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FIXED-RATE MORTGAGES
A fixed-rate mortgage means the interest rate and principal payments remain the same for the entire life of the loan. (Taxes, of course, may change.)
Advantages include consistent principal and interest payments make this loan stable your rate won't change, so you don't need to worry about market fluctuations. A good choice if you're likely to stay in this house for a long time.
Disadvantages include a possibly higher cost - these loans are usually priced higher than an adjustable-rate mortgage. Keep in mind that, on average, most people move or refinance within seven years. If rates in the current market are high, you're likely to get a better price with an adjustable-rate loan.
30 Year Fixed-Rate Mortgages offer consistent monthly payments for the entire 30 years you have the mortgage. So if the market is good, you can benefit from locking in a lower rate for the full term of the loan. The best choice if you're looking for a long-term, stable loan - for instance, if you're planning on staying in your house for some time.
20 Year Fixed-Rate Mortgages allow you to make a consistent monthly payment throughout the 20 years you have the mortgage. The shorter term means you pay the loan off more quickly, and therefore pay less interest. And you'll build equity faster than you would with a 30 year loan. (But remember the shorter term means higher payments, when compared to the 30 year fixed-rate mortgage.
15 Year Fixed-Rate Mortgages mean consistent monthly payments for all 15 years you have the mortgage. By building equity even more quickly than with a 30 year or 20 year loan, and paying less interest, you'll save money in the long run. It's an ideal option if you can handle the higher payments and if you'd like to have the loan paid off in a shorter period of time - for instance, if you plan to retire.
ADJUSTABLE-RATE MORTGAGES
An adjustable-rate mortgage (ARM) means that the interest rate changes over the life of the loan - according to the terms specified in advance. With ARMs:
The initial interest rate is usually lower than with a fixed-rate mortgage.
The monthly repayment would also be lower.
The interest rate may be adjusted (up or down) at predetermined times.
The monthly payment will then increase or decrease.
Most ARM programs do offer "rate cap" protection, which limits the amount the rate can be increased, both each year and over the life of the loan. All ARMs are amortized over 30 years.
Advantages include lower costs - ARMs are usually priced lower than fixed-rate mortgages so you can increase your buying power and lower your initial monthly payments. If interest rates go down, you'll enjoy lower payments. Usually an ARM is the best choice for homeowners who plan to relocate (for example, with their company or the military, or for those who are purchasing their first home and plan to be in the property only for three to five years. Remember that, on average, most people move or refinance within seven years.
Disadvantages include the possibility of increasing monthly payments if interest rates go up. Keep in mind that ARMs are best for homeowners who aren't planning on staying with a property for a long period. If you're on a fixed income, an ARM (especially a short-term ARM) may not be your best choice.
10/1 Adjustable-Rate Mortgages provide a fixed initial rate of the loan for the first ten years of repayment. After 10 years, the rate adjusts every year thereafter for the remaining life of the loan. The loan is amortized over 30 years, so you'll enjoy the stability of a 30 year mortgage at a lower price than a fixed-rate mortgage of the same term. But an ARM is likely not the best choice if you're planning on owning the same property for more than 10 years.
7/1 Adjustable-Rate mortgages offer an initial rate that is fixed for the first seven years of repayment, then the rate adjusts every year thereafter for the remaining life of the loan.
5/1 Adjustable-Rate Mortgages mean the initial rate remains fixed for the first five years of repayment, and then adjusts every year thereafter. Remember that your rate and monthly payments may go up after only five years, so this choice is best if you're expecting to sell or refinance the property within that period.
3/1 Adjustable-Rate Mortgages provide three years at the initial fixed-rate, then the rate adjusts every year for the remaining life of the loan. A good choice if you expect to move or refinance in a relatively short period of time. But a much shorter fixed-rate period means your interest rate (and therefore monthly payments) may begin to fluctuate after three years.
