Fifteen-year loans became quite popular in the 90′s. Thanks to historically low rates, borrowers can use a 15-year loan to pay off their home loans quickly without an unbearably high mortgage payment.
The benefits are simple: You could own your house free and clear more quickly and you might save a great deal of interest. For example, a couple in their mid-40s may like this concept knowing that by the time they reach age 60, they own their home and will no longer have mortgage payments. For a young couple in the mid-20s, it may not make as much sense as having a longer term 30-year loan.
The key to deciding is to compare the monthly payments and see how comfortable you are with the higher payments of a 15-year loan. If you want to pay off your loan early but can’t quite handle the payments on a 15-year loan, ask us about our 20-year loans. For those who want to pay off their loan even more quickly, we can offer a 10-year fully amortizing loan.
WHAT ARE CONFORMING, HIGH BALANCE AND JUMBO LOAN PROGRAMS?
Conforming Loans are loans that meet Fannie Mae (FNMA) and or Freddie Mac (FHLMC) underwriting requirements. In other words, income, credit, and property requirements must meet nationally standardized guidelines. There are additional guidelines, pricing and restrictions regarding conforming loans for manufactured housing.
Conforming loans are subject to loan amount limits that are set annually by Fannie Mae and Freddie Mac. These limits vary based on the region in which the subject property is located as well as the number of legal units contained in the subject property. Under the FNMA and FHLMC Charter Acts, the loan limits are 50% higher for first mortgages in Alaska, Hawaii, Guam, and the U.S. Virgin Islands.
When FNMA and FHLMC limits don’t cover the full loan amount, the loan is referred to as a jumbo mortgage. The average interest rates on jumbo mortgages are typically higher than for conforming mortgages.
A high-balance mortgage loan is between a “conforming” and a “jumbo” loan. The loan amounts for a high-balance loan depend on the county you live in. Rates on a high-balance loan are typically higher than conforming but less than jumbo. Jumbo investors may have additional overlays and qualification requirements above FNMA/FHLMC.
WHEN SHOULD I GET A 30-YEAR FIXED LOAN?
The traditional 30-year fixed rate mortgage has a constant interest rate with the monthly payments (principal and interest only) that never change for both conforming and jumbo loan programs. This may be a good choice if you plan to stay in your home for seven years or longer. If you plan to move within seven years, adjustable-rate loans are usually more cost effective.
As a rule of thumb, fixed-rate loans may be harder to qualify for than adjustable-rate loans. When interest rates are low, fixed-rate loans are generally not that much more expensive than adjustable-rate mortgages and may be a better deal in the long run because you can lock in the rate for the life of your loan.
WHAT ARE ADJUSTABLE-RATE MORTGAGE PROGRAMS?
Adjustable-rate mortgage programs charge a fixed-interest rate for the first three, five, seven, or ten years. After that time, the loan turns into a variable interest rate loan (with a rate cap) for the remaining years on the life of the loan, based on the then-current interest rates.
When it comes to Adjustable-Rate Mortgages (ARMs), there is a basic rule to remember: The longer you ask the lender to charge a specific rate, the more expensive the loan.
If you plan to own the house for three years or less, the perfect loan is one that is fixed for three years before starting to adjust. This way you’ll benefit from the lower rate offered by an ARM without being subjected to the uncertainty of payments that could be higher. Similarly, if you think you’ll be in the house for five or fewer years, the perfect loan is our loan that is fixed for five years before starting to adjust. The same logic applies to our loan that is fixed for seven years before adjusting.
WHAT ARE FIXED-RATE PRODUCTS?
For most people, the greatest benefit of fixed-rate loans is their predictability. Your payment (principle and interest payment) will remain the same from your first payment till your last. While fixed-rate loans tend to have higher rates than adjustable-rate loans, people place great value on the psychological comfort of this predictability.
Why then would someone ever choose an adjustable-rate mortgage (ARM)?
Home buyers often choose ARMs because the lower rates (a) can be easier to qualify and (b) may allow them to get a larger mortgage. Beyond this situation, an ARM product makes sense if you know you will only be in the home a short period of time. The increasingly popular 3/1, 5/1, 7/1 and 10/1 ARMs are good choices for people who expect to move or refinance their home, before or shortly after the adjustment occurs.
WHEN DOES IT MAKE SENSE TO REFINANCE?
Until this decade, there was a solid rule of thumb: Don’t refinance your loan unless you can save two points on the rate. In that era, you had to save a great deal to make up for the points it cost to get a loan. In fact, for most of this century, all loans typically cost a two-point loan fee.
The good news is that Land Home offers loans with no points. As you may know, you will get a slightly higher interest rate if you want a no-points loan. Of course, you always have the option of paying points to get a lower rate. We offer you a few choices:
Paying points to get an even lower rate.
