Home Financing Options

As a buyer of a new home, one of your first steps in moving forward with your home purchase is to review your financing options and decide the best option for your family based on income and other financial obligations. Although not all encompassing, the following options provide a short list of traditional home financing options that you will want to discuss with your lender and financial advisor before making a decision on which path to take when financing your new home.

Conventional Mortgages

Fixed Mortgage

A fixed mortgage is one of the most common and widely employed home financing options. As its name implies a fixed mortgage will have a fixed term of 15, 20, 25, or 30 years. The interest rate as well is fixed and set with points (interest rate percentage points) above the prime-lending rate. The prime-lending rate is the most widely used benchmark in setting home equity lines of credit and credit card rates. It is in turn based on the fed funds rate, which is set by the Federal Reserve.

Adjustable Rate Mortgage or ARM

In an Adjustable Rate Mortgage, interest rates are set to a rate over which the lender has no control. Because of a typically lower starting loan payment this option often appeals to young borrowers who anticipate increased income in future years, or to homebuyers that do not anticipate staying in their home for many years. However, there is one caution with an Adjustable Rate Mortgage. Due to the often-lower initial loan payments with an Adjustable Rate mortgage, payments may not fully cover interest due. As a result, the unpaid interest is added to outstanding principal, which in the end increases the debt. This situation if it were to occur is called "negative amortization", and borrowers may get a shock if they decide to sell in a few years and discover that the equity in the property may well be lower than they had expected. ARM interest rates will change when the fed funds rates change, however the rate change will only take place at specified intervals, such as annually or every 3 to 5 years. The timing of any rate changes will be stipulated within the terms of the loan agreement.

Federally backed Mortgages

Federal Housing Administration (FHA) & Veterans Administration (VA) Guaranteed Loans

FHA loans are issued by federally qualified lenders and insured by the Federal Housing Administration (FHA). FHA loans are designed for low to moderate-income borrowers who are unable to make a large down payment. FHA loans allow the borrower to borrow up to 96.5% of the value of the home. The 3.5% down payment requirement can come from a gift or a grant, which makes FHA loans popular with first-time buyers. FHA loans are available from only lenders approved by the FHA. Additionally, properties to be mortgaged under these loans must meet certain FHA requirements.

VA Guaranteed Home Loans have interest rates that are set by the Veterans Administration. In addition the borrower may not have to pay points at the time of closing. VA home loans are typically fixed and usually have a 25 to 30 year fixed term. The terms of these loans are eased because the Veterans Administration has guaranteed them. Often there is either a low or no down payment associated with the loan. Veterans should check with the VA for eligibility requirements and for other assistance related to housing.

There are many considerations that go into financing your new home purchase. Take your time to study your options, ask good questions and rely on your real estate agent and your financial advisor to guide you through the process to determine the best option for your financial situation. Christine Mastis has many years of experience in helping homebuyers work through the maze of financing their home.

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