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In a conventional fixed rate mortgage, your interest
rate stays the same for the term of the mortgage, which is normally
15 or 30 years. The advantage of a fixed-rate mortgage is that
you always know exactly how much your mortgage payment will
be, and you can plan for it.
The conforming limit is a mortgage amount set by Congress and
is the maximum loan size eligible for purchase by either Fannie
Mae or Freddie Mac, two Federally chartered organizations who
purchase the underlying securities from mortgage originators.
Those funds are reinvested in new mortgages completing the flow
of funds cycle. The current conforming limit is set at $322,700.
Any loan amount above that figure is considered a "Jumbo" loan
and is often subject to an interest rate pricing premium as
well as to some additional underwriting restrictions.
A common strategy to lower overall interest costs if your purchase
or refinance balance is above $322,700 is to use a combination
of both first and second trust money, referred to as an 80/10/10,
80/15/5 or 80/20.
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With a fixed-rate mortgage, the interest
rate stays the same during the life of the loan. But with an
ARM, the interest rate changes periodically, usually in relation
to an index, and payments may go up or down accordingly. Lenders
generally charge lower initial interest rates for ARMs than
for fixed-rate mortgages.
This makes the ARM easier on your pocketbook at first than a
fixed-rate mortgage for the same amount. It also means that
you might qualify for a larger loan because lenders sometimes
make this decision on the basis of your current income and the
first year's payments. Moreover, your ARM could be less expensive
over a long period than a fixed-rate mortgage -- for example,
if interest rates remain steady or move lower. Against these
advantages, you have to weigh the risk that an increase in interest
rates would lead to higher monthly payments in the future. It's
a tradeoff -- you get a lower rate with an ARM in exchange for
assuming more risk. Here are some questions you need to consider:
Is my income likely to rise enough to cover higher mortgage
payments if interest rates go up? Will I be taking on other
sizable debts, such as a loan for a car or school tuition, in
the near future? How long do I plan to own this home? (If you
plan to sell soon, rising interest rates may not pose the problem
they do if you plan to own the house for a long time.)
Can my payments increase even if interest rates generally do
not increase?
With most ARMs, the interest rate and monthly payment change
every year, every three years, or every five years. However,
some ARMs have more frequent interest and payment changes. The
period between one rate change and the next is called the adjustment
period. So, a loan with an adjustment period of one year is
called a one-year ARM, and the interest rate can change once
every year. Most lenders tie ARM interest rate changes to changes
in an "index rate." These indexes usually go up and down with
the general movement of interest rates. If the index rate moves
up, so does your mortgage rate in most circumstances, and you
will probably have to make higher monthly payments.
On the other hand, if the index rate goes down your monthly
payment may go down. Lenders base ARM rates on a variety of
indexes. Among the most common are the rates on one-, three-,
or five-year Treasury securities. Another common index is the
national or regional average cost of funds to savings and loan
associations. A few lenders use their own cost of funds, over
which -- unlike other indexes -- they have some control. You
should ask what index will be used and how often it changes.
Also ask how it has behaved in the past and where it is published.
To determine the interest rate on an ARM, lenders add to the
index rate a few percentage points called the "margin." The
amount of the margin can differ from one lender to another,
but it is usually constant over the life of the loan. Let's
say, for example, that you are comparing ARMs offered by two
different lenders. Both ARMs are for 30 years and an amount
of $65,000. (All the examples used in this booklet are based
on this amount for a 30-year term. Note that the payment amounts
shown here do not include items like taxes or insurance.)
Both lenders use the one-year Treasury index. But the first
lender uses a 2% margin, and the second lender uses a 3% margin.
Here is how that difference in margin would affect your initial
monthly payment. In comparing ARMs, look at both the index and
margin for each plan. Some indexes have higher average values,
but they are usually used with lower margins. Be sure to discuss
the margin with your lender.
