Financing Options
Following are some potential financing options you may want to discuss with your loan officer. Keep in mind that your lender may have other options as well, and that a good loan officer can help you determine which is best for you.
Fixed Rate Mortgage
The interest rate stays the same throughout the term of the loan - usually 15 or 30 years - so the principal interest portion of your payment remains the same. Payments are stable but initial rates tend to be higher than adjustable rate loans and often cannot be assumed by a subsequent buyer.
Balloon Mortgage
This is a loan, which must be paid off after a certain period. The advantage they offer is an interest rate that is lower than a mortgage that is made for 30 years.
Adjustable-Rate Mortgage (ARM)
The interest rate is linked to a financial index, such as a Treasury security or a cost of funds - so your monthly payments can vary up or down over the life of the loan - usually 25 to 30 years. Interest rates can 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 may require additional fees.
Index: A measure of interest rate changes used to determine changes in the loan's interest rate 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.
VA Loan
The VA does not lend money; it guarantees a portion of the loan so that lenders who originate the loan feel comfortable with their risk. Qualified veterans can obtain loans with no down payment. VA-guaranteed loans can be combined with second mortgages.
FHA Loan
FHA does not lend money or make a loan; rather, it insures loans. The down payment can be as low as 3.5%. Either buyer or seller may pay discount points. FHA charges an front Mortgage Insurance Premium that can be financed in the mortgage amount or paid in cash. The borrower must also pay an annual Mortgage Insurance Premium which is collected monthly.
Seller Assisted Second Mortgage
The seller of the house lends the buyer enough to make up the difference between the purchase price and the down payment plus first-mortgage balance (a commercial lender may also make this kind of loan). The terms including the interest rate are based on buyer/seller agreement. It is often a short-term (5 to 15 year) loan; sometimes "interest only" payments until the term date when the balance is due in full. A buyer can then refinance the home.
Assumable Mortgage
Buyer assumes or "takes over" the mortgage obligation of the seller (with approval of the lender). The interest rate doesn't change and is sometimes lower than current rates. Often the loan fees are less as well. Most loans in existence today though have clauses that prohibit the loan being assumed.
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A Few Points About Interest Rates
