When choosing a loan, there are many factors that should be considered. It goes well beyond the rate and the length of term. The amortization type, length of term (10-30 yrs), configuration of the actual financed amount, Fixed or Adjustable Rate (A.R.M), type of mortgage insurance or its alternative, and many many more. Below are some things to consider and things you would want to ask your Mortgage Counselor.
Fixed versus Adjustable. First of all, what is an ARM. An Adjustable Rate Mortgage loan will have a fixed rate period followed by a period of adjusting rates. It may be 1 year up to 10 years. The most popular are the 5 yr, 7 yr, or 10 yr ARMS. Many people often automatically rule out an adjustable loan as too risky when in actuality it may be the perfect loan. There will be a spread (difference in rate) between ARMS and Fixed loans and each situation is slightly different in determining how much SPREAD is worth it to you. If you do not reasonably expect to remain in the house beyond 5 yrs then a 5 yr ARM might be the right choice. Ask the right questions to make certain you are getting the right loan and that you are comfortable with that choice.
Conforming versus Non Conforming. If you’re home is valued below the current conforming limit of $417,000 ( the maximum amount that Fannie and Freddie are allowed to place in their mortgage securities and sell) then your options are maximized. If you exceed that number, you will be lumped into a category called Non Conforming, sometimes known as Jumbo. Fannie Mae and Freddie Mac hold an estimated 70% of all mortgage loans in their portfolios but are not allowed to carry loans above the conforming limit of $417,000. For that reason, Jumbo clients must seek financing in more specific, unique arenas called portfolio markets. These markets are much smaller and are not centralized. So if your total loan is over $417,000, you have some decisions to make. Ask the right questions. Should you divide your mortgage up so it stays under $417,000 (combo loans) or keep it as one? Its all part of choosing the right loan.
Conventional versus Government sponsored. There are 3 basic types of Government sponsored loans: FHA, VA, and USDA. They each have unique properties that make them viable options for you. Ask the right questions and do not rule these loans out without exploring their potential benefit. FHA is the most used and accessible of the 3 Government loans, but both VA and USDA will allow for 100% financing. VA loans are available only for veterans (Active duty or previous) and their spouses (death of veteran). USDA loans are otherwise known as “Rural housing Loans” and while they do allow for 100% financing, these are the only loan programs that require specific approvals for both the property (Some Locations are excluded) AND the borrower 9there are income limitations)
Once you have chosen the type loan you want you must begin crafting HOW you want that particular loan to function. If you have 20% to put down on the purchase, then you are significantly ahead of the game and will not need to fret over mortgage insurance, subordinate financing, or other structuring issue. If however you have a down payment ranging from zero to 19%, you will have to decide how to structure that debt. There are several implications to borrowing greater than 80% of the sale amount.
Mortgage Insurance. Should you pay mortgage insurance if you do not have 20% down payment? Maybe. Maybe Not. In 2007, mortgage insurance became a tax deductible item, gaining the same tax advantage as equity-lines and second mortgages. But there are thresholds based upon income level. Ask the right questions. Also take into account the anticipated appreciation of the home as well as the possibility of the elimination of mortgage insurance in the near future.
Combination loans. Or Subordinate financing as it is often called. This is the practice of taking one loan and splitting it into two loans so as to get the maximum benefit and most favorable terms on the larger First mortgage loan. To avoid mortgage insurance, you may do a first loan at 80% of the sale price and then do a second loan for the remainder. This affords you the opportunity to eliminate mortgage insurance (MI). It does however, create a need for a second loan that may have less favorable terms than the first. For many years, this was a preferred method, but in the late 2000’s, the terms for secondary financing became much more restrictive and as such “piggy back” loans are not as popular as they once were. Ask the right questions, there is no ONE answer that fits everyone. There are absolutely times when MI is the right answer. There are times when combo loans are proper. And there are times when a third genre is appropriate. This type is called LPMI.
Lender paid MI or LPMI is a loan structure that will produce a loan without mortgage insurance but at a rate slightly above the standard rate. There are several types of lender paid mortgage insurance and you should ask the right questions to see which is best for you.
If you use these tools properly, you can create an arrangement where you have found a great home, AND you have used the financial resources around you to get the best loan for that home.
After you have chosen your loan and then structured it appropriately the next step (and a big one) is choosing the bets time to insure your rate or “LOCK” your rate. This is something we take very seriously. We have a wealth of information available to us but on top of that, we have the knowledge of what it means. We can seldom foresee what’s going to happen next month or even next week. But we can take the pieces of information available, assemble the puzzle and tell you what is likely to happen today or maybe tomorrow. So we can not say what will happen next week, but we may be able to tell you what is likely to occur tomorrow… SEVEN TIMES.
Here at Mortgage Choice Inc, we have chosen our Investor partners carefully and have negotiated unique terms with them so as to keep you the consumer in the best possible position. We have essentially turned the “Rate Lock” and the stress level that goes with it… into opportunities to continue improve your financial position. Now if you are wondering WHY we would do this? Ask yourself this one simple question… What is the one thing that your Mortgage broker could do for you that would most certainly positively impact your decision to refer friends and to use them again and again? If we can Improve your rate after we have already agreed upon a fair rate, wouldn’t you like that? So the question should not be Why WOULD we do it? The question is Why doesn’t EVERY BROKER do that? WE DO!!!