 Year Fixed Rate Mortgage
15 year fixed loan has a loan term of 15 years and will not change during this period. Your monthly payment on this loan program will be much higher than 20 years fixed or 30 years fixed but you will pay your loan balance down much more quickly. The interest rate will not change during the term of this loan. If you can afford the higher payment and you plan to sell your home in 5-8 years, this may be a great option for you. The interest rate will not change during the term of the loan.
Comparison of different terms
For a $100,000 loan, at a rate of 4%:
P&I Payment on 30 yr term = $518.83; P&I Payment on 20 yr term = $658.55; P&I Payment on 15 yr term = $803.86
P&I = principal & interest (the amount required to repay the loan over the given term)
LOAN TYPES
The type of mortgage you get will probably be based on what is best for you and your situation in terms of down payment, qualifying criteria, etc
Conventional
A conventional loan is also known as a conforming loan and is generally a loan underwritten to the guidelines of Fannie Mae or Freddie Mac. Conventional loans do not have income limits and are generally available through all mortgage companies, brokers and banks who give mortgages. Conventional loans are used for the purchase of primary residences, second homes and investment properties. Conventional loans are available on single family homes and 2-4 unit properties and condos. The required down payment ranges from 3% to 25% depending the purpose of the loan and the type of property being financed. Generally a minimum credit score of 620 is required but conventional loan rates, generally, will be higher for people with lower credit scores and a little lower for people with higher scores (740 or above). The loan limits for conventional loans start at $417,000 for a One-Family (single family homes) $417,000; Two-Family $533,850; Three-Family $645,300 and Four-Family $801,950.
FHA
Federal Housing Administration - an FHA loan is not limited to first time home buyers and can be obtained by people who already own another property. There are no income limits but loan limits apply (county by county). Check out the loan limits. FHA loans are readily available through mortgage companies, brokers and banks who give mortgages. FHA loans are available for owner occupied properties only and for single family homes, 2-4 unit properties and condos that are prior approved by FHA. One of the features that makes FHA loans so attractive is that they require only a 3.5% down payment for all property types. Generally a 640 credit score is required but the loan rate will be higher for people with scores below 680. FHA does allow non-occupying co-signers allowed for purchases of single family properties.
FHA 203K and 203Ks – FHA has provisions to allow a borrower to purchase a home and receive funds to complete repairs after closing. The amount and type of renovation needed will dictate if the loan is a full 203K rehab loan or a streamlined rehab loan (203Ks). Basically the streamlined product is for repairs needed under $35,000 that don’t involve structural work. For renovations exceeding $35,000 or that include structural repairs then the full 203K loan is applicable.
RD - Rural Development
These loans have both income limits and geographical limits. As the name implies they are not available in cities but are for more rural areas. Check RD’s property eligibility website to see if any particular town you are interested in is eligible for RD financing. RD financing is available for owner occupied single family properties and approved condos only. RD cannot be used to finance 2-4 family homes or homes with in-law apartments. Although buyers using an RD loan do not have to be first time buyers, they cannot own other real estate at the time of closing. It is ok to sell a house and buy another using an RD loan as long as the closing for the sale of the first home happens before the closing on the new home (can be same day).
The beauty of RD is that it allows for no money down and the seller can pay the borrower’s reasonable closing costs! This is an excellent way to finance a home located in an eligible area.
VA – Veteran’s Administration
If you have served in the armed forces then you may be eligible for a VA loan. This type of loan allows the Veteran to purchase a home with no down payment and the seller can pay all the closing costs. There are no income limits but there are some loan limitations. For a no down payment VA loan the max loan is $417,000 but higher loan limits may be available with a down payment.
ARM (Adjustable Rate Mortgage)
ARM Loans are fixed for a certain period of time, then become an adjustable loan. The most common ARM products are 1/1, 3/1, 5/1, 7/1 and 10/1 ARMS. 1/1 means the interest rate is only fixed for the first year then the loan will adjust every year thereafter. 10/1 means the interest rate is fixed for 10 years then the loan will adjust every year thereafter. Theoretically, the lowest starting rate should be found with a 1/1 ARM. Typically the rates on ARMS are lower than the current fixed rates. However, ARMS are often used to finance borrowers and/or properties that do fit into the guidelines of conventional loans. In these scenarios, the ARM rates may be higher than the going fixed rate.
Each ARM Loan Program has these features
1) Index: this is an agreed upon starting point to base future changes on. Common indexes used in ARM products are the 1-yr constant-maturity treasury security(CMT), the cost of fund index (COFI) or the London Interbank Offered Rate (LIBOR)
2) Margin: a fixed amount that will be added to the index to determine the new rate when the ARM adjusts.
3) Caps: the loan will usually have two caps; the amount the rate can change (up or down) at any given change and the amount the loan can change during the life of the loan.
When it is time for an ARM to adjust, the margin will be added to the applicable index to determine the new rate. If that rate is higher than the cap then the rate will be adjusted only to the cap.
ARMs are available in conventional loans, FHA, VA and nonconforming loans. For more info on ARMs check out this website: http://files.consumerfinance.gov/f/201204_CFPB_ARMs-brochure.pdf
Author
The author of this article is Renee Duval from Merrimack Mortgage Company, NMLS # 97958. Renee has been a mortgage originator since 1987. She is licensed in New Hampshire and Massachusetts. She is a Certified Mortgage Professional – a designation given by the NH Bankers & Brokers Association. She is a top 10 originator for NH Housing. She is a top producer with Merrimack Mortgage Company and branch manager of their Concord, NH branch. Merrimack Mortgage Company is an equal opportunity lender. Find me at
www.NHmortgages.com
