What type of loan program would you like?

Selecting a program | Program Types | Finance Types

Select the Right Loan and Fees

Many people who are considering financing a home assume their best option is a conventional 30-year, fixed-rate loan. However, there are many different loan programs available which may better meet your individual plans and goals. The following decisions will help you select the best choice;

How long do you plan on keeping your loan?
Will you be capable of making higher payments in the future?
Do you expect rates to be higher or lower in the future?

How long you intend to keep your loan may be the most important factor to make the best choice. A simple way to estimate the costs of a particular loan program in the first few years is to take the principal amount, multiply it by the interest rate and then add the cost of the origination and discount points. The following is an example for estimating the costs of a $100,000 mortgage with a 7.50% rate for two years.

Est. Cost = (Loan amount x interest rate/12 x number of months) + points & origination fee
Est. Cost = ($100,000 x 7.50%/12 x 24 months) + ($100,000 x 2.00%)
Est. Cost = $15,000 + $2,000
Est. Cost = $17,000

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Rate and Point Options

To compare the same loan program with different rate and discount point options a borrower will probably save the most money by paying more points if they are sure they will keep the mortgage for more than five years. The following is a sample rate and fee comparison for a loan amount of $100,000:

Note: The schedules above do not show tax consequences or interest income from monthly or up-front savings.

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Loan Program Options

If you think you may sell or refinance your home within three years, you may be better off getting an adjustable-rate mortgage. An adjustable rate loan has a low interest rate in the early years of the loan, while a fixed-rate loan stays constant at a higher rate. With an adjustable, you'll pay less for short-term ownership of your house. On the other hand, if you think you may keep the house more than 5 years, a predictable fixed-rate loan is probably a better choice. The following is a program comparison for a loan amount of $100,000. Please note it assumes that the ARM programs will make the maximum interest rate adjustments:

Note: The schedules above do not show tax consequences or interest income from monthly or up-front savings.

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Loan Term Options

If your primary goal is paying your mortgage off and building equity in you home you may want to consider a 15 or 20 year loan. The interest rate is typically about .375% lower for a 15 year loan versus a 30 year loan so you can save money on your interest payments as well. If you are not comfortable with a higher payment you may elect to obtain a 30 year loan then pay extra principal monthly when you can afford it. The following is a sample loan term comparison for a loan amount of $100,000:

Note: The schedules above do not show tax consequences or interest income from monthly or up-front savings.

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Consider your future plans and then look for a loan that best meets all your goals.

Do you want to remain in the area?

If you like the area where you live now and don't think you'll buy a bigger, smaller or better house soon, then get a loan with the best rate for the long term.

Are you happy with your job or confident you won't change jobs soon?

If not, you may want to invest in a property with good resale value and a loan that ties up a minimal portion of your income.

Are you planning home additions or repairs?

If you think you will need to get money for upgrading your home you may want to get the lowest possible rate and fees with an ARM and plan to refinance when you are ready to make the upgrades to your home.

Do you expect interest rates to go up or down in the future?

Some borrowers believe that interest rates may go up in the future. In that case you may want to consider selecting a fixed interest rate. If you think rates will go lower an Adjustable Rate Mortgage may save you money.

What are your long-term financial goals?

A mortgage is a form of fixed savings, and you get a payback in the form of a mortgage interest deduction, but you may need to invest more cash in areas that have a bigger return. You may shortchange your retirement savings plan if you put the bulk of your resources into a home loan.

The Portfolio Advantage

Portfolio lenders are lending institutions that don't resell their loans on the secondary mortgage market. They can be more flexible about loan terms and qualifications because they don't have to follow secondary-market rules. It's harder to qualify for loans intended for sale, because they must conform to rigid guidelines. For example, Freddie Mac and Fannie Mae won't permit all of the down payment to be a gift if the borrower is applying for a 90 percent loan, but some portfolio lenders will. A portfolio lender may also:

Fund a loan for an "as is" property
In fact, a portfolio lender may be your only option. Properties sold "as is" almost always need major work. Some portfolio lenders will allow funds from the seller's proceeds to be held in an account to complete repair work after closing. Loan programs following Freddie Mac and Fannie Mae guidelines may not allow holdbacks for such work.

