When it comes to real estate loans, you'll find that there are many options. What's more, the options are continually changing. As the market shifts, different loan types and structures move in and out of popularity. For a borrower, the difference between one mortgage and another can have a huge financial impact.
15 Year Fixed Rate Mortgage
What is a 15 Year Fixed Rate Mortgage?
A 15 Year Fixed Rate Mortgage is a loan whose interest rate stays the same for the duration of the loan.
Should you choose a 15 Year Fixed Rate Mortgage?
People who desire a predictable, fixed deduction from their monthly budget, want a shorter loan term, and can tolerate a higher monthly payment are well-suited for a 15 year fixed mortgages.
What you should know about 15 Year Fixed Rate Mortgages?
The advantages of a 15 Year Fixed Rate Mortgage is it's predictable monthly payment. The paydown is half the time of a 30 Year Fixed Rate Mortgage, with rates that are usually lower than that of a 30 Year Fixed Rate. It's relatively simple and maintenance free once you lock the rate, without worrying about rate fluctuation.
The disadvantages of a 15 Year Fixed Rate Mortgage are that the monthly payments are quite higher than a 30 Year Fixed Rate Mortgage, making these loans more difficult to qualify for; and the mortgage tax deduction is less than a 30 Year Fixed Rate.
What is a 30 Year Fixed Rate Mortgage?
A 30 Year Fixed Rate Mortgage is a loan whose interest rate stays the same for the duration of the loan.
Should you choose a 30 Year Fixed Rate Mortgage?
People who don't like surprises and those who desire a predictable, fixed deduction from their monthly budget are well-suited for 30 Year Fixed Rate Mortgages. It's also attractive to people who plan to stay in the house for more than 5-7 years and desire a mortgage payment spread out over many years so it's more affordable.
What you should know about 30 Year Fixed Rate Mortgages?
The advantages of a 30 Year Fixed Rate Mortgage is it's predictable monthly payment. It's also a hedge against inflation (the rate is not tied to the index, so it doesn't go up or down). It's relatively simple and maintenance-free (no need to worry about rate fluctuation). It provides a tax deduction from the interest you pay on your mortgage, and if rates drop significantly, you can refinance.
The disadvantages of a 30 Year Fixed Rate Mortgage are that payments are usually higher than 15 Year Fixed Rate Mortgage and Adjustable Rate Mortgage (ARMs), and if the owner decides to sell the home in less than five years, they could end up paying more interest vs. an ARM.
Adjustable Rate Mortgages (ARM)
What is an Adjustable Rate Mortgage?
An adjustable-rate mortgage, or ARM, has an introductory interest rate that lasts a set period of time and adjusts annually thereafter for the remaining time period for a total of 30 years. After the set time period your interest rate will change and so will your monthly payment. The monthly payment amount is usually subject to a cap.
What you should know about Adjustable Rate Mortgages?
The initial interest rates for ARMs are normally lower than a fixed rate, which in turn means your monthly payment is lower. If you only plan to stay in your home for a short period of time, an ARM might be advantageous to you because you plan on moving or selling your home before your initial mortgage rate adjusts. If you expect your income to increase in the future, you might feel comfortable with the idea of saving money now by having a lower monthly payment but be comfortable with having to make higher payments in the future when your income rises and your ARM adjusts.
ARMs are generally considered riskier because your interest rate will probably go up after the initial fixed-rate period ends.
The fluctuations of an Adjustable Rate Mortgage
You can determine how much your ARM's interest rate is going to increase or decrease after the initial fixed-rate period ends based upon the index and margin it is tied to. The index value is variable while the margin value is constant throughout the lifetime of the loan.
An index is a benchmark variable interest rate that is published regularly and available publicly. Typical index rates that are associated with ARMs are LIBOR (London Interbank Offered Rate), COFI (11 District Cost of Funds), T-Bill (U.S. Treasury Bill) and CMT (Constant Maturity Treasury), etc. A margin is a fixed percentage rate that you add to your index rate to obtain the fully indexed rate for an adjustable-rate mortgage. Margin rates can often be negotiated with your lender.
FHA (Federal Housing Administration) Loan
What is an FHA Loan?
An FHA loan is a mortgage loan that is insured by the Federal Housing Administration (FHA). Essentially, the federal government insures loans for FHA-approved lenders in order to reduce their risk of loss if a borrower defaults on their mortgage payments.
