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Home Financing 101
Home Loans 101
Today, finding the right financing for a home purchase is as important as finding the right house. The only certainty in the mortgage market is change – and finding the financing package that best suits your needs can be a complicated process.
Your Better Homes and Gardens Real Estate sales professional has only one goal in mind whether you are selling or buying a home – helping you achieve your real estate goals. Depend on your sales professional to keep you abreast of all the pertinent information regarding the purchase of your home or the availability of new homes on the market.
Once you’ve found your new home, your local Better Homes and Gardens Real Estate sales professional can help you find the financing method that works for you from among the many types of mortgages available. This brochure provides an overview of the types of mortgages currently being used most frequently. Keep in mind the financing methods may vary according to state and region.
Investing in a home
Though the rate of appreciation in home values is more rapid at some times than at others, a home has traditionally been a prime personal investment.
There are many reasons why: According to the National Association of Realtors, the national median existing-home price for all housing types should grow 5.6 percent this year (2006) to $195,500. A carefully selected home may stay ahead of inflation rather than simply track it. Real estate is a cyclical business, but historically, houses have risen in value. If you hold a property, chances are you’ll realize the benefits of its appreciation. Buying and owning a home can save you money in taxes, particularly in the early years of a mortgage when most of your payment is applied to the interest.
With a home, you get the full use of your investment – living in your home – at the same time you’re building ownership value. Generally, you’ll gain nothing by waiting to invest in a home. You’ll often end up paying more for a home by postponing the chase.
Where to find mortgage money
To find the best mortgage, be sure to compare financial institutions – shop around and compare savings and loans, mortgage companies, commercial banks or credit unions. One mortgage will surely fit your needs. The federal government is also a resource for mortgages. They offer VA-guaranteed loans. The Texas Loan Center is a mortgage brokerage that has the resources to shop the best rates and programs to meet your needs.
Conventional financing options
All mortgages are called conventional unless they are government-backed loans. These mortgages are made by private lenders.
Standard fixed-rate mortgages:
This traditional, “tried-and-true” mortgage option is a loan with a constant interest rate and level, equal payments during a set period of time – most commonly, 30 years. The biggest selling point of fixed-rate loans is predictability, and they are particularly suited to people with steady incomes. If lower rates indicate the time is right to refinance, it’s a good idea to compare the costs of incurring a new mortgage – such as prepayment penalties and loan origination costs – vs. keeping your current mortgage rate.
Adjustable-rate mortgages (ARMs):
As the name implies, the interest rate on an adjustable-rate mortgage changes throughout the term to stay current with present interest rates. ARMs are most popular when rates are relatively high and appear to be dropping and when the difference between the ARM and the fixed rate is greater than 2 to 3 percent. Different lenders offer variations in the front end of their ARM plans, such as the points you pay or discounted initial rates. To make a useful comparison of an ARM rate, consider the index upon which the rate is based, the margin or spread between that index and the rate paid, and the intervals at which the rate and payments are adjusted.
The rate you pay is directly related to a particular interest rate index. The vast majority of ARMs are based either on average yields of constant maturity U.S. Treasury Securities or on the average cost of mortgage money across the nation. (This is called the National Average Federal Home Loan Bank Board Contract Rate.)
Most lenders will offer ARMS that state a margin that is added to the index to get the rate on which the payments are based. Currently, most margins are between 2 and 3 percent. Always look at the index plus the margin when comparing ARMs. The larger the margin, the less likely the rate you pay will go down, even if interest rates drop.
Rate adjustment periods:
With most ARMs, any periodic adjustment in the interest rate changes the payment. Adjustment periods tend to reflect the period of the index of the most popular ARMs; currently, annual adjustments are the most common.
As a safeguard against excessively high payment increases, some ARMs place a cap on the amount by which either the interest rate or payment may rise at any single adjustment, over the life of the loan, or both. Annual caps are often between 1 and 2 percentage points, and lifetime caps are typically 6 percentage points. Look at the cap as the “worst-case scenario” to determine if the ARM suits your financial capabilities. Your Better Homes and Gardens Real Estate sales professional can help you evaluate the financing options available so you may make the right decision.
The Veterans Administration guarantees lenders against loss if a property is foreclosed due to default. These assumable loans are available to eligible veterans and may be used to buy, refinance, construct or repair a house. If the VA property appraisal is less than the sale price, the borrower pays the difference as a down payment.
Borrowers can lock in the price of a house today and postpone financing for 12 to 18 months with these agreements. The borrower gives the seller a deposit that is applied to the purchase and makes monthly rental payments. Lease/purchase agreements are used by sellers who want to keep a home occupied and receive rental money after they’ve moved out, and by buyers who are not in a position to commit to a property at a particular time.
Buyers and sellers work out a contract that states a down payment, interest rate and term. Some contracts have long terms; others are short term with balloon payments. State regulations about title transfer in a contract sale may vary. First mortgages from relatives or others: Sometimes relatives or private investors will purchase a home outright then offer a borrower a first mortgage. Incidentally, the Internal Revenue Service will impute higher rates on the lender for loans arranged with below-market rates.
These are used when a borrower needs additional financing to buy a home. This mortgage may be financed by the seller, another lender, relative or investor. Terms are negotiated between buyer and lender. Often, second mortgages are used when a borrower assumes a guaranteed first mortgage with a lower interest rate and needs to make up the difference between the loan and the sale price.
An equity plan allows buyers to buy new homes by borrowing against a portion of the equity in their present home. A six-month “bridge” loan is secured on which no monthly payments are required and that money is used to purchase the new home. When the present home sells, the loan is paid off with the proceeds of the sale. If the home doesn’t sell within six months, the owner may renew the loan or choose from other “back-up” options.