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Program Types

We offer offers several loan programs. Most loan programs contain different features that can be confusing for even experienced homeowners. The most common loan programs include:

FHA Loans | VA Loans | Conforming | Jumbo | Second Mortgages | Equity Lines

Federal Housing Administration (FHA)

The Federal Housing Administration is a division of the U.S. Department of Housing and Urban Development, commonly referred to as HUD. FHA loans were created to provide affordable mortgages to the average homebuyer. The federal government insures FHA loans, or guarantees participating lending institutions against loss from default on qualifying loans.

Programs and Features:

Fixed Rate Loans, Temporary Buy-Downs and ARMS
Available for detached 1 to 4 unit dwellings, eligible condos and PUD's
Properties must meet HUD guidelines and be inspected by HUD-approved appraisers
Subject to loan limits set by HUD (see HUD web site for loan limits)
Mortgage insurance of one-half of 1% due annually and paid monthly
One time mortgage insurance fee of 2% to 2.25% charged on detached dwellings and PUD's, which may be financed
Non-occupant co-borrowers allowed
No reserve requirements at closing
100% of down payment and closing costs may be a "gift"
Fully assumable by a qualified borrower
Seller may contribute a maximum of 6% of the lower of the sales price or the appraised value

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Veterans Administration (VA)

Veterans Administration loans were created to help veterans finance the purchase of their homes with favorable loan terms. For the purpose of the VA program, "veteran" includes active duty service personnel and certain categories of spouses. Like FHA loans, the federal government insures VA loans, or guarantees VA approved lending institutions against loss from default on qualifying loans.

Programs and Features:

Fixed Rate Loans, Temporary Buy-Downs and ARMS
Available for detached 1 to 4 unit dwellings, eligible condos and PUD's
Properties must meet HUD guidelines and be inspected by HUD-approved appraisers
Mortgage insurance of one-half of 1% due annually and paid monthly
One time mortgage insurance fee of 2% is typically charged, which may be financed if the total loan amount does not exceed $240,000
No prepayment penalty
No reserve requirements at closing
No down payment required
Out-of-pocket expenses may be gifted, typically from relatives
Only eligible veterans and their spouses occupying the subject property may be co-borrowers or co-signers
Seller may contribute a maximum of 6% of the lower of the sales price or the appraised value

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Conforming Loans

Conforming Loans are those that meet Fannie Mae and or Freddie Mac underwriting requirements. In other words, income, credit, and property requirements must meet nationally standardized guidelines. Conforming loans are subject to loan amount limits that are set by Fannie Mae (FNMA) and Freddie Mac (FHLMC). 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. Conforming loan limits for owner-occupied units in all states except Alaska and Hawaii are:

$417,000 for single family dwelling
$533,850 for 2 unit properties
$645,300 for 3 unit properties
$801,950 for 4 unit properties

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.

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Jumbo and Non Conforming Loans

Jumbo loans are those that exceed the loan amounts allowed by FNMA and FHLMC.

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Second Mortgages or Home Equity Closed-End Loans

A close-ended loan is one where a set amount of money is borrowed and repaid within a specific period of time. There are a multitude of second mortgage products available and lender guidelines vary widely. Generally, loan amounts, interest rates and fees are tied closely to equity in the property and credit scores. Whether to do a first or second mortgage or whether to take a line of credit or closed-end loan depends largely on the purpose of the loan.

Second mortgages are ideal products for the following situations:

Debt Consolidation: This is the most common purpose for acquiring a second mortgage. Typically, a second mortgage is paid off in a shorter period of time than a first.
Home Improvements: The greater the equity in a property, the better the deal on a mortgage. Often, a borrower will take second mortgage to complete improvement projects. After the improvements are completed, the borrower refinances the first mortgage.
Cash Out: Many borrowers use the equity in their properties to obtain cash to pay for college expenses, vacations, or any other purpose that requires a fairly sizable amount of cash.
Eliminate the requirement for Mortgage Insurance.

