Your Financing Options           

The number of ways to finance your home is truly staggering. As a consumer, you have hundreds of loan products available to choose from. In this section we will describe some of the most popular loan programs and (where meaningful) go over the pros and cons of each.

It is a good idea to speak with a few different loan officers about the products they offer - many have access to a wide array of loan types but most only will know the details of ten to twenty that they regularly use. We would be happy to refer you to an excellent loan officer with whom we have worked before and who has earned our trust and admiration.

Fixed-Rate Mortgage
The traditional route. Typically a 15- or 30-year mortgage with an interest rate that remains the same (fixed) for the term of the loan.

 

Pros:	A stable loan, allowing you easily to plan your yearly budgets. Since the rate remains the same through the life of the loan, it is a good loan for people who plan to stay in the same home for a longer period.
Cons:	Higher initial interest rate than an ARM.

Adjustable-Rate Mortgage (ARM)
Many lenders are recommending this to first-time home buyers. The initial interest rate is usually lower than with fixed-rate mortgages, allowing you to qualify for a more expensive home. The interest rate will be adjusted according to a fixed index, after every specified amount of time.

For instance, a 3/1 ARM would remain fixed for the first 3 years and would adjust every year after that. The maximum the rate can move per time period (called the “cap”) is also indicated in the loan. Generally speaking the more easily the ARM's interest rate adjusts to current market rates, the lower the initial interest rate.

This can work to your benefit if you do not think you will keep your home for a long period. Many first-time home owners will sell their home after the first 3-5 years and move into a larger house. Therefore, it may make financial sense to use an ARM.

 

Pros:	Lower initial interest rates, allowing the consumer to qualify for a more expensive home. Lower monthly payments initially.
Cons:	Risk of increasing payments if interest rates continue to rise.

FHA Loan
Many first-time home buyers use an FHA loan to put a lower down payment on the home. Since the Federal Government insures these loans, lenders are able to reduce their risk and buyers can put as little as 0% to 3% down on the home, depending on the program they choose.

 

Pros:	FHA loans have easier guidelines than conventional loans, allowing more people with credit problems to qualify.
Cons:	FHA loans cost the seller more and also have tougher appraisals - sellers may be wary about the amount of money in repairs that they might be required to do. This can hurt a buyer's negotiating position.

0% Down Programs
In general, zero-down loans are usually structured such that the seller “donates” the down payment plus a fee to a non-profit agency which is established for the loan program. The agency then “grants” the down payment funds back to the buyer. Like seller-paid closing costs, the seller views this as a reduction in the sales price and the home will need to appraise for the higher price.

Generally, you will need to add between $10,000 - $12,000 to the purchase price to cover a zero-down program (to cover the down payment and the closing costs). For a full-priced offer, the buyer may simply add these costs on to the purchase price. Closing costs will also need to be added for you to pay truly nothing down. But bear in mind that when you add these costs to produce a genuine zero-down situation, the seller will have to pay Realtor fees and taxes based on the higher sales price.

 

Pros:	You don't need any money out-of-pocket for this program. It may also get you into a home now instead of risking that the home will be even more expensive once you manage to save up a down payment.
Cons:	You still must qualify for the higher purchase price of the home.

(For further information about how these programs work and a detailed description of a sample program, wander over to our Zero Down section.)

VA Loan
This loan is available to qualifying veterans and those on active military duty. The principal and interest payments remain fixed for the entire term of the loan (30 years). The maximum loan amount is $203,000. No minimum investment of your funds is required. The veteran may finance up to 100% based on eligibility.

Assumable Loan
Some owners may have a loan which is assumable. This can save you money in points as well as allow you to assume a loan with a lower interest rate. As interest rates rise, this can be a benefit to buyers and a selling point for sellers. An experienced Realtor can help you find sellers with assumable loans.