If you get a loan with no points, it may actually make sense to refinance to lower your payment by as little as one-quarter of one percent. The goal is to make certain that your new loan saves you money.
HOW MUCH HOUSE CAN I AFFORD?
When you buy a house, there are up-front costs and mortgage payments to consider. Your buying power depends on how much money you have available to put down on a house and on how much a creditor will agree to lend you.
The general rule of thumb is that you should buy a house that costs up to 2 1/2 times your annual gross income, and your housing costs should be about 1/3 of your take-home pay or 1/4 of your gross pay. This should provide some general parameters for the price range of houses to look at, and an approximate amount you might be able to spend on monthly mortgage payments.
The down payment: Coming up with the cash for a down payment is usually the hardest part of buying a home. If you put down less than 20%, you will be required to purchase Private Mortgage Insurance (This protects the lender’s investment in case you fail to make your payments). The larger your down payment, the lower the cost of your mortgage (and, ultimately, the house). So, you’ll want to make as large a down payment as you can afford. However, before determining your down payment, consider the following costs associated with your loan:
Closing Costs. These usually total between 3% and 6% of the amount of your loan, and include points, insurance, various fees, and inspections.
Cash Reserves. Lenders often want to see that you have at least two months of mortgage payments in savings when you apply for your loan.
Miscellaneous Up-Front Costs. Moving into your new home will cause other up-front costs such as moving costs, repairs that the house might need, furnishing, etc.
Taking all this into consideration, you should try to come up with a down payment of as much as possible. How much can you afford to borrow?
Consider that your lender will review both your income and existing debt to determine how much mortgage debt you can afford. Two ratios serve as guidelines for lenders in evaluating your loan application.
Housing Expense Ratio: Monthly housing costs (including property taxes and insurance as well as mortgage payments) cannot exceed 28% of your monthly gross income.
Debt-to-Income Ratio: Your total long-term debt (including housing costs, car loans, student loans, alimony or child support, and balances on credit cards that will take longer than 10 months to pay off) should not exceed 36% of your monthly gross income.
Lenders feel that these guidelines will keep household debt manageable. However, they are somewhat flexible. If you make a large down payment, or if you have consistently made rental payments close to the amount of your proposed mortgage payments, you may be able to exceed these guidelines. And some lenders allow low and moderate-income buyers to use 33% of their gross monthly income for housing and 38% for total debt.
See our Calculators page for assistance with helpful calculations. However, just because a formula determines that you can afford a certain mortgage doesn’t mean you will feel comfortable making the payments.
A suggestion would be to keep track of what you spend for a few months and then plan for any vacations you want to take, major purchases you’ll make, or emergency savings you want to have in reserve. This will help you to know what you can comfortably afford.
WHEN IS PRIVATE MORTGAGE INSURANCE (PMI) REQUIRED?
Private Mortgage Insurance (PMI) is insurance required by most lenders, which is purchased by the borrower to protect the lender in case the borrower defaults on the loan. PMI is required on purchase loans with down payments that are less than 20% of the home's sale amount. For example, if you make a down payment of 20% of the cost of your home, the lender has good reason to trust that you will make your mortgage payments faithfully to protect your large investment. But, if you make a smaller down payment, such as 5% or 10%, and borrow the rest, and you default on your loan, the lender risks losing money. So, lenders require you to purchase PMI, which will guarantee them payment on the balance of loans not covered by the sale of foreclosed properties.
WHAT IS A REVERSE MORTGAGE?
A special type of home loan that allows you convert some of the equity in your home into cash. You built up equity in your home by making mortgage payments over many years. The equity can be paid back to you. You will retain the title and ownership during the life of the loan, and you can sell your home at any time. The loan will not become due as long as you continue to live in the home, maintain your home and pay your property taxes and homeowners insurance.
HOW DOES A REVERSE MORTGAGE WORK?
Reverse Mortgages allow you to tap the equity in your home without making a monthly mortgage payment. Depending on your age, home value and equity, you may be able to access that equity in the form of cash. This can be delivered to you in one of four ways:
Lump sum at closing. Cash to you after the loan closes.
Receive funds as a monthly payment to you for either a set period of time or lifetime, depending on your needs.
Maintain funds as a Line of Credit where you can draw money as you need it, when you need it, in an amount you control. The unused Line of Credit will grow every month increasing the amount of money available to you regardless of your current property value. The “Growth feature” creates a wonderful hedge against inflation and property fluctuations.
Any combination of the above.
You can change your options as frequently as you like. This is truly the mortgage of choice and flexibility!
WITH A REVERSE MORTGAGE, DO I STILL OWN MY HOME?
You will retain the title and ownership during the life of the loan, and you can sell your home at any time. The loan will not become due as long you continue to live in the home, maintain your home, and pay your property taxes and homeowner's insurance.