Option ARM (aka Optional Payment Mortgage is an adjustable-rate mortgage that allows the borrower to choose from four types of payment each month. The borrower can make a standard mortgage payment (principal, interest, taxes, insurance or PITI that will pay off the loan off in 15 years or in 30 years. Or, the borrower can choose to pay only the interest charged in the previous month. Finally, the borrower can make a minimum payment that doesn't even cover the interest – a convenient option when times or tight, but one which increases the total amount owed on the mortgage.
Most option ARMs have ridiculous introductory interest rates that are simply teasers, sometimes below 2 percent. Those rates usually last a month or two, rarely more. At that point, they begin to rise and continue to do so with clockwork regularity. The truly hidden risk in an option ARM is that although the interest rate changes every month, the required monthly payment changes only once a year.
If the introductory interest rate starts at two percent, it is going to double, then triple, then probably quadruple and maybe continue beyond that. While the interest rate hikes are going on in the background, the minimum payment rises at a maximum rate of 7.5 percent a year. The result is often what is known as “negative amortization.” What is occurring is that as the home owner is making payments on the option ARM, the balance owed on the loan is steadily increasing.
People who select option ARMs as their mortgage of choice had better be fully informed and be adept at math. It is not uncommon for mortgage debt to rise at the rate of several hundred dollars per month while the home owner is making those easy payments; however this process can only proceed to a point. Most lenders will not allow debt on an option ARM get beyond 110 percent of the loan’s initial amount. When you hit the principal cap, you will be required to begin making payments on principal as well as interest.
ARM TERMS
Teaser Rate - (aka your loan's start rate) the initial rate on your adjustable, prior to its first adjustment date, typically 6 months to a year.
Lifetime Cap - the maximum rate that your adjustable may climb to.
Floor Rate - the minimum rate that your adjustable may fall to.
Periodic Caps - the maximum percentage that either your rate or payment may change in any given year or specified time period. (See Interest Rate Cap and Payment Cap).
Interest Rate Cap - a periodic cap describing the maximum percentage that your rate may change in any given year or specified time period. Interest capped ARM's typically do not have negative amortization.
Payment Cap - a periodic cap describing the maximum percentage that your payment may change in any given year or specified time period. Applies to ARM loans with the potential for negative amortization.
Rate Change at the First Adjustment Date - usually applies to intermediate ARMs and can exceed the annual or semi-annual caps. Ask what it is.
Negative Amortization - occurs when the effective interest rate associated with a payment cap on an ARM is less than the fully indexed rate. In other words, the minimum payment allowed by the lender is less than the actual payment that is due. This difference or spread is then added onto the borrowers loan balance and rather than amortizing or paying down the loan balance, the loan balance actually grows.
CASH LOANS
Question: What about an all-cash offer?
Answer: Although most home buyers could never buy a property with all cash, anyone considering such a move (or who has bought a lottery ticket lately) may be wondering how to approach such a deal.
Because buyers sidestep the tedious and time-consuming loan qualification process, the deal can close very quickly. In addition to fewer hassles and a better position in price negotiations, the all-cash buyer's primary advantage is completely avoiding mortgage interest, which can total hundreds of thousands of dollars over the life of the loan. Buyers also save money that would be spent on loan origination fees, required appraisal, some closing costs and various other charges imposed by the lender.
At the same time, all-cash buyers should consider potential pitfalls of the transaction. Buyers who want to use the home as their primary residence lose out on many of the tax advantages available to homeowners with conventional loans, since the IRS allows home owners to deduct all mortgage interest on loans up to $1 million.
If you can afford to pay cash but are concerned about price appreciation, you may be better off obtaining some financing. Also, look at other which investments are paying off and determine if spending cash on a home is worthwhile.
c 2000 Inman News Features
All Rights Reserved
ALTERNATIVE (A,B,C,D) LOANS
Question: What are the risks of "b" and "c" loans?
Answer: The major risk is the cost of the loan. Desperate home buyers who are not selective when seeking an "A-," "B," "C" or "D" loan may find themselves locked into long-term loans with outrageous fees and interest rates. "Watch out how costly they are," said Jon Riccardi, a mortgage broker with MPR Financial in Albany, Calif. "Some of the quotes are a little difficult to quote."
