There
are literally hundreds of financing options available to home
purchasers and numerous ways to categorize them. Below are some of the
most common:
A. Conventional Loans
Conforming or Jumbo
-- This refers to the amount of the loan. The secondary market
periodically sets the upper limit for conforming loans ($417,000 in
northern Illinois). Loans above this amount are jumbo loans and will
typically have a higher interest rate.
Fixed-rate or Adjustable rate
-- Somewhat self explanatory, a fixed-rate loan has the same interest
rate and monthly payment for the life of the loan, typically 15 or 30
years. The payment for an adjustable rate mortgage (ARM) will adjust
based on predetermined intervals and indices. There many ARM options,
the most common being a one-year and a three-year adjustable. Other
popular ARM’s will be fixed for the first 3 or 5 years and then adjust
annually for the life of the loan. By law, ARM’s have limits or “caps”
on how much the interest rate may change in one year and over the life
of the loan. Most ARM’s have a 30-year amortization.
Insured or Uninsured –
This refers to the amount of down payment, specifically the ratio of
mortgage amount to purchase price (“loan to value” or LTV). If a buyer
has less than 20% down payment (loan is more than 80% LTV), a lender
will require private mortgage insurance (PMI) which will be reflected in
a higher interest rate and more closing costs. An uninsured loan has a
loan to value of 80% or less.
B. FHA and VA Loans
-- These loans are either guaranteed or insured by an agency of the
federal government. They are primarily used by veterans and/or
purchasers with little or no down payment. Underwriting standards are
generally more lenient than those of conventional loans, but these loans
often require more “red tape”. FHA loans canot exceed $410,000 and
typically require at lease 3.5% down payment, while veterans may qualify
for VA loans with no down payment.
C. Interest Only –
As the name implies, these are loans for which the borrower only pays
monthly interest (as opposed to principal and interest). The monthly
payment is lower, but the loan balance never goes down. These are
typically used for shorter terms or if keeping the payment lower is a
necessity.
D. Seller Financing –
It is typically in the form of “Articles of Agreement for Warranty
Deed” (“contract sale”) or a Purchase Money Mortgage (where the seller
acts as lender in the transaction). Seller financing is very rare in
the current market since other financing is so readily available at low
rates.
Current interest rates are at
historically low levels, so most buyers are opting for 15- or 30-year,
fixed-rate loans. There are often good reasons to explore alternatives,
however. Your CENTURY 21 Kreuser and Seiler agent can help you choose
the financing that is best for you and/or refer you to a good lender
for additional information, pre-qualification or pre-approval.
To get pre-qualified or pre-approved, click here.