Mortgages, Second Mortgages & Home Equity Loans Explained
Home Loan Types available
How Financing Details affect Your Offer
Because most real estate buyers do not have enough cash available to buy a home outright, a mortgage is required to finance the purchase. And because a purchase will likely be contingent upon obtaining a mortgage, the seller has the right to be informed of the buyer's financing plans in order to evaluate the transaction. This is why financing details are included in a purchase offer.
Financing Options Explained
All mortgage plans can be divided into categories in two different ways: Conventional and Government loans, or the various mortgage programs commonly classified as fixed rate loans, adjustable rate loans and all their combinations.
Conventional and Government Loans
Any mortgage loan other than an FHA, VA or an RHS loan is conventional loan.
FHA Loans
The Federal Housing administration (FHA), which is part of the U.S. Dept. of Housing and Urban Development (HUD), administers various mortgage loan programs. FHA loans have lower down payment requirements and are easier to qualify than conventional loans. FHA loans cannot exceed the statutory limit. Go to FHA Programs for more information.
VA loans
VA loans are guaranteed by U.S. Dept. of Veterans Affairs. The agency allows veterans and service persons to obtain home loans with favorable loan terms, usually without a down payment. In addition, it is easier to qualify for a VA loan than a conventional loan. According to the US Department of Veteran Affairs, basic entitlement is $36,000. For loans in excess of $144,000 to purchase or construct a home, additional entitlement up to an amount equal to 25 percent of the Freddie Mac conforming loan limit for a single family home may be available, but can change yearly. Currently the conforming loan limit for 2008 is $417,000 ($625,500 for Hawaii, Alaska, Guam and U.S. Virgin Islands). This means that qualified veterans could get a no down payment purchase loan for those amounts. VA determines your eligibility and, if you are qualified, VA will issue you a certificate of eligibility to be used in applying for a VA loan. For more information visit VA Affairs.
State and Local Housing Programs
Many states, counties and cities provide low to moderate housing finance programs, down payment assistance programs, or programs tailored specifically for a first time buyer. These programs are typically more lenient on the qualification guidelines and often designed with lower upfront fees. Also, there are often loan assistance programs offered at the local or state level such as MCC (Mortgage Credit Certificate) which allows you a tax credit for part of your interest payment. Most of these programs are fixed rate mortgages and have interest rates lower than the current market.
RHS Loan Programs
The Rural Housing Service (RHS) of the U.S. Dept. of Agriculture guarantees loans for rural residents with minimal closing costs and no down payment. Ginnie Mae, which is part of HUD, guarantees securities backed by pools of mortgage loans insured by these three federal agencies - FHA, or VA, or RHS. Securities are sold through financial institutions that trade government securities.
Conforming Loans
Conventional loans may be conforming and non-conforming. Conforming loans have terms and conditions that follow the guidelines set forth by Fannie Mae and Freddie Mac. These two stockholder-owned corporations purchase mortgage loans complying with the guidelines from mortgage lending institutions, packages the mortgages into securities and sell the securities to investors. By doing so, Fannie Mae and Freddie Mac, like Ginnie Mae, provide a continuous flow of affordable funds for home financing that result in the availability of mortgage credit for americans.
According to Fannie Mae loan limits are for the following:
First Mortgage:
Number of Units
|
Maximum Original
Principal Balance |
Alaska, Guam, Hawaii,
and U.S. Virgin Islands Only |
| 1 |
$417,000 |
$625,500 |
| 2 |
$533,850 |
$800,775 |
| 3 |
$645,300 |
$967,950 |
| 4 |
$801,950 |
$1,202,925 |
Second Mortgage:
Number of Units
|
Maximum Original
Principal Balance |
Alaska, Guam, Hawaii,
and U.S. Virgin Islands Only |
| 1 |
$208,500 |
$312,750 |
| 2 |
$266,925 |
$400,387 |
| 3 |
$322,650 |
$483,975 |
| 4 |
$400,975 |
$601,462 |
Jumbo Loans
Loans above the maximum loan amount established by Fannie Mae and Freddie Mac are known as 'jumbo' loans. Because jumbo loans are bought and sold on a much smaller scale, they often have a little higher interest rate than conforming, but the spread between the two varies with the economy. Maximum Jumbo Loan amounts vary depending on territory. Visit Fannie Mae Territory Lookup Table for more information.
B & C Paper Loans
Loans that do not meet the borrower credit requirements of Fannie Mae and Freddie Mac are called 'B', 'C' and 'D' paper loans vs. 'a' paper conforming loans. B/C loans are offered to borrowers that may have recently filed for bankruptcy, foreclosure, or have had late payments on their credit reports. Their purpose is to offer temporary financing to these applicants until they can qualify for conforming "a" financing.
Fixed Rate Mortgages
With a fixed rate mortgage (FRM) loan, the interest rate and your mortgage monthly payments remain fixed for the period of the loan. Fixed-rate mortgages are available for 40, 30, 25, 20, 15 years and 10 years. Generally, the shorter the term of a loan, the lower the interest rate borrowers will have. The 30-year fixed rate is the most popular loan length term. a 30-year fixed rate loan will have lower payments than a 15 year fixed rate loan. But if a borrower can afford higher monthly payments, then a 15-year fixed-rate mortgage will allow them to repay their loan twice as fast and save a significant amount of money in unpaid interest. another great option is a bi-weekly mortgage. This plan schedules payment of half of the monthly mortgage payment every 2 weeks (vs. one payment per month), and allows a borrower to repay a loan much faster (a 30 year loan can be paid off within 18 to 19 years).
Adjustable Rate Mortgages
A variable or adjustable rate mortgage loan (ARM) is a loan whose interest rate, and accordingly monthly payments, fluctuate over the period of the loan. With this type of mortgage, periodic adjustments based on changes in a defined index are made to the interest rate. The index for your particular loan is established at the time of application. Common aRM Loans are as follows:
- Bank Prime Loan (Prime Rate)
- Fannie Mae's Required Net Yield (RNY)
- National average Contract Mortgage Rate
- 12-Month Treasury average (MTa or MaT)
- Certificate of Deposit Index (CODI)
- 11th District Cost of Funds Index (COFI)
- Cost of Savings Index (COSI)
- Constant Maturity Treasury (CMT)
- Treasury Bill (T-Bill)
- London Inter Bank Offering Rates (LIBOR)
- Certificates of Deposit (CD) Indexes
Visit the Federal Reserve Board for more information on ARM loans.
Option ARM Loans
One of the most creative products that doesn't require a set payment each month is the option ARM. After the first payment, you get four payment options to choose from each month: your lender sends you a monthly statement offering a minimum payment, interest-only payment, 30-year amortized payment or 15-year amortized payment.
Additional Common Loan Options
- Combined (Hybrid) Loans
- Balloon Loans
- Negative Amortized Loans
- Fixed-period ARMs
- Two-Step Mortgage
- Convertible ARMs
- Graduated Payment Mortgages (GPMs)
- Buydown Mortgage
With a variety of different loan programs available, it is important to choose the type of loan that will best suit your needs. If you don't plan to stay in your house for at least 5 to 7 years, it will be reasonable to consider an Adjustable Rate Mortgage, Balloon Mortgage or Two-Step Mortgage. ARMs traditionally offer lower interest rates during the early years of the loan than fixed-rate loans. Generally, you can start to consider 15 or 30 year fixed rate mortgages if you plan to stay in your home for more than 5 - 7 years.