Financing Options
Financing Options
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Home Financing Options
As a new home buyer, once you begin the process of finding your dream home, it’s worth your time to review your financing options and not only decide on your best option, based on income and other financial obligations, but to consider pre-qualification to make the process more streamlined once you have an accepted contract. Here are several of the more traditional home financing options to discuss with your lender and financial advisor before making your final decision.
Conventional Mortgages
Fixed Mortgage
A fixed mortgage, one of the most common and widely utilized home financing options, will have a fixed term of 15, 20, 25, or 30 years. The interest rate is also fixed and set with points (interest rate percentage points) above the prime-lending rate. The prime-lending rate is the industry benchmark in setting home equity lines of credit and credit card rates. It is in turn based on federal fund rates set by the Federal Reserve.
Adjustable Rate Mortgage or ARM
Adjustable Rate Mortgages often appeal to young borrowers who are anticipating an increase in income in the future, or to homebuyers not planning to stay in the home for many years. Interest rates are set to a rate over which the lender has no control, which allows for a lower starting loan payment. However, there is one caution with an Adjustable Rate Mortgage, the lower initial loan payments may not fully cover the interest payment and as a result, the unpaid interest is added to the outstanding principal, which in the end increases the debt. If this situation occurs, it is called, "negative amortization", and borrowers may be shocked to find that the equity in the property may be significantly lower than anticipated when they consider selling the property in a few years. ARM interest rates usually change annually or every 3-5 years when federal fund rates change. 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 insured by the Federal Housing Administration (FHA). FHA loans are designed for people who would struggle to make a large down payment or who makes a low to moderate-income. Qualified borrowers can borrow up to 96.5% of the value of the home with an FHA loan. A gift or grant may also be used to fulfill the 3.5% down payment requirement, making FHA loans popular with first-time home buyers. Only approved lenders and loans meeting certain FHA requirements are eligible to provide FHA loans.
VA Guaranteed Home Loans have interest rates set by the Veterans Administration. Additionally, the borrower may not have to pay closing points. VA home loans are typically fixed with a 25 to 30 year fixed term, because the Veterans Administration has guaranteed them. Many times these loans also offer a low or no down payment option associated with the loan. Veterans should check with the VA for eligibility requirements and for other assistance related to housing.
There are many things to consider when financing your new home purchase. Take the time to study your options, ask good questions and rely on your real estate professional and financial advisor to help you determine the best option for your financial situation.
Sue Martin has been helping her clients work through their financing options for more than 15-years. She’d welcome the opportunity to assist you, too. Give her a call at 636-717-6000 for information and resources to help you navigate your mortgage options.
