Financing Your Home.
At NewAmericanHomes.com we are not mortgage brokers; however, our principals have been on the borrowing side many times and know that it can be overwhelming sometimes. Especially these days, there are so many new options.
Whether you are borrowing to purchase or refinance, choosing the right mortgage may be the most important long-term financial decision you will make. Basic interest rates are essentially the same with all lenders. Watch out for points, discounted rates, closing costs, appraisal fees and adjustable rates – sources of revenue for mortgage companies that come at your expense.
NewAmericanHomes.com has selected several very reputable lenders who will give you a fair deal. Just click here to complete a brief application and lenders will be in touch with you to make some great suggestions. I am ready to fill out an application now.
To help NewAmericanHomes.com visitors, we have compiled some general information on mortgages which we hope may be of assistance. There is no question it is complicated and that is why we have made it possible to work with some of America’s leading companies.
All mortgage plans can be classified in two different ways - conventional and government loans and then sub-classified as fixed rate loans, adjustable rate loans and their combinations.
Any mortgage loans other than a FHA, VA or some state-specific loans are conventional ones.
Advantages of Conventional Financing
a. Higher Maximum Loan Limits than Government Financing
b. Investor and Second Home Loans Available
c. Ability to Substitute Equity for Mortgage Insurance
d. Greater Variety of Programs Available-Balloons, ARMS, etc.
e. Alternate Documentation programs Allow Speed Processing
Conventional loans may be conforming and non-conforming. Conforming loans have terms and conditions that follow the guidelines set forth by Fannie Mae and Freddie Mac. These two stockholder-owned corporations purchase mortgage loans complying with the guidelines from mortgage lending institutions, package the mortgages into securities and sell the securities to investors. By doing so, Fannie Mae and Freddie Mac, like Ginnie Mae, provide a continuous flow of affordable funds for home financing and that results in the availability of mortgage credit for Americans.
Fannie Mae and Freddie Mac guidelines establish the maximum loan amount, borrower credit and income requirements, down payment, and suitable properties. Fannie Mae and Freddie Mac announce new loan limits every year. The conforming loan limits for first mortgages are to $417,000 for 2006 in the continental U.S., and $800,775 in Hawaii, Alaska, Guam and U.S. Virgin Islands.
Loans above the maximum loan amount established by Fannie Mae and Freddie Mac are known as 'jumbo' loans. Because jumbo loans are bought and sold on a much smaller scale, they often have a little higher interest rate than conforming, but the spread between the two varies with the economy.
Loans that do not meet the borrower credit requirements of Fannie Mae and Freddie Mac are called 'B', 'C' and 'D' paper loans vs. 'A' paper conforming loans. B/C loans are offered to borrowers that may have recently filed for bankruptcy, foreclosure, or have had late payments on their credit reports. Their purpose is to offer temporary financing to these applicants until they can qualify for conforming "A" financing. The interest rates and programs vary, based upon many factors of the borrower's financial situation and credit history. (top)
Fixed Rate Mortgages
With fixed rate mortgage (FRM) loan the interest rate and your mortgage monthly payments remain fixed for the period of the loan. Fixed-rate mortgages are available for 30, 25, 20, 15 years and 10 years. Generally, the shorter the term of a loan, the lower the interest rate you could get.
The most popular mortgage terms are 30 and 15 years. With the traditional 30-year fixed rate mortgage your monthly payments are lower than they would be on a shorter term loan. But if you can afford higher monthly payments a 15-year fixed-rate mortgage allows you to repay your loan faster and save more than half the total interest costs of a 30-year loan,
Balloon loans are short-term fixed rate loans that have fixed monthly payments based usually upon a 30-year fully amortizing schedule and a lump sum payment at the end of its term. Usually they have terms of 3, 5, and 7 years.
The advantage of this type of loan is that the interest rate on balloon loans is generally lower than 30- and 15- year mortgages resulting in lower monthly payments. The disadvantage is that at the end of the term you will have to come up with a lump sum to pay off your lender, either through a refinance or from your own savings.
Balloon loans with refinancing option allow borrowers to convert the mortgage at the end of the balloon period to a fixed rate loan -- based upon the outstanding principal balance -- if certain conditions are met. If you refinance the loan at maturity you may not need to requalify, nor have the property reappraised. The interest rate on the new loan is a current rate at the time of conversion. There might be a minimal processing fee to obtain the new loan. The most popular terms are 5/25 Balloon, and 7/23 Balloon.
Adjustable Rate Mortgages
Variable or adjustable loan is a loan whose interest rate, and accordingly monthly payments, fluctuate over the period of the loan. With this type of mortgage, periodic adjustments based on changes in a defined index are made to the interest rate. The index for your particular loan is established at the time of application.