The FHA program was created in response to the rash of foreclosures and defaults that happened in 1930s; to provide mortgage lenders with adequate insurance; and to help stimulate the housing market by making loans accessible and affordable. Nowadays, FHA loans are very popular, especially with first-time home buyers.
What you should know about an FHA Loan?
Typically an FHA loan is one of the easiest types of mortgage loans to qualify for because it requires a low down payment and you can have less-than-perfect credit. An FHA down payment of 3.5 percent is required. Borrowers who cannot afford a traditional down payment of 20 percent or can’t get approved for private mortgage insurance should look into whether an FHA loan is the best option for their personal scenario. Another advantage of an FHA loan is that it can be assumable, which means if you want to sell your home, the buyer can “assume” the loan you have. People who have low or bad credit, have undergone a bankruptcy or have been foreclosed upon may be able to still qualify for an FHA loan.
You knew there had to be a catch, and here it is: Because an FHA loan does not have the strict standards of a conventional loan, it requires two kinds of mortgage insurance premiums: one is paid in full upfront – or, it can be financed into the mortgage – and the other is a monthly payment. Also, FHA loans require that the house meet certain conditions and must be appraised by an FHA-approved appraiser.
Upfront Mortgage Insurance Premiums (MIP)
Appropriately named, this is an upfront monthly premium payment, which means borrowers will pay a premium of 1.75% of the home loan, regardless of their credit score. Example: $300,000 loan x 1.75% = $5,250. This sum can be paid upfront at closing as part of the settlement charges or can be rolled into the mortgage.
Annual MIP (Charged Monthly)
Called an annual premium, this is actually a monthly charge that will be figured into your mortgage payment. It is based on a borrower's loan-to-value (LTV) ratio, loan size, and length of loan. There are different Annual MIP values for loans with a term greater than 15 years and loans with a term of less than or equal to 15 years.Loans with a term of greater than 15 Years and Loan amount < or =$625,000.
Loans with a term of greater than 15 Years and Loan amount < or =$625,000
- LTV less than or equal to 95 percent, annual premiums are .80%
- LTV above 95 percent, annual premiums are .85%.
Loans with a term of greater than 15 Years and Loan Amount >$625,000
- LTV less than or equal to 95 percent, annual premiums are 1.00%
- LTV above 95 percent, annual premiums are 1.05%
Loans with a term of 15 years or less and Loan amount < or =$625,000
- LTV less than or equal to 90 percent, annual premiums are .45%
- LTV above 90 percent, annual premiums are .70%
Loans with a term of 15 Years or less and Loan Amount >$625,000
- LTV less than or equal to 90 percent, annual premiums are .70%
- LTV above 90 percent, annual premiums are .95%
Example (for LTV less than 95 percent on a 30 year loan): $300,000 loan x 1.30% = $3,900. Then, divide $3,900 by 12 months = $325. Your monthly premium is $325 per month. The Mortgage Insurance will be in your payments for the entire loan term if your LTV is >90%. If your LTV is = or < 90% ,the Mortgage Premium will be for the mortgage term or 11 years, whichever occurs first.
Single family home mortgages with amortization terms of 15 years or less, and a loan-to-value (LTV) ratio of 78 percent or less, remain exempt from the annual MIP.
FHA Mortgage Insurance Duration
The duration of your annual MIP will depend on the amortization term and LTV ratio on your loan origination date.
FHA Loan Requirements
- Must have a steady employment history or worked for the same employer for the past two years
- Must have a valid Social Security number, lawful residency in the U.S. and be of legal age to sign a mortgage in your state
- Must make a minimum down payment of 3.5 percent. The money can be gifted by a family member.
- New FHA loans are only available for primary residence occupancy
- Must have a property appraisal from a FHA-approved appraiser
- Your front-end ratio (mortgage payment plus HOA fees, property taxes, mortgage insurance, home insurance) needs to be less than 31 percent of your gross income, typically. You may be able to get approved with as high a percentage as 46.99 percent. Your lender will be required to provide justification as to why they believe the mortgage presents an acceptable risk. The lender must include any compensating factors used for loan approval.
- Your back-end ratio (mortgage plus all your monthly debt, i.e., credit card payment, car payment, student loans, etc.) needs to be less than 43 percent of your gross income, typically. You may be able to get approved with as high a percentage as 56.99 percent. Your lender will be required to provide justification as to why they believe the mortgage presents an acceptable risk. The lender must include any compensating factors used for loan approval.
