Financing :: Mary A. Thomas Realtor

When it comes to paying for a home, buyers today have an almost unlimited number of financing options from which to choose.

Many are from regular financial institutions like mortgage companies, banks and Credit Unions. Here's a run-down on the main types of financing every home buyer should know today. Interest rates are intended for illustration only; ask your Mary A. Thomas Associate or loan officer from for current market rates.

Conventional Mortgage

A conventional loan is an indebtedness or mortgage made between a lending institution and a borrower without a third party participant, such as VA or FHA. Most types of conventional loans are paid off in equal monthly payments spread over 15, 25 or 30 years. The interest rate stays the same for the life of the loan, therefore the monthly principal and interest payment also remains constant.

Terms of a conventional loan vary among lenders, but basically a loan can be obtained with as little as 5% down payment. When the down payment is less than 20% it is, in most cases, necessary for the loan to have private mortgage insurance to protect the lender.

Example: The buyer purchases a $150,000 home. Typically, the lender will require a down payment of $30,000 or 20% of the purchase price. Assuming 8% market rate; $120,000 loan amount; 30 years, $880.52 monthly payment. With private mortgage insurance, however, the lender would lower the down payment requirement to 5%, or $7,500, which increases the monthly payment. (Lenders refer to private mortgage insurance as "PMI.")

VA Loan

The VA does not lend money, it guarantees a portion of the loan so that lenders who originate the loan feel comfortable with their risk. Qualified veterans can take out loans up to $203,000 with no down payment. VA-guaranteed loans can be combined with second mortgages.

Example: The veteran agrees to buy a home for $100,000. With no down payment, the loan amount is $102,000 (includes a minimum 2% VA Funding Fee) for 30 years, and say the VA interest rate is 8%, plus "points." The monthly payment for the $102,000 loan will be $748.44.

Advantage: No down payment necessary.

FHA Loan

Strictly speaking, FHA does not make a loan; rather, it insures loans, which makes lenders willing to finance home purchases on favorable terms.

With an FHA loan the down payment can be as low as 2.25%, depending on where you plan to reside. The borrower must also pay an annual Mortgage Insurance Premium of .50% of which is collected monthly. As of the year 2001, once the buyer owns 20% equity they can apply to their lender for the PMI to be removed.

Many lenders today are willing to assist buyers with the closing costs. In exchange for paying a higher interest rate, a lender may forgo its normal charges plus pay other closing costs on behalf of the buyer. These plans vary widely, so study them carefully. The advantage is less cash is required to close. This is offset by higher monthly payments due to the higher interest rates.

Second Mortgage. The seller of the house lends the buyer enough to make up the difference between the purchase price and the down payment + first-mortgage balance. (A commercial lender may also make this kind of loan). The terms, including the interest rate, are based on buyer/seller agreement. It is often a short-term (5-to-15 year) loan; sometimes "interest only" payments being made until the term date, when the balance is due. A buyer can then pay off the loan or refinance.

Owners may finance first, second, third or fourth loans. They may lend their equity back as a first mortgage (often called a "take back") or help the buyer in other ways. One form of owner financing (sometimes called a "balloon" mortgage) bases monthly payments on a 30 year-loan scale, but requires the balance of the mortgage to be paid at the end of a short period, say 5 to 7 years.

Buyer "takes over" or assumes the mortgage obligations of the seller (with concurrence of the lender). Down payment is the difference between new purchase price and the existing mortgage balance. Interest doesn't change.

Adjustable Rate Mortgage (ARM). The interest rate may go up or down over the years, and it is keyed to a financial market index. Interest rate increases are at the lender's option, but rate decreases are mandatory.

Balloon Mortgages. A balloon mortgage is typically a loan which must be paid off after a certain period. The advantage they offer is an interest rate that is lower than a mortgage that is made for 30 years.


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