Negatively amortizing loans
Some types of ARMs offer payment caps rather than interest rate caps, which limit the amount the monthly payment can increase. If a loan has a payment cap but has no periodic interest rate cap, then the loan may become negatively amortized: if the interest rates rise to the point that the monthly mortgage payment does not cover the interest due, any unpaid interest will get added to the loan balance, so the loan balance increases. However, you always have the option to pay the minimum monthly payment, or the fully amortized amount due.
The advantage of negatively amortizing loans is that you can control cash flow (relatively stable payment), take advantage of low interest rates relative to the market at any given time, and pay back the money borrowed today at a depreciated value years from now (because of natural inflation). This makes such loans a great tool for homeowners as long as you understand the mechanics of what's going on.
With most ARMs, the interest rate can adjust every six months, once a year, every three years, or every five years. The interest rate on negatively amortized loans can adjust monthly. A loan with an adjustment period of 6 months is called a 6-month ARM, with an adjustment period of 1 year is called a 1-year ARM, and so on.
Most ARMs offer an initial lower interest rate than the fully indexed rate (index plus margin) during the initial period of the loan, which could be one month or a year or more. It is also known as teaser rate.
The Federal Housing Administration was created by the National Housing Act of June 27, 1934. The FHA was established to encourage improvement in housing standards and conditions to provide an adequate home financing system by insurance of housing mortgages, and to exert a stabilizing influence on the mortgage market. The FHA does not make loans or build housing, but operates insurance programs which provide against loss on home and housing project mortgages and property improvement loans made by private housing project mortgages and property improvement loans made by private lending institutions. An FHA loan is fully insured by FHA, and any qualified buyer, whether a citizen of the US or not, may seek such financing.
Each mortgage insurance program administered by the Federal Housing Administration is commonly referred to by the section of the National Housing Act which established it.
There are many programs offered by FHA. The following are the most commonly used:
FHA203b - 30 year fixed rate level payment loan for owner-occupant borrowers.
FHA234c - Condominium loans.
FHA/VA - Veteran does not pay any down payment on the first $25,000 of loan amount. Veteran must have established a time of separation from the service, and re-enlisted, or must be presently out of the service. Immediate re-enlistment does not qualify for a separation from the service.
FHA Arm - One-year adjustable rate mortgage.
FHA203(k) - Mortgage to rehabilitate or renovate existing property.
Advantages of FHA Financing
a. Low Down Payment
b. More Favorable Credit and Income Standards
c. No Prepayment penalty
d. Fully Assumable with Credit Qualification
e. Co-Mortgagor Loans Available (top)
The Veterans Administration, under the provisions of the Servicemen's Readjustment Act of 1944, has assisted countless veterans in securing a home loan by guarantying a portion of the loan for the lender. An important function of VA is to offer protection through their guaranty to private lenders who provide financing for veterans in the acquisition of real estate for personal residential use. The Dragas Mortgage Company is a VA automatic approved lender. Loans are processed, approved, and closed locally, rather than having to be sent away to a VA office. This speeds up the amount of time it takes for your loan to close!
Advantages of VA Financing
A. No Down Payment, in most cases
B. More Favorable Credit and Income Standards
C. No prepayment penalty
D. Fully Assumable
Maximum Loan Amount $203,000-With Full Eligibility
and No Down Payment
VA requires owner occupancy. A veteran may purchase a two- to four-family property, provided he/she occupies one unit.
Interest Rate and Discount Points
Effective October 28, 1992, VA rates are freely negotiable between the borrower, lender, and seller. Prior to this time, the maximum rate that could be charged to a veteran was set by the Federal Government, and the veteran was not allowed to pay discount points.
Discount points may now be paid by the veteran, although they may not be financed on a purchase transaction. VA continues to have the authority to return to an administered rate if data indicates that the negotiated rate is not beneficial to veteran home buyers. At this time, the program will be reviewed to determine if it is tin the best interest of the veterans, and therefore may be subject to change at that time. (top)
Other Types of Mortgages
Today, new programs are being developed constantly to assist people own their home. Professional mortgage brokers and counselors are available throughout the country to explain all options.
NewAmericanHomes.com has evaluated several experienced and reputable lenders. Just click here to complete a brief application and lenders will be in touch with you to make some great suggestions. I am ready to fill out an application now.
Good luck with your home financing. We hope this information has been helpful. There is other great information available from Fannie Mae at www.fanniemae.com. Some suggestions are:
Becoming a Homeowner
Home Improvement Financing
Reverse Mortgages for Seniors
Glossary of Mortgage Terms
Notice: NewAmericanHomes.com is not a mortgage broker or mortgage company. This information is provided only for the use of visitors to this web site wishing to make more informed decisions. All information is believed to be from reliable sources, however the industry is always changing and visitors should consult a mortgage lending expert and not rely solely on the information offered on this site. (Return to top)