LOANS EXPLAINED

Conventional

Conventional loans are secured by government sponsored entities or GSEs such as Fannie Mae and Freddie Mac. Conventional loans can be made to purchase or refinance homes with first and second mortgages on single family to four family homes.

In general, Fannie Mae and Freddie Mac's single family, first mortgage loan limit is $417,000 in 2006. This limit is reviewed annually