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FHA Mortgage / Conventional / VA

Content provided by Prospect Mortgage of Arizona

When it comes to financing your dream home, there are many mortgage options for a homebuyer to choose from. First and foremost, it is imperative to select a Loan Originator that is licensed, knowledgeable and pro-active when working towards closing on time. An experienced “LO” will explain the loan programs available to you and assist you in determining which option will be best for your situation. Some of the financing options available in today’s market include:

Fixed Rate Mortgages

This type of mortgage should be considered if you a) plan to live in your new home for many years to come and/or b) you are not a risk taker and prefer the stability of knowing how much your mortgage payment will be each month.

Most mortgages are for a term (period) of thirty years, so if you wish to have a stable payment you can count on for that long, a fixed rate mortgage may be best for you. Once your loan amount and interest rate are calculated and locked in, a fixed rate mortgage will guarantee that you will have the same payment over the life of the loan. Of course there is always the option of making extra payments to principal in order to payoff you’re your loan more quickly.

However, if interest rates are not favorable at the time you take out your loan, you would be stuck with a very high interest rate for the life of the loan. (unless of course you choose to refinance and incur additional costs) On the contrary, if interest rates are very low, the rate you choose will stay low no matter how high interest rates go in the future.

Below are the advantages and disadvantages of the varying lengths and terms of fixed-rate mortgages:

Down Payment Assistance (DPA) Fixed-Rate

  • Receive 4% (Military veterans and active duty receive an additional 1%) of your loan amount to use towards the down payment and closing costs on a 30-year fixed FHA loan.
  • Grant received does not have to be repaid.
  • Income and credit score requirements determine if you qualify.

15-Year Fixed-Rate

  • Pay off the loan in half the time of a 30-year loan.
  • Equity builds up more quickly than in a 30-year loan.
  • Payments are higher (which may be a problem if you lose your job or become unable to work).

20-Year Fixed-Rate

  • Pay off the loan in 2/3 the time of a 30-year loan.
  • The overall interest paid is considerably less than for a 30-year loan.

30-Year Fixed-Rate

  • The most common choice, especially for first-time homebuyers, as it's the easiest of the fixed-rate loans to qualify for.
  • Monthly payments are lower than for 15-year and 20-year loans. This can prove especially helpful if you do not have a lot of "padding" between the amount you can afford to spend and the monthly payment for your desired property.
  • More desirable if you plan on staying in the same home for years, since equity builds more slowly than for shorter-term loans.
  • For income tax purposes, this term provides the maximum interest deduction.

Adjustable-Rate Mortgages (ARMs)

This type of loan product is for the risk takers, borrowers who only plan to own the property for a short period of time or those who expect their income to increase to cover any potential rise in rate. In general, ARM’s have lower interest rates than a fixed-rate mortgage although this is only true initially, not necessarily for the term of the loan. Seeing as an ARM rate rises and falls depending on the established interest rate, your mortgage payment will rise and fall as a result. If your income is not sufficient to cover the highest possible payments, then this option is not for you.

Characteristically, ARM interest rates are tied to a specific financial index (such as Certificate of Deposit index, Treasury or T-Bill rate, Cost of Funds-Indexed Arms or COFI, or LIBOR [London Interbank Offered Rate]) and the payment will be based on the index your lender uses plus a margin, generally of two to three points. This formula can be obtained in writing from the lender so that you ensure understanding of what is means.

The good news is that the amount an ARM can increase is limited. The limits are caused by “caps” on how much the lender can increase your rate both annually and for the life of the loan. Be sure to do the math and plan ahead. Have your Loan Originator calculate what the highest payment would be if your rate hit the maximum amount allowed for by the cap of your mortgage. If you feel you aren’t able to pay this amount on a monthly basis, it would be best to reconsider this type of loan.

Government Loans

Another popular mortgage option is government loans which are available to borrowers who meet the specific qualifications for these loans.

VA Loans: VA guaranteed loans are made by lenders and guaranteed by the U.S. Department of Veteran Affairs (VA) to eligible veterans for the purchase of a home. The guaranty means the lender is protected against loss if you fail to repay the loan. In most cases, no down payment is required on a VA guaranteed loan and the borrower usually receives a lower interest rate than is ordinarily available with other loans.

Other benefits of a VA loan include:

  • Negotiable interest rates
  • Closing costs are comparable and sometimes lower - than other financing types
  • No private mortgage insurance requirement
  • Right to prepay loan without penalties
  • The Mortgage can be taken over (or assumed) by the buyer when a home is sold.
  • 100% financing with no limits on loan amount

Although mortgage insurance is not required, the VA charges a funding fee to issue a guarantee to a lender against borrower default on a mortgage. The fee may be paid in cash by the buyer or seller, or it may be financed in the loan amount.

A VA loan can be used to buy a home, build a home and even improve a home with energy-saving features such as solar or heating/cooling systems, water heaters, insulation, weather-stripping/caulking, storm windows/doors or other energy efficient improvements approved by the lender and VA.

Veterans can apply for a VA loan with any mortgage lender that participates in the VA home loan program. A Certificate of Eligibility from the VA must be presented to the lender to qualify for the loan.

FHA Loans: An FHA home loan is insured by the Federal Housing Administration, a federal agency within the U.S. Department of Housing and Urban Development (HUD). The FHA does not loan money to borrowers, rather, it provides lenders protection through mortgage insurance (MIP) in case the borrower defaults on his or her loan obligations. Available to all buyers, FHA loan programs are designed to help creditworthy low-income and moderate-income families who do not meet requirements for conventional loans.

FHA loan programs are particularly beneficial to those buyers with less available cash. The rates on FHA loans are generally market rates, while down payment requirements are lower than for conventional loans.

Some of the other benefits of FHA home financing:

  • Only a 3.5 percent down payment is required.
  • Closing costs can be financed.
  • Lower monthly mortgage insurance premiums and, under certain conditions, automatic cancelation of the premium.
  • More flexible underwriting criteria than conventional loans
  • Loans are assumable to qualified buyers.

Visit Prospect Mortgage for more information and online mortgage applications.