Types of Financing Options
Beaufort and Morehead City, North Carolina
Fixed Rate Mortgage: The Fixed Rate Mortgage is the most common type of mortgage used by home owners today. The interest rate stays the same throughout the term of the loan - usually 15 or 30 years. Payments are stable but initial rates tend to be higher than adjustable rate loans and often cannot be assumed by a subsequent buyer.
Adjustable Rate Mortgage (ARM): The interest rate is linked to a financial index, such as a Treasury Security or a "cost of funds index" so your monthly payments ca vary up or down over the life of the loan - usually a 25 to 30 year team. Interest rates can change monthly, annually, or every 3 or 5 years. Some ARMS have a cap on the interest rate increases, to protect the borrower.
Other terms relating to adjustable rate mortgages:
- Adjustment Period: the interval at which the interest is scheduled to change during the life of the loan. Example: one year ARM-interest changes annually.
- Cap: The limit on how much an interest rate or monthly payment can change at each adjustment over the life of the loan.
- Conversion Clause: A provision in some loans that enables you to change an ARM to a fixed rate loan, usually after the first adjustment period. This may require additional fees.
- Index: A measure of how an interest rate changes. Used to determine changes in the loan's interest rate over the term of the loan.
- Margin: the number of percentage points a lender adds to the index rate to calculate the ARM's interest rate at each adjustment.
Ballon Mortgage: This is a loan that must be paid off after a certain period. The advantage to a balloon mortgage is an interest rate that is lower than a mortgage that is made for 30 years.
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. VA guaranteed loans can be combined with second mortgages and are assumable upon qualifying by any future buyer.
FHA Loan: FHA does not lend money or make a loan; rather, it insures loans. The down payment can be much lower than conventional rates. Either buyer or seller may pay discount points. FHA charges a 2.25% up front Mortgage Insurance Premium (or as little as 1.75% for a first time home buyer) that can be financed in the mortgage amount or paid in cash (no premium is required for condominiums). The borrower must also pay an annual Mortgage Insurance Premium of .5%, which is collected monthly. (Numbers are subject to change, please check with your lender.)
Second Mortgage: A second mortgage, often referred to as a "combination loan," can be used to help you with a portion of your down payment at the time you purchase a home. A combination loan is one that has a first and second mortgage combined. Usually, a combination loan is used when a borrower does not have the typical 10-20 percent for a down payment. For example, one type of combination loan is an "80/10/10." With this type of loan, you get a mortgage for 80% of the purchase price, put 10% down (of your own funds) and borrow the remaining 10% on a second mortgage. The second loan is called a "piggy back loan." Some buyers use this type of loan to avoid private mortgage insurance, an expense that is NOT currently deductible on your income taxes.
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