Loan Information

 

There are many types of available home loans out there from a variety of different sources.  Home loans can be either fixed, adjustable, or some combination of the two.

 

Fixed Rate Loan

These loans are a a fixed rate of interest for the entire term of the loan.  The term can be 15 or 30 years (Some lenders are now offering a 40 or 50 year term as well).  This is the safest type of loan, as the payment and interest rate will remain the same for the duration of your ownership.  Generally, most lenders will only do a fixed rate loan for up to 80% of the value of the property you are purchasing.

 

Adjustable Rate Loan

There are many different types of adjustable rate loans, from those that are fully adjustable, menaing the interest rate adjusts each month for the duration of the loan, to those with initial fixed terms of 1, 3, 5, or 7 years, and then convert to a fully adjustable rate when the term is over.  Adjustable rate loans should be at a lower interest rate than a fixed rate loan, since they have a higher risk factor to the borrower.

"Beware"

Many lenders have loan programs that are fully adjustable with a low start rate generally between 1% and 3%.  These programs guarantee a low payment for the first year, but can have "negative amortization", meaning that the balance owed on the loan actually goes up as your monthly payment is not enough to cover the amount of interest being charged.  You can also see substantial increases in your monthly payment in the future.  Be sure you understand all the terms of any home loan, and don't be taken in by ads for extremely low interest rates and monthly payments.

 

Down Payment

Lenders typically loan up to 80% of the home's appraised value on a first mortgage or deed of trust.  If you are lacking a 20% down payment, as many buyers do, the remaining amount can be financed in a second mortgage of deed of trust taken at the time of purchase.  It is not unusual these days to see buyers finance 100% of the purchase price with two loans, one for 80%, andone for 20% of the purchase price.  A second deed of trust is likely to have a higher interest rate than a first deed of trust, and is likely to be a fully adjustable loan.  It is important to note that in a competitive market, sellers are more likely to accept an offer with a higher down payment than one with little or no down payment from the buyers, as the lower the down payment is, the more likely it is that problems could occur with the loan approval process during the course of the sale.

 

Federal Housing Authority (FHA) Loan

These loans are insured to the lender by the government. These usually help first-time homebuyers acquire a mortgage that they would not ordinarily be able to obtain. They usually require a smaller down-payment. There is a limit to the amount an FHA loan can have as principal. But generally, this is high enough to obtain a moderately priced home in many parts of the country.


VA Loan

Available to qualified Veterans, these loans are backed by the Department of Veterans Affairs. Usually these carry low or no down payment requirements. These are subject to the VA Mortgage funding fee of up to 1% of the loan amount, depending on the down payment.

 

Seller Financing

another option is asking the seller to finance part of the purchase price.  If the seller has substantial equity in the property, and if it is an unusual or difficult to sell property, a seller may agree to finance a part of the purchase themselves.  This would be treated much like a second deed of trust, and the interest rate and terms can be negotiated directly with the seller.  In a competitive marketplace, it is unlikely that many sellers would agree to this type of financing.

 

Interest Rates

Currently, the conforming loan limit is $417,000, meaning that any loans under this amount for a first deed of trust will get the lowest possib le rate.  Higher loan amounts, ranging from $417,001 to $650,000 are considered to be "Jumbo" loans, and will generally have interest rates of 1/8% to 1/2% higher than conforming loans.  Any loan amount above $650,000 is considered "Super Jumbo" and will also have slightly higher rates.

 

Interest Only Loans

A recent addition to many lender's options are "Interest Only" loans.  For a slightly higher interest rate, buyers can opt to pay only the interest amount being accrued on the loan balance each month for a set period of time, usually 3, 5 or 7 years.  During this time, the principal balance remains the same.  Remember that the real estate market is unpredictable, and while we've seen record appreciation in recent years, a leveling off or downturn is always possible.