Cynthia Szoradi

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Home Financing Options

You may be looking for a new home or already found one. In either case, you need to consider the cost of purchase as well as the possible costs of renovations if they are neccessary to meet your needs. You may have to apply for a loan or mortgage. If you have never done it before or recently, you may find that the options and language of financing can be a bit daunting. Fortunately, with a little explanation, you can easily understand and find a financing method to best meet your personal needs. Here are several financing options that may apply to you:

Fixed Rate Mortgage

A fixed rate mortgage is the common loan that is particularly simple to understand. The interest rate of the mortgage stays the same throughout the term of the loan, usually 15 or 30 years. While the payments are stable, the initial rates may be higher than comparable adjustable rate loans. Additionally, a fixed rate mortgage sometimes cannot be assumed by a subsequent buyer.

Adjustable-Rate Mortgage (ARM)

Unlike a fixed rate mortgage, an adjustable-rate mortgage has a dynamic interest rate that fluctuates according to a financial index such as a Treasury security or a cost of funds. The monthly payments can vary up or down over the life of the loan. Interest rates may change monthly, annually, or every 3 or 5 years. Some ARMs have a cap on the interest rate increase, to protect the borrower.

Other terms relating to adjustable-rate mortgages:

Adjustment period: The length of time between interest rate changes. Example: one year ARM-interest changes annually.

Cap: The limit on how much an interest rate or monthly payment can change at each adjustment or over the life of the loan.

Conversion clause: A provision in some loans that enables you to change an ARM to a fixed rate loan, usually after the first adjustment period. This sometimes results in additional fees.

Index: A measure of interest rate changes used to determine rate changes over the term of the loan.

Margin: The number of percentage points a lender adds to the index rate to calculate the ARM's interest rate at each adjustment.

Balloon Mortgage

A balloon loan has a major balance that must be paid off after a certain time period. They often have lower interest rates and monthly payments in comparison to mortgages over a 30 year timeframe.

VA Loan

If you’ve served in the arm forces, you may be eligible to receive a VA-guaranteed loans. Rather than lending money, the VA guarantees a portion of the loan so that lenders who originate the loan feel comfortable with their risk. If qualified, you can acquire loans up to $203,000 without a down payment. VA loans can also be combined with second mortgages and are assumable upon qualifying by any future buyer.

FHA Loan

Rather than lending money, FHA insures loans. Either buyer or seller may pay discount points. FHA typically charges a 2.25% upfront Mortgage Insurance Premium that can be financed in the mortgage amount or paid in cash. The borrower must also pay annual Mortgage Insurance Premiums, which are collected monthly.

Assumable Mortgage

In an assumable mortgage agreement, the seller’s current mortgage passes to you, the buyer (with the agreement of the lender). The interest rate doesn't change from the original agreement, and it may actually be lower than current interest rates. The loan fees are usually lower as well.

Seller Assisted Second Mortgage

In a seller assisted second mortgage, the buyer enters into a direct agreement with the seller of the house. The seller lends the buyer enough to make up the difference between the purchase price and the down payment plus first-mortgage. It is often a short-term (5 to 15 year) loan and is sometimes paid in "interest only" payments until the full balance term date. A buyer can then refinance the home.