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Home Equity Lines of Credit

A home equity line of credit loan is a line of credit that is secured against real estate. The amount of the credit line is dependent upon the amount of equity in the subject property and the lender's guidelines. Each lender has its own specific guidelines and limitations. Lines of credit are typically designed for borrowers who intend to pay back the borrowed funds within a short period of time. Equity lines of credit are processed and underwritten similar to traditional mortgages; however, lender guidelines vary widely.

Home equity lines differ from traditional mortgages that provide funds up front, then require repayments of principal and interest each month. With a home equity line, a borrower may draw against any available credit on the line while continuing to make monthly payments during the "draw period." The draw period usually lasts 15 years. At the end of that time, the borrower has a set number of years to repay the remaining balance in full without further draws. The "repayment period" is typically 15 years.

Interest on home equity lines accrues similar to interest on credit cards and payments are based on payment factors.

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Finance Types

We offer several finance methods. Most finance methods contain different features that can be confusing for even experienced homeowners. The most common finance methods include:

Fixed Rate | Balloon | ARMs

Fixed Rate Mortgages

The interest rate on a Fixed Rate Mortgage remains fixed for the life of the loan and monthly payments of principal and interest payments never change.

The most common fixed rate terms include the 30-year term and 15-year term. In general, the shorter the term, the lower the interest rate and the higher the principal and interest payment. Therefore, the interest rate on a 15-year term loan is lower than the rate of a 30-year term loan, however, the principal and interest payment on a 15-year term is higher than the payment on a 30-year term.

Distinction between 15-year fixed term and 30-year fixed term

Interest rates for a 15-year term are slightly lower than rates for a 30-year term.
Interest costs are significantly reduced for a 15-year term due to lower interest rate and shorter loan term. Equity builds faster in a 15-year term than in a 30-year term.
Principal is paid down quicker in a 15-year term resulting in faster equity growth.
Monthly principal and interest payments are higher in the 15-year term, and as a result, your qualifying loan amount will be less than a 30-year term.

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Balloons

Balloons are short-term mortgages that contain features similar to fixed rate mortgages. Typically, the Balloon is a short-term loan, however, the monthly payments are calculated using a 30-year term. Such payments remain unchanged for a predetermined period, at the end of which, a lump sum payment is due to pay off the remaining principal balance of the loan. This larger payment is the "balloon" payment.

In general, borrowers sell or refinance before their balloons are due. Most balloon loan programs offer options to convert to a fixed rate at the end of the loan term. For example, a 7/23 balloon mortgage gives the borrower the option to convert to a fixed rate program (for a nominal fee) after the initial term (7 years) is over. If the conversion feature is used, the interest rate for the remaining term of the loan (23 years) will be adjusted once to reflect market conditions, then remain fixed for the remainder of the loan term. To qualify for the option, the borrower must typically still be an owner-occupant, have no previous late payments, and have no liens against the property. Other conditions may apply.

Adjustable Rate Mortgages

Adjustable-rate mortgages (ARMs) became popular in the early 1980s when interest rates were much higher. When lenders were offering fixed rate mortgages at 15 percent to 16 percent, over 60 percent of homebuyers chose ARMs with interest rates starting at 12 percent to 13 percent. Currently with low fixed rates, most lenders reported that fewer than 15 percent of homebuyers were financing their homes with ARMs.

ARMs are good to consider when:

You believe that rates are going to fall to levels much lower than they are today.
You only plan to keep your home for two or three years, and an ARM looks less expensive in the short term.

The obvious difference between an adjustable rate mortgage and a traditional fixed rate mortgage is that with an ARM, the interest rate goes up and down. It changes according to a set of formula (typically one year) for the life of the loan. Usually, your monthly payment goes up and down with the interest rate.

