| Financial Considerations
Fixed Rate Mortgage
The interest rate stays the
same throughout the term of the loan - usually 15 or 30 years -
so the principal interest portion of your payment remains the same.
Payments are stable but initial rates tend to be higher than adjustable
rate loans and often cannot be assumed by a subsequent buyer.
This is a loan which must be
paid off after a certain period. The advantage they offer is an
interest rate that is lower than a mortgage that is made for 30
The interest rate is linked
to a financial index, such as a Treasury security or a cost of funds
- so your monthly payments can vary up or down over the life of
the loan - usually 25 to 30 years. Interest rates can change monthly,
annually, or every 3 or 5 years. Some ARMs have a cap on the interest
rate increase, to protect the borrower. Other terms relating to
- Adjustment period: The length
of time between interest rate changes. Example: one year ARM-interest
- Cap: The limit on how much
an interest rate or monthly payment can change at each adjustment
or over the life of the loan.
- Conversion clause: A provision
in some loans that enables you to change an ARM to a fixed rate
loan, usually after the first adjustment period. This may require
- Index: A measure of interest
rate changes used to determine changes in the loan's interest
rate over the term of the loan.
- Margin: The number of percentage
points a lender adds to the index rate to calculate the ARM's
interest rate at each adjustment.
The VA does not lend money,
it guarantees a portion of the loan so that lenders who originate
the loan feel comfortable with their risk. Qualified veterans can
obtain loans up to $203,000 with no down payment. VA-guaranteed
loans can be combined with second mortgages and are assumable upon
qualifying by any future buyer.
FHA does not lend money or make
a loan; rather, it insures loans. The down payment can be as low
as 2.25%. Discount points may be paid by either buyer or seller.
FHA charges a 2.25% up front Mortgage Insurance Premium (or as little
as 2% for a first time home buyer) that can be financed in the mortgage
amount or paid in cash (no premium is required for condominiums).
The borrower must also pay an annual Mortgage Insurance Premium
or .5% which is collected monthly.
Seller Assisted Second Mortgage
The seller of the house lends
the buyer enough to make up the difference between the purchase
price and the down payment plus first-mortgage balance (a commercial
lender may also make this kind of loan). The terms including the
interest rate, are based on buyer/seller agreement. It is often
a short-term (5 to 15 year) loan; sometimes "interest only" payments
until the term date when the balance is due in full. A buyer can
then refinance the home.
Buyer "takes over" or assumes
the mortgage obligation of the seller (with concurrence of the lender).
The interest rate doesn't change and is sometimes lower than current
rates. Often the loan fees are less as well.