Traditional lenders who offer conforming loans are extremely competitive. They must offer desirable terms or lose their share of the market. Meanwhile, hopeful home buyers who were rejected often turn to mortgage brokers and specialized mortgage lending businesses. Alternative lending sources not only offer a variety of loan products but also are more willing to deal with higher debt-to-income ratios, credit problems and other black marks on an individual's record.
In cases where negative information on a credit report may be due to disappear in the next few years, or a borrower expects their income to increase significantly, non-conforming loans without excessive prepayment penalties can be excellent. The borrower can obtain a conventional loan as soon as they qualify, yet enjoy the benefits of home ownership and establish equity in the meantime. Many home buyers engaged in this process look at these less desirable loans as a penalty while others are grateful for a second chance. Yet no one should be so anxious that they sign for a loan with questionable terms. "The goal of these loans is to pay them off quickly," Riccardi said. "What I've seen is, people don't investigate these loans enough and when they try to get out of it, realize what they got into."
Resource: "How to Shop For a Mortgage," a brochure available from the Mortgage Bankers Association of America, 1125 15th St., N.W., Washington, DC 20005.
c 2000 Inman News Features
All Rights Reserved
ASSUMABLE LOANS
Question: Are FHA loans assumable?
Answer: Lenders will only permit those loans that have a "subject to transfer" clause to be taken over through a formal assumption process. Look to your loan agreement for specific terms. In addition, you should candidly discuss any risks with your lender, and possibly consult an attorney before signing the final agreement.
Question: How do you find out if a loan is assumable?
Answer:
Look to the loan agreement to determine if it is assumable by someone else. Then talk to the lender about specific requirements based on the value of the home.
Assumable loans permit one borrower to take over a loan from another borrower without any change in the loan terms. Such loans still exist but they aren't very common or popular (for buyers) in a low-interest-rate environment. Plus, today new assumable loans are almost always adjustable rate mortgages.
Question: What is a wrap-around loan?
Answer: "This method of seller financing is risky if the underlying first loan has a "due on sale" clause because the loan might be called due when the first lender becomes aware that the property has transferred title," says Dian Hymer, author of "Buying and Selling a Home, A Complete Guide," Chronicle Books, 1994.
A seller usually will want to incorporate a late charge to encourage the buyer to make monthly loan payments on time. "A buyer will probably want to stipulate that prepayment of the loan be without penalty. This should not cause a problem unless the loan payments are a source of retirement income, in which case early prepayment could have negative financial repercussions for the seller...
"Most sellers prefer to have a due-on-sale provision included in the note, but this can be a negotiable item. Buyers who are concerned that they might be forced to sell during a period of high interest rates can request that the note be assumable by a future buyer, and sellers might find this provision agreeable as long as they have the right to approve the future buyer's credit report and financial statement," Hymer writes.
EASY-QUALIFIER LOANS
Question: Can someone who is unemployed get a loan?
Answer: Generally, lenders will not make loans to unemployed persons because someone without an income would seemingly have no way of making monthly mortgage payments.
However, there are home loans for which lenders require very little loan documentation as long as the borrower puts down a sizable down payment, generally 25 percent or more. These "no-doc" loans are common among self-employed people who say they earn a certain amount of money but whose income tax returns show that their earnings are much lower.
Borrowers should check directly with lenders when seeking a no-doc loan. If specific lenders do not offer them, ask for a referral.
Question: What are no-doc loans?
Answer: "No-doc" loans are mortgages for which lenders require very little loan documentation as long as the borrower puts down a sizable down payment, generally 25 percent or more.
These mortgages are common among self-employed people who say they earn a certain amount of money but whose tax returns show that their earnings are much lower.
15, 30 & 40 YEAR LOANS
Question: Are 40-year mortgages a good idea?