An ARM, much like a new home, has some basic features and a number of options.

Basic Features
Index
Margin
Adjustable Interval
Initial Interest Rate

Optional Features
Periodic Interest Rate Cap
Life Interest Rate Cap
Initial Adjustment Rate Cap
Fixed rate conversion option

Index
An ARM's interest rate goes up and down according to a nationally published index. Your lender has no control over the index and cannot arbitrarily adjust your rate. Your rate is determined by the index.

Different ARMs have different indexes. The One-Year Treasury Bond Index is the most common ARM index. Other indexes are:

Six-Month Treasury Bill
Three-Year Treasury Bond Index
Five-Year Treasury Bond Index
11th District Cost of Funds Index - COFI
London InterBank Offered Rate - LIBOR
Prime Rate

Margin
Your ARM's interest rate is the sum of the index value plus the margin. Your lender sets the ARM's margin before settlement of your loan. Once set, the margin does not change for the life of the loan. In a hypothetical example if the margin is set at 2.75 percent and the index is 4.75 percent, the rate for the following year becomes 7.50 percent (2.75 percent plus 4.75 percent).

Adjustment Interval
The interest rate of an ARM changes at fixed intervals. This is called the adjustment interval. Different ARMs have different adjustment intervals. The interest rate of most ARMs adjust once a year, but others adjust every month, every six months, every three years or every five years. An ARM whose rate changes once a year is called a "one-year ARM". The graphed example is a one-year ARM.

Sometimes the first adjustment interval is longer or shorter than the following intervals. For instance, an ARM's interest rate might not change for the first three years, and then change once a year thereafter. Or the initial rate might change after ten months rather than a year.

Initial Interest Rate
The final feature common though all adjustable rate mortgages is the initial interest rate. This is the rate that you pay until the end of the first adjustment interval. The initial interest rate also determines the size of your starting monthly payment. The initial interest rate for most ARM's is lower than standard fixed rates.

Often the initial interest rate is lower than the sum of the current index value plus margin. When it is several percentage points lower, it is called a teaser rate. If your ARM starts with a teaser rate, your interest rate and monthly payment will increase at the end of the first adjustment interval unless your ARM's index goes down.

Optional Features
Most ARMs have consumer protection options that limit the amount that your interest rate and monthly payment can increase. They are called caps.

Periodic Interest Rate Cap
The first type of cap is the periodic interest rate cap. It limits the amount an ARM's interest rate can change from one adjustment interval to the next. If the periodic interest rate cap is two percent, this means that the ARM's interest rate cannot go up more than two percent. Without a periodic interest rate cap, the ARM's rate could exceed that amount if the index moves more than the amount of the periodic interest rate cap.

Life Interest Rate Cap
The second type of cap that you want on an ARM is the life interest rate cap. It sets the maximum interest rate that you can be charged for the life of the loan. If the life interest rate cap is 12 percent and the index value plus margin equals 13 percent, the life cap would limit the rate increase to 12 percent. Even if the index went to 16 percent, as the One-Year Treasury Bond Index did in 1982, the interest rate of this ARM would still be limited to 12 percent.

Typically the life cap is quoted as percentage points over the initial interest rate (i.e., a "six percent life interest rate cap" means five percent over the initial rate).

Initial Adjustment Rate Cap
If an ARM has an initial fixed period of more than one year a lender may provide that the first adjustment exceed the periodic interest rate cap. This means the initial adjustment could raise your interest rate and payment substantially, but never more than the life interest rate cap.

Conversion Option
This provides the borrower with the opportunity to convert their ARM rate to a fixed rate during a specified time period. Typically, the borrower must have had the loan for the fixed period of the loan plus one or more years. The conversion option also provides for the fees to be paid and a rate formula to determine what the new fixed rate will be. That rate may be higher than fixed rates available by refinancing but it may eliminate other closing costs encountered with a refinance.

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