The Down Payment.
When you buy a home, your mortgage lender will expect you to pay a percentage of the sales price as a down payment. The higher your down payment, the lower your monthly mortgage payments will be. Your down payment will typically be 5% to 10% of the purchase price, which can be quite a chunk of cash. Don't panic-there are many mortgage programs today which don't require as much as 5% down payment. Conventional and FHA loans may be as low as 3% down; VA requires NO money down; and the Virginia Housing Development Authority has a program for first-time buyers only (there are several qualifications) with as low as 1% down payment.
You can finance your home with a loan from a bank, a savings and loan, credit union, private mortgage company, or various state and national government lenders. Your loan choices include such varied programs as conventional fixed rate loans, adjustable rate mortgages, buy downs, VA, FHA, graduated payment mortgages and all the varieties of each. So take a look and then get with your Loan Officer and Real Estate Agent to decide what is best for you.
FHA Insured Loan.
In this type of loan, the Federal Government insures the lender against loss in case the home buyer defaults on the loan. This program was set up so Americans who couldn't afford the larger down payments required by conventional lenders could still buy a home. However, today there are many conventional loans that only require 3% down-such as the "Community Homebuyers Program." FHA loans usually require 3-4% as down payments. FHA loans can are capped at $152,362 in the Northern Virginia/Washington Metro Area. FHA loans require mortgage insurance premium (MIP) on ALL their loans.
VA Loans.
There are lots of advantages with Veterans Administration (VA) loans. To be eligible for a VA Loan you must be a Veteran and have your Certificate of Eligibility from the VA. If you qualify you can buy a home with no money down. There is a VA cap in the Northern Virginia/Washington Metropolitan Area pf $203,000. With a VA loan, sellers may contribute 4% of the sales price plus the discount points towards your closing costs (which can include all escrow amounts). VA has fixed rates and buy-downs. This is not to say the sellers will do it!! This is just what is allowed by law. They did have the 1-yr ARM with 1/5 caps similar to FHA (which was very popular). However, Congress deleted it this past October-many lenders are hoping it will be added again soon Note check this info). The VA loan criteria allows for the highest of ratios -- 41% total and the lenders are flexible and will go higher for good credit, etc. They do not require any type of mortgage insurance. However, they do have a one-time charge for the "funding fee" which may be added to the loan (if the total doesn't exceed $203,000) or be paid at closing. The funding fee is 2% of the loan amount for a first-time user and 3% of the loan amount for a multiple user (meaning you've used your VA housing benefit before).
Conventional Loans.
Conventional loans offer you more creative financing programs (all the ARM programs plus many others not mentioned above). Many programs today only require 3% down payment (like FHA) -- such as the Community Homebuyers Program, for conforming loans (at present the cap is $203,000 for Fannie Mae and $207,000 for Freddie Mac-it is expected that Fannie Mae will also raise in the near future). Above $203,000/$207,000 is considered a JUMBO loan and at least 5% (and often higher) down payments will be required.
All conventional loans with less than a 20% down payment require private mortgage insurance (PMI) similar to FHA's mortgage insurance premium.
Sellers may contribute 3% of the sales price toward the purchasers' closing costs on a 5% down loan (this amount may not include any escrows); they may contribute 5% on a 10% down loan; and if your down payment is even higher than 10%, the sellers may contribute even more. Again, this is not to say the sellers will do it!! This is just what law allows.
Fixed Rate Mortgage.
With a fixed-rate mortgage, your interest rate stays the same for the term of the mortgage, whether it is for 15 years, 20 years, 30 years or even 40 years. Although with a 15-yr or 20-yr fixed rate, you may save slightly on the interest rate, it will obligate you monthly to a higher mortgage payment. Fixed-rate mortgages are more straightforward and easier to understand, are more secure for the buyer, and are popular with first-time homebuyers. Since the risk to the lender is higher, fixed-rate mortgages generally have higher interest rates than some other mortgages.
