Types of Mortgages | New Homes Market Center
Today, there are mortgage loan programs available to purchase a new home that do not require any money down, and there are even some programs that provide a 102-103 percent financing to cover some closing costs. Current market conditions are requiring that mortgage lenders tighten up on some of these zero-down and easy finance loan programs and may eliminate some of them in the future. This section covers just a few of the most widely used mortgage products and the kind of borrower for whom each works best.
You will hear the term “amortization” or “amortized” during the loan process. It means to provide for the gradual exstinguishment of a loan, by making principal and interest payments over a specified amount of time. For example, when your lender suggests to amortize your loan over 30 years, it means spreading payments over 30 years with those payments due once per month.
Amortization can occur with a variety of time-periods. The most common periods are 10, 15, 20, 25, and 30 years. Typically, a longer amortization means a lower monthly payment, but it also means paying more interest over the life of the loan. If you review a sample amortization schedule, you will notice that you pay mostly interest upfront and over time, you pay down your principal.
Conventional Loans, Conforming and Jumbo (Non-conforming)
Conventional loans are backed by Fannie Mae and Freddie MAC and are made to purchase property with a first lien or second lien. There are breaks in the loan amounts that change the interest rates on the mortgage loan programs. For Single-family residence loan conforming loan limits for the first lien is loans less than $417,000. Lenders consider any loan amount over that a jumbo or non-conforming loan. These loans are subject to higher interest rates, which are typically 0.125 percent to 0.50 percent. Many loan structures are available for both conforming and jumbo loan amounts to purchase a new home. There are many different ways to structure a loan program. The key is finding the structure that will work best with your goals.
Conventional Loan Structures
You might hear the terms 80/10/10, 80/15/5, or 80/20. If a lender tells you that your best option is an “eighty-fifteen-five,” this means your first lien will be 80 percent of the purchase value, there will be a second lien of 15 percent of the value, and you will put five percent down. An 80/20 can mean an 80 percent first lien and a 20 percent second lien or 20 percent down. An 80-10-10 means a first lien of 80 percent, a second lien of 10 percent, and 10 percent down. These programs can be very beneficial because when the first lien loan exceeds 80 percent of the purchase price, mortgage insurance is often required, and that may cost more than the monthly payment on the second lien in certain cases. Discuss these options with your lender and choose the one that will save you the most money.
Mortgage insurance typically costs between .23 percent and .98 percent multiplied by the loan amount and divided by 12 months. The variation depends on the loan-to-value ratio and the type of financing. This premium is a monthly charge for your mortgage insurance coverage. Mortgage insurance is avoidable if you get a first lien that covers 80 percent of the loan-to-value and a second lien that covers up to the remaining 20 percent depending on what you put down. However, second liens are usually at a higher interest rate than first liens. So you have to weigh whether mortgage insurance is a better deal or paying the higher interest rate is better. Bottom line, if you are putting less than 20 percent down, talk with your lender about these different options.
Federal Housing Administration (FHA) loans are great for first-time homebuyers or for people who want to put three to five percent down. This loan program is not credit-score based, so if you have a blemished credit history, this might be a good program for you when purchasing a home. Another benefit of using this program is that FHA loans allow you to use gifts as part of your down payment, combine this program with a down payment assistance program or qualify for bond money from the city for the money down. With these programs and the builder paying your closing costs you may be able to get into a home with little or nothing out of pocket.
FHA offers 30-year fixed, one-year ARM, and 15-year fixed loan options. FHA loans require mortgage insurance (MI) if the loan to value exceeds 80 percent. Usually you will pay 1.5 percent of the loan amount upfront and 0.5 percent of the loan amount on a monthly basis. The upfront MI is not due on condominiums.
Veteran Administration (VA) loans, guaranteed by the Veteran’s Administration, are for veterans who meet a certain criteria. VA loans do not require any down payment and, in some cases, the seller or new homebuilder may be willing to pay all or part of the closing costs. This allows the veteran to purchase a home with little or no money out of pocket. To find out if you qualify for a VA loan, ask your loan officer for an 1880 form. After you have completed this form, take it and your discharge papers (or DD214) to your local VA office to determine your eligibility. Active military personnel may also be eligible for a VA loan.
VA loans are normally a 30-year fixed, 15-year fixed, or a 3/1 ARM. And for VA loans, even if your loan to value ratio exceeds 80 percent, you will not incur monthly mortgage insurance. However, depending on your eligibility, there is an upfront funding fee of 2.15 to 3.3 percent of the loan amount. In many cases, lenders can include this fee into the financing with the VA loan, or it may be waived altogether if the veteran has a disability.