- Minimum credit score of 580 for maximum financing with a minimum down payment of 3.5 percent.
- Minimum credit score of 500-579 for maximum LTV of 90 percent with a minimum down payment of 10 percent. FHA-qualified lenders will use a case-by-case basis to determine an applicants' credit worthiness.
- Typically you must be two years out of bankruptcy and have re-established good credit. Exceptions can be made if you are out of bankruptcy for more than one year if there were extenuating circumstances beyond your control that caused the bankruptcy and you've managed your money in a responsible manner. See this page for more details.
- Typically you must be three year out of foreclosure and have re-established good credit. Exceptions can be made if there were extenuating circumstances and you've improved your credit. If you were unable to sell your home because you had to move to a new area, this does not qualify as an exception to the three-year foreclosure guideline.
Property needs to meet certain standards: Also, an FHA loan requires that a property meet certain minimum standards at appraisal. If the home you are purchasing does not meet these standards and a seller will not agree to the required repairs, your only option is to pay for the required repairs at closing (to be held in escrow until the repairs are complete).
Keep current on the premium costs for FHA loans by visiting the U.S. Department of Housing and Urban Development (HUD).
FHA Loan Limits
There are maximum mortgage limits for FHA loans that vary by state and county. In certain counties, you may be able to get financing for a loan size up to $729,750 with a 3.5 percent down payment. Conventional financing for loans that can be bought by Fannie Mae or Freddie Mac are currently at $625,000.
To find out the FHA mortgage limits in your area, click here
VA (Department of Veteran Affairs) Loan
What is a VA Loan?
VA loans are home loans for the purchase of a primary residence available to consumers who have served or are presently serving in the U.S. military. While the Department of Veterans Affairs (VA) does not lend money for VA loans, it backs loans made by private lenders (banks, savings and loans, or mortgage companies) to veterans who qualify.
Who is Eligible for a VA Loan?
- Active-duty personnel
- Reservists/ National Guard memebers
- Some surviving spouses
Benefits of a VA Loan
There are many, as taken directly from the Veterans Affairs site:
- No down payment required (unless required by the lender or the purchase price is more than the reasonable value of the property).
- Buyer informed of reasonable value.
- Negotiable interest rate.
- Ability to finance the VA funding fee (plus reduced funding fees with a down payment of at least 5 percent and exemption for veterans receiving VA compensation).
- Closing costs are comparable with other financing types (and may be lower).
- No mortgage insurance premiums.
- An assumable mortgage.
- Right to prepay without penalty.
- For homes inspected by VA during construction, a warranty from builder and assistance from VA to obtain cooperation of builder.
- VA assistance to veteran borrowers in default due to temporary financial difficulty.
ow can Veterans receive a VA Loan?
Veterans can apply for a VA loan with any mortgage lender that participates in the VA home loan program, but will need a Certificate of Eligibility from the VA to prove to the lender they are eligible for a VA loan. Lenders can also get the certificate on behalf of their clients.
How to apply for a Certificate of Eligibility and what evidence you'll need to get the Certificate?
Click here for eligibility requirements.
How large of a VA Loan can a veteran receive?
2014 VA County Loan Limits : According to the VA there is "... no maximum that an eligible veteran may borrow using a VA-guaranteed loan." However, there are county limits that must be used to calculate the VA's maximum guaranty amount for a particular county. Generally, an eligible veteran can get a loan up to $417,000 with no money down and in some high-cost places, up to $1,094,000.
Resources for VA Loans
General info about VA loans, click here.
General FAQ page for VA loans, click here.
What is a Jumbo Loan?
A loan is considered jumbo if it exceeds the conforming and conforming high-balance loan limits:
- The current conforming loan limit for a single-family home is $417,000 for all states—except Hawaii and Alaska, where it is $625,500
- In federally designated high-priced markets in the continental United States, conforming high-balance limits range from $417,001 to $625,500 and, in designated markets in Hawaii, from $625,501 to $721,050. To note, conforming high-balance loans typically have higher interest rates, stricter underwriting and larger down payment requirements than standard conforming loans, but are generally priced lower than jumbo loans. Additionally, limits may be different for multi-unit properties.
Why choose a Jumbo Loan?
Jumbo loans are available for primary residences, second or vacation homes and investment properties, and are also available in a variety of terms, and are available as fixed-rate or adjustable-rate loans. They may have higher interest rates than conforming and conforming high-balance home loans and can have stricter underwriting and larger down payment requirements.