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Many people hear the term "FHA loan," and incorrectly assume the Federal Housing Administration is a mortgage lender. That is not the case. Established in 1934, the FHA helps lower-income, first-time home buyers get approved for a home loan by providing private lenders with mortgage insurance. This gives the lender the security of knowing the loan will be honored if the buyer defaults on the loan and allows buyers who might not otherwise qualify for a conventional loan get approved. FHA loans are available to individuals with less than perfect credit and often require a smaller down payment (usually at least 3%) than conventional loans. FHA loan limits vary throughout the country depending on the guidelines that apply to the particular market. The FHA and lender will require a real estate appraisal as a routine part of the mortgage application process. For more information on FHA loan insurance, visit the U.S. Dept. of Housing and Urban Development's Web site and search for the guide "100 Questions and Answers About Buying a New Home."
Most mortgage terms today are 15 or 30 years. If you choose a 15-year term, your payments will be higher but you may be able to get a lower interest rate. However, you will also pay down your loan more quickly and build equity at a faster rate. 30-year mortgages generally have higher interest rates than 15-year terms, but because of the extended repayment period, the monthly payments are lower. While it takes longer to pay down the loan and longer to build equity, this is the option many first-time home buyers opt for. If this is your second (or third or fourth) home, or you're older than 40 or so, you may consider a 15 year, so that your loan will be paid off before you retire.
When you are out searching for your dream home, it is important to know just how much house you can afford. Financial institutions that offer home loans will pre-qualify you to make sure you are considering houses that you realistically stand a chance of winning loan approval for. One of the things lenders consider is the loan to value ratio, or LTV. The LTV ratio is the amount of money a home buyer borrows to purchase a home versus the appraised value of the home. The higher the LTV ratio, the less money a home buyer has to put down on the property. For example, a home buyer would need to make a down payment of $10,000 on a $100,000 home at 90% LTV. Higher LTV ratios mean the lender is taking on more risk by lending the money to the buyer. Lenders almost universally require mortgage insurance on loans with LTVs above 80%. If you are paying mortgage insurance, keep in mind as soon as you build at least 20% equity (either through the miracle of appreciation or by actually paying the loan down), you are eligible to stop paying mortgage insurance. For more information on mortgage insurance and LTVs, visit Bankrate.com. The site offers a wealth of information on mortgages, including a variety of mortgage calculators.
The variety of home mortgage loans available today can be mind-boggling. It is critical that a home buyer understand the home mortgage products offered by lenders. An adjustable rate mortgage, or ARM, is a mortgage in which the payment fluctuates over time in response to changes in prevailing interest rates. In exchange for accepting a higher level of risk than a fixed-rate mortgage, lenders offer ARMs to consumers at initially lower interest rates. Of course, when interest rates rise or fall, your monthly payment increases or decreases accordingly on a regular schedule subject to the caps specified in the loan terms. Examples of ARMs are the balloon mortgages, which offers low initial payments with a large, lump-sum payment at the end of the loan, and two-step mortgages, which adjust once and then remain fixed for the life of the loan. The benefits of ARMs include lower initial interest rates and potentially lower monthly payments. Risks associated with ARMs include the unpredictability of the interest rate markets, which could ultimately price your monthly payment outside your ability to pay.
Many financial institutions that offer home loans now offer affordable mortgage options and first time buyer loans. These loans are designed to help borrowers who don't have a lot of money for a down payment or who have blemished credit get approved for loans. Most private lenders still require at least 3-5% down to approve a loan. There are also federal mortgage insurance programs, such as that offered by the Federal Housing Authority, that have low-down payment options. While these programs have done a lot to help people achieve their dream of homeownership, interest rates on low-down payment loans or loans for those with less than perfect credit tend to be higher than conventional loans. A good source of information on first time buyer loans is the U.S. Dept. of Housing and Urban Development's Web site. Search for the guide "100 Questions and Answers About Buying a New Home."