Keep in mind that if you make just one extra payment per year, (write a separate check and send it in a separate envelope to your lender with a note that this is to be credited to principal only), you can reduce a 30-yr fixed loan to 22 yrs; 2 extra payments per year will reduce the 30-yrs to 15 yrs. This way, if in the unlikely event there was an emergency in your family or life, you would not be obligated for the higher payment and would have still paid the loan down reducing the amount of interest you would have paid over the life of a 30-yr loan.
Adjustable Rate Mortgage (ARM).
With this type of loan, your interest rate and monthly payments usually start out lower than with a fixed-rate mortgage. But your rate and payment can change either up or down as often as once or twice a year. The adjustment is usually tied to a financial index such as the one-year U.S. Treasury Bill, the Cost of Funds Index. Keep in mind that throughout the life of that loan, the homebuyer's principal and interest payment will adjust periodically based on fluctuations in the interest rate. However, the trade off is that you may be able to buy more house for your money.
Most conventional ARMS have 2/6 caps which means they can adjust as much as 2% per year, but never more than 6% in the lifetime of the loan. A 6-month ARM can only adjust 1% each 6 months (for a total of 2% per year). This means if you start at 5%, your loan would never go higher than 11% (5+6). Obviously, the shorter term ARMs have the lowest interest rates, but the 5, 7 & 10 yr ARMS are also very attractive and usually slightly lower than a fixed rate.
There is also a 3/3 ARM which stays fixed for 3 yrs; adjusts & stays fixed for another 3 yrs, adjusts, etc. Not all lenders offer this product. Be sure to question your lender and Real Estate Agent thoroughly regarding ARMs, their caps, the index and the margin (usually between 2.50 and 3.00). Also watch out for the 6-month ARM as it may have negative amortization.
Buy Downs or Two-Step Mortgages
While these two mortgage types start the homebuyer off at one rate and increase the rate over time, one of these types of mortgages may be right for you:
Buy down.
Type of mortgage loan where the loan rate is reduced by paying more up-front at closing and is increased by one percent each year for the period set for the loan product. For example: For a 2-1 buy down at an 8% rate, Year 1 the rate is 6%, Year 2 the rate is 7%. For Year 3 through the life of the loan, the rate is 8%. It's true you end up paying .50% more in years 3-30, but if it's your first home, the assumption is your salary will move up within 4-7 yrs whether because of financial growth. Qualification rules for the loan programs remain the same. Depending on the lender, the buyer may qualify using the reduced rate. (Example: For a 3-2-1 Buy down at a rate of 8%, the buyer could qualify using the 5% rate.)
The difference between the actual payment schedule and the rate schedule is usually paid "up-front" at closing. This can be paid by the seller, the buyer, the homebuilder, or in some cases, the lender. If the cost is borne by the lender, it is usually offset with increased rates or in points. Generally the funds used to buy down the loan are held in a separate account and are applied with the borrower's payment to equal the true interest rate.
Graduated Payment Mortgage (GPM).
Mortgage payments increase gradually for an established time period, typically five years, if you have this type of loan. This is a negatively amortizing loan, which means that the difference between the interest paid and the interest due is deferred and added to the loan balances. Because of this, your loan amount will increase once you start paying off the loan; it will amortize normally at the end of the loan period. These loan products are more popular when the interest rates are higher, providing a financial incentive for potential buyers.
Since many lenders will qualify a buyer at a lower rate, a buyer can secure a larger mortgage. These loan types are good for those buyers who expect their incomes to increase to cover the increase in loan amount
30-Year vs. 15-Year Mortgage Terms.
Typically, a 30-year mortgage terms has lower monthly payments than a 15-year mortgage term. However, if you decide on a 15-year loan, you will pay significantly less in total interest over the life of the loan, but your monthly mortgage payments will be higher. As a homebuyer, you will need to consider the implications of supporting higher monthly payments when accepting a 15-year term.
