Real Estate Financing - Loan Programs

Real Estate Financing - Loan Tips

In your real estate financing if you make too many loan inquiries (with aps), it may look like you're shopping for credit . This can be a red flag for many lenders.  When you finally do select a good lender you may have to explain, possibly in writing, why there are other inquiries from lending institutions on your credit report.

Some lenders may impose limits on how much of your down payment can come from borrowing.  And any money received from a lending institution will show up on your credit report and your payments will factor into your debt-to-income ratio.

Fixed-Rate Mortgages

A fixed-rate mortgage means the interest rate and principal payments remain the same for the  life of the loan.  The taxes may change.

The advantages include consistent principal and interest payments make this loan stable so your rate won't change. No need to worry about market fluctuations. A good choice if you're likely to stay in this house for many years.

Disadvantages include a possibly higher cost - these loans are usually priced higher than an adjustable-rate mortgage. Keep in mind most people move or refinance within seven years. If rates in the current market are high, then you'll probably get a better price with an adjustable-rate loan.

30-year fixed-rate mortgages offer consistent monthly payments for all of the 30 years you have the mortgage. If the market is good, you can benefit from locking in a lower rate for the full term of the loan. The best choice if you're looking for a long-term, stable loan - for instance,  if you're planning to stay in your house for a long time.

20-year fixed-rate mortgages allow you to make a consistent monthly payment throughout all of the 20 years you have the mortgage. The shorter term means you pay the loan off quicker and therefore pay less interest. You'll build equity faster than you would with a 30 year loan. Know that the shorter term means higher payments, when compared to the 30-year fixed-rate mortgage.)

15-year fixed-rate mortgages mean consistent monthly payments for all 15 years that you have the mortgage. By building equity even more quickly than with a 30-year or 20-year loan, and paying less interest, you save money in the long run. It's an ideal option if you can handle the higher payments and if you'd like to have the loan paid off in a shorter period of time, for example, if you plan to retire.

Adjustable-Rate Mortgages

An adjustable-rate mortgage (called ARM) means that the interest rate changes over the life of the loan, according to the terms specified ahead of time. With ARMs: The initial interest rate is usually lower than with a fixed-rate mortgage. The monthly repayment would also be lower. The interest rate may be adjusted (up or down) at predetermined times. The monthly payment will then increase or decrease.

Most ARM programs do offer "rate cap" protection, which limits the amount the rate can be increased, both each year and over the life of the loan. All ARMs are amortized over 30 years.

Advantages include: lower costs - ARMs are usually priced lower than fixed-rate mortgages so you can increase your buying power and lower your initial monthly payments. If the interest rates go down, you'll enjoy lower payments. Usually an ARM is the best choice for homeowners who plan to relocate, or for those who are purchasing their first home and plan to be in the property for just three to five years. On average, most people move or refinance within seven years.

Disadvantages include the possibility of increasing monthly payments if interest rates should go up. Keep in mind that ARMs are best for homeowners who aren't planning on staying with a property for a long period of time. If you are on a fixed income, an ARM (especially a short-term ARM) may not be your best choice.

10/1 adjustable-rate mortgages provide a fixed initial rate of the loan for the first ten years of repayment. After ten years, the rate adjusts every year thereafter for the remaining life of the loan. The loan is amortized over 30 years, so you'll have the stability of a 30 year mortgage at a lower price than a fixed-rate mortgage of the same term. But an ARM is not the best choice if you're planning on owning the same property for more than ten years.

7/1 adjustable-rate mortgages offer an initial rate that's fixed for the first seven years of repayment, then the rate adjusts every year thereafter for the remaining life of the loan.

5/1 adjustable-rate mortgages mean the initial rate remains fixed for the first five years of repayment, and then adjusts every year thereafter. Your rate and monthly payments may go up after just five years, so this choice is best if you're expecting to sell or refinance the property within that period.

3/1 adjustable-rate mortgages provide three years at the initial fixed-rate, then the rate adjusts every year for the remaining life of the loan. Choose this if you expect to move or refinance in a short period of time. But a much shorter fixed-rate period means your interest rate -and therefore your monthly payments- may begin to fluctuate after the three years.