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The Federal Housing Administration was
established in 1934 to advance opportunities for Americans to
own homes. By providing private lenders with mortgage insurance,
the FHA gives them the security they need to lend to first-time
buyers who might not be able to qualify for conventional loans.
With the FHA, you don't need perfect credit or a high-paying
job to qualify for a loan. The FHA also makes loans more accessible
by requiring smaller down payments than conventional loans.
In fact, an FHA down payment could be as little as a few months
rent. And your monthly payments may not be much more than rent.
Anyone who meets the credit requirements, can afford the mortgage
payments and cash investment, and who plans to use the mortgaged
property as a primary residence may apply for an FHA-insured
loan. There is also no minimum income requirement. But you must
prove steady income for at least three years, and demonstrate
that you've consistently paid your bills on time. FHA loan limits
vary throughout the country, from $115,200 in low-cost areas
to $208,800 in high-cost areas.
The loan maximums for multi-unit homes are higher than those
for single units and also vary by area. Because these maximums
are linked to the conforming loan limit and average area home
prices, FHA loan limits are periodically subject to change.
You must have a down payment of at least 3% of the purchase
price of the home. Most affordable loan programs offered by
private lenders require between a 3%-5% down payment, with a
minimum of 3% coming directly from the borrower's own funds.
To pay the down payment and closing costs of an FHA loan, you
can use your own funds as well as any cash gifts or money from
a private savings club. If you can do certain repairs and improvements
yourself, your labor may be used as part of a down payment (called
-sweat equity").
If you are doing a lease purchase, paying extra rent to the
seller may also be considered the same as accumulating cash.
The FHA is generally more flexible than conventional lenders
in its qualifying guidelines. In fact, the FHA allows you to
re-establish credit if: two years have passed since a bankruptcy
has been discharged all judgments have been paid any outstanding
tax liens have been satisfied or appropriate arrangements have
been made to establish a repayment plan with the IRS or state
Department of Revenue three years have passed since a foreclosure
or a deed-in-lieu has been resolved Except for the addition
of an FHA mortgage insurance premium, FHA closing costs are
similar to those of a conventional loan.
The FHA requires a single, up-front mortgage insurance premium
equal to 2.25% of the mortgage to be paid at closing (or 1.75%
if you complete the HELP program). This initial premium may
be partially refunded if the loan is paid in full during the
first seven years of the loan term. After closing, you will
then be responsible for an annual premium - paid monthly - if
your mortgage is over 15 years or if you have a 15-year loan
with an LTV greater than 90%. Although you can't roll closing
costs into your FHA loan, you may be able to use the amount
you pay for them to help satisfy the down payment requirement.
Ask me for details.
For more information on the FHA and how you can obtain an FHA
loan, visit the HUD web site at http://www.hud.gov or call a
HUD-approved counseling agency at 1-800-569-4287 or TDD: 1-800-877-8339.
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A Construction to Permanent Loan is a loan
available to borrowers who have an agreement with an "approved"
general contractor/builder to build their single family detached
personal residence. Borrowers will have one closing and will
sign one set of loan documents for both the construction and
permanent phase of the home. The borrower is provided with the
loan amount to construct their new home with financing up to
95% of the value of the home. Generally, the construction phase
varies from 6 to 9 to 12 months while the permanent loan is
amortized over a 30 or 15 year term.
The following homes are eligible for a Construction to Permanent
Loan:
Single family one-unit detached residences.
Detached dwellings in Planned Unit Developments (PUDs).
Manufactured homes permanently affixed to the property.
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A home equity loan is a second mortgage
on your home. Home equity loans are a very powerful tax-deductible
financial tool. Since home equity credit is a type of mortgage,
it shares lower interest rates and the tax advantages of mortgages.
You can borrow up to $100,000 of your available home equity
for virtually any purpose, and 100% of the interest paid each
year is tax deductible. You must weigh carefully whether a home
equity loan is a good option for you because it is a second
mortgage on your home.
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