A reverse mortgage is a way for homeowners to get equity out of their home if it's already paid off. Reverse mortgages are typically used by retirees who need cash. A lender pays you a certain amount each month, based on the equity in your home and how long you expect to need the income. The funds come from the equity in your home, so when the home is sold, either by the owner or by the heirs, the lender is paid back from the proceeds.
The variety of home loans available today can be daunting. You must be sure to research the mortgage products offered by banks and mortgage brokers. A fixed-rate mortgage is a mortgage in which the payment remains the same for the life of the loan. Most fixed-rate mortgages come in 15-year and 30-year terms. The primary benefit of a fixed-rate mortgage is its predictability. You know what the payment is going to be and can plan your household budget accordingly.
It's important to consider how much of a mortgage you can afford. A online mortgage calculator may help you figure this out. Lenders will look carefully at your income over the past two years, and your expenses. Be sure you are comfortable with the monthly payment. Just because a lender will loan you a certain amount doesn't mean you'll be able to pay it back on time. Consider the condition of the property as well. If you're buying an antique Colonial, or even a 1970's contemporary, there may be more out of pocket expense than with new construction. And when you're the homeowner, you can't just pick up the phone and call the landlord when the water heater breaks - you head to Home Depot with your checkbook.
If you are fortunate enough to have your income rise year after year, you may find yourself in a position to make larger mortgage payments than required by the terms of your loan. This is a great way to pay off your loan faster. However, since mortgage interest is tax deductible, consult your tax adviser first. Some people opt for a bi-weekly mortgage, where half of your monthly payment is paid every two weeks. This payment plan results in, effectively, an extra payment each year, since you're making 26 half payments, vs. 12 full payments. This is a great way to get your mortgage paid off faster, and works especially well for people who get paid bi-weekly.
As interest rates have begun to rise and home prices remain high in many areas, some lenders are offering interest only mortgages. As the name suggests, you pay interest only on the loan, so the principal amount is never reduced. Some interest only loans add in a principal payment after the first few years. The risk here to the borrower is obvious: you aren't building any equity. If you pay only interest for five years, you still owe the bank the entire mortgaged amount at the end of five years. These loans are often used to qualify people for a more expensive house than they could otherwise afford. While they may be able to pay the interest for the first five years, they cannot afford the higher payment once the principal is added in. An interest only loan is only appropriate in very specific circumstances - if you know your income will significantly increase in a certain number of years, if you will have an influx of money at a certain time, or if you plan to only own the house for a short time, for example. Be very wary of the interest only loan.
If you are putting down a down payment of less than 20% of the selling price of your hew home, your mortgage lender will almost certainly require private mortgage insurance (PMI). This monthly cost will be added to your mortgage payment, and it protects the lender if you default on your mortgage. If you are paying mortgage insurance, once you have at least 20% equity in your home, you are eligible to stop paying mortgage insurance. Typically, you must request that your mortgage insurance be discontinued, and your lender may require a new appraisal to verify that you now owe 80% or less of the home's value. For more information on mortgage insurance and LTVs, visit Bankrate.com. The site offers a wealth of information on mortgages, including a variety of mortgage calculators.
Deciding how much of a down payment to make on your home can be daunting. On the one hand, you want to put a much down as possible, because you're going to be paying the mortgage for thirty years (or at least fifteen). Yet you don't want to put down so much that you have to borrow Uncle Earl's pickup truck to move yourself, or you can't afford to plant any bulbs in your new garden. Figure your moving and closing costs carefully, then add a 'fudge factor' of 10-15% for things like dinner out because you can't find the box that holds the pots and pans. Don't put down so much that you're 'house poor,' but make that down payment as big as you can to keep the mortgage reasonable. If you put down 20% of the purchase price or more, you'll qualify for the best mortgage rate (all else being equal) and you won't have to pay Private Mortgage Insurance (PMI).