Answer: Smaller monthly payments are the primary advantage of adding 10 years to the traditional 30-year mortgage, but real estate experts say the shorter-term loan usually is more beneficial for the home buyer. The drawback becomes apparent simply by calculating the cost of additional interest payments, which can total thousands for a few dollars difference in mortgage payments.
Question: What about a 15-year v. 30 year loan?
Answer: The difference in payments and overall savings between a 15-year fixed-rate loan and a 30-year fixed-rate loan depends on the interest rate and the loan amount. Using a $100,000 loan and 7.25% interest rate as an example, monthly payments on the 15-year note would be $912.86. Monthly payments on a $100,000 loan at 7.25% fixed for 30 years would be $682.18.
The 15-year note offers the opportunity to save considerable money over the life of the loan, since the period of amortization is half that of the 30-year note. This means that the total interest paid on a 15-year note as compared to a 30-year note is significantly less.
However, calculating the overall savings of the 15-year note over the 30-year note depends on several individual circumstances, such as the borrower's changing income status.
Question: What about splitting my mortgage in two and paying bi-weekly?
Answer: Some people set on paying off their home loan early and reducing interest charges opt for a biweekly mortgage. Monthly payments are divided in half, payable every two weeks.
Because there are 52 weeks in a year, the program results in 26 half-payments, or the equivalent of 13 monthly payments per year instead of 12. Using the biweekly payment system, a homeowner with a $70,000, 30-year biweekly mortgage at 10 percent interest could save $60,000 in interest and pay off the balance in less than 21 years.
LEASE OPTIONS
Question: How do lease options work and what are the benefits?
Answer: A lease option is an arrangement with you and a seller to exercise the option to buy a house after you have rented it for a specific period. A portion of your rent would applied toward the purchase if the option is exercised. This is referred to as rent credit, which most institutional lenders will accept as part of the down payment if rental payments exceed the market rent and if a valid lease-purchase agreement is in effect, a copy of which must be attached to the loan application.
If you are a seller, lease options can give you several advantages, especially in a slow market. These include a monthly rent higher than market rent, top-market value for the property and tax-free use of the option consideration until the option expires or is exercised. Also, the renter is more likely to treat the property like an owner, tax-free use of option consideration until the option expires or is exercised.
Read any lease-option arrangement carefully for details on transferring the option and other important concerns.
For more information, get a copy of "How Lease- Options Benefit Realty Buyers, Sellers, Agents and Investors," available for $4 from Tribune Media Services, 64 E. Concord St., Orlando, FL 32801.
Question: What is a lease option?
Answer: When a renter signs a lease with an option to purchase a property for a specific price within a certain time frame, which is called a lease option. In most lease-option situations, a portion of the rent is applied to a future down payment.
Lease options are most popular among buyers who don't have enough funds for a down payment and closing costs.
Question: Where do I get information on lease options?
Answer: Contact your real estate agent (some even specialize in such transactions) or read up on lease options at the public library. If you have a real estate attorney, ask if he or she has any prepared information you can review. Most bookstores have a fairly hefty real estate book section these days. Many current real estate books have at least a section on lease options.
If you are considering a lease option, be sure you do your homework first. And have an attorney or financial advisor on hand to review any paperwork before you sign.
LOW-COST LOANS
Question: Is there such a thing as a no-cost or no-fee loan?
Answer: Not really. While some lenders occasionally promote "no-cost" loans, banking regulators have cracked down on these misrepresentations. Advertised "no-fee" loans may actually cost the borrower more over the long term because these costs are often rolled into the new note through higher interest or more principal.
A typical no-fee loan is one where the points charged and all fees are included in the loan principal, meaning that the borrower does not pay these expenses at the close of escrow, but instead ends up paying on them over the life of the loan. The loan is called a no-fee loan because the borrower is not charged any fees up front.
Question: What about these ads for no-cost loans?
Answer: In many states, real estate regulatory agencies are cracking down on such advertising. The very term, "no-cost" loan, is misleading because borrowers are actually paying a higher interest rate in exchange for not having to pay fees or closing costs up front when the loan is secured.
A "no-points" loan is one for which the lender does not charge points (one point is equal to 1 percent of the loan amount). But there are other fees involved in no-point loans, as with most loans.
NO MONEY DOWN
Question: Are there no-down payment home loans?
Answer: Though some real estate experts advise against it, home buyers interested in buying a house with nothing down can do so. Occasionally, a builder will offer no-down-payment loans to induce sales in an otherwise slow-moving project. Desperate sellers will also promise to finance the down payment to get out from under a property. A veteran can buy a house with nothing down through a VA home loan, as can members of some pension funds.
Question: Is equity sharing a good idea?
Answer: Equity sharing is not as popular in a slowly appreciating real estate market as in a rapidly appreciating one (when equity investors are easy to find).
Nevertheless, a form of equity sharing called tenants-in-common partnerships is becoming more popular, particularly in high-priced markets. First-time buyers are the most interested in TIC arrangements because it gives them a way to buy property collectively with an unrelated partner.
Loan underwriting standards are more complicated in TIC deals because lenders have more than one party's financial situation to assess. But many standard loan programs do apply.
Question: What about nothing down?
Answer: Though some real estate experts advise against it, home buyers interested in buying a house with nothing down can do so. But it's not easy finding these loans and in some cases they can be risky. Occasionally, a builder will offer no-down loans to induce sales in an otherwise slow-moving project. Desperate sellers also may agree to finance the full purchase price to get out from under a property. The Department of Veterans Affairs, or VA, loan program is one program that allows buyers to qualify for a no-down loan.
REVERSE ANNUITY MORTGAGES (RAMs)
Question: What is a reverse mortgage loan?
Answer: A reverse mortgage is a special type of loan available only to older homeowners with full or nearly full equity in their homes. Such owners can borrow against the equity they have built up over the years, but no repayment is necessary until the borrower sells the property or moves elsewhere. If the borrower dies before the property is sold, the estate repays the loan (plus any interest that has accrued.
These loans have become increasingly popular. If you believe you qualify for such a loan, be sure to have the document reviewed by an attorney or financial advisor.
SELLER FINANCING
Question: How are the rates set for seller financing?
Answer: The interest rate on an owner-carried loan is negotiable. Ask your agent to check with a lender or mortgage broker to determine the current rate on institutional first (or second) loans.
Seller financing typically costs less than conventional financing because sellers don't charge loan fees (points). Interest rates on an owner-carried loan will also be influenced by current Treasury bill and certificate of deposit rates. Sellers usually aren't willing to carry a loan for a lower return than they would earn if their money was invested elsewhere.
Question: What are the benefits of seller financing?
Answer: Seller financing offers tax breaks for sellers and alternative financing for buyers who can't qualify for conventional loans.
If you are a seller, the risks you face are the same as those facing any lender: Is the borrower a good credit risk? Will the property hold enough value over time to allow for the repayment of all loans made against it?
You should run a full credit check on the borrower, require hazard insurance on the property and include a due-on-sale clause. There also are financing, disclosure and repayment-term requirements that need to be met. It is wise to consult a lawyer when putting together this kind of transaction.
Question: What is seller financing?
Answer: Seller financing is when a seller helps to finance a real estate transaction by taking back a second note or even financing the entire purchase if the seller owns the home free and clear. Usually sellers do this when a buyer has difficulty qualifying for a conventional loan or meeting the purchase price.
Seller financing differs from a traditional loan because the seller does not give the buyer cash to complete the purchase, as does a lender. Instead, it involves extending a credit against the purchase price of the home while the buyer executes a promissory note and trust deed in the seller's favor. These special circumstances must be acceptable to the lender who makes the first mortgage on the property.
The necessary paperwork is prepared by the title or escrow company after the terms are worked out between the buyer and seller.
If you are a seller considering such an arrangement, it is critical to thoroughly evaluate the creditworthiness of the buyer first. Fear of default makes many sellers reluctant to take back a second. But seller financing can bring a higher price plus complete the sale sooner in some situations. |
