Financing and Insurance
HOME FINANCING OPTIONS
Types of mortgage rates include the following:

Fixed-Rate Mortgage
A fixed-rated mortgage comes with an interest rate that remains the same for the life of the loan. Industry standards set up a life or term of a mortgage as 30 years, but 15- and 20-year term loans also are available.
  • Shorter-term loans come with cheaper interest rates. A 15-year mortgage interest rate is typically 0.25 to 0.5 percent lower than a 30-year mortgage. Both the cheaper rate and the shorter term mean you also pay less during the life of the loan than you would if you borrowed the same amount with a long-term loan; however, monthly payments of a shorter-term loan generally are higher than with a long-term loan because it is necessary to repay the debt sooner.
  • A long-term loan with smaller monthly payments can be easier to budget, but if you have a stable salary that allows you to afford the larger monthly outlay, the shorter-term loan can be to your advantage. Whatever term you choose, fixed-rate mortgages protect you from the risk of rising interest rates. Of course, since you are locked in to a given rate, you could end up with a rate higher than necessary should rates fall.

Adjustable-Rate Mortgages
Adjustable-rate mortgages (ARMs) come with interest rates that adjust up or down depending on current economic trends and are based on a money market index. Commonly used is the one-year U.S. Treasury bill because its yield is similar to the 30-year bill used to set rates on 30-year fixed-rate mortgages. ARMs also might be tied to other indexes, including certificates of deposit (CDs) or the London Inter-Bank Offer Rate (LIBOR) among other regularly published indexes.

To come up with the ARM rate, the lender will add to the index a “margin” of usually two to four percentage points. Initially, the ARM rate is lower than the fixed rate, from about a quarter point to two points or more, depending on the economy. The date when the first adjustment occurs (from six months to many years) and how often the rate adjusts depend on the terms of the loan. After the first adjustment occurs, subsequent adjustments can occur every six months, once a year or longer intervals. The adjustment period is disclosed in the specific loan.

ARMs generally have limits or “caps” on how high it can adjust during each adjustment period as well as during the life of the loan. The caps protect you from drastic market changes, but ARMs do not offer the stability of a fixed-rate loan; however, the lower initial rate of an ARM can help you qualify for a larger loan or start you off with smaller payments than you would have for the same loan at a higher fixed rate. Plus, if index rates fall with an ARM, so does your monthly mortgage.

ARMs also could be a good choice for someone who knows his or her income will rise and at least keep pace with the loan rate’s periodic adjustment cap. If you plan to move in a few years and are not concerned about the possibility of a higher rate, an ARM could be a sound option.

Most lenders now are requiring that buyers use an escrow account. The lender automatically places a portion of the homeowner’s monthly payment into an account specifically designated to pay for insurance and taxes. From that account, the lender is responsible for paying the annual bills.

Types of loans include following:

Conventional
This is the traditional 15- or 30-year home loan. Variations include conforming loans (loans under $417,000), jumbo loans (loans for more than $417,000) and adjustable-rate mortgages (ARMs).

FHA Loans
The Federal Housing Administration (FHA), part of the U.S. Department of Housing and Urban Development (HUD), administers various mortgage loan programs. FHA loans have lower down-payment requirements and are easier to qualify for than conventional loans, but FHA loans cannot exceed a statutory limit. Reasons cited by FHA for this option include the following:
  • Easier qualification: Because FHA insures your mortgage, lenders are more willing to give loans with lower qualifying requirements.
  • Less-than-perfect credit: Even if you have had credit problems, such as bankruptcy, it’s easier for you to qualify for an FHA loan than a conventional loan.
  • Low down payment: FHA has a low 3-percent down payment, and that money can come from a family member, employer or charitable organization. Other loans do not allow this.
  • Lower cost: FHA loans often have competitive interest rates because the federal government insures the loans. Always compare an FHA loan with other loan types.

Find out more information about FHA Loans at
www.fha-home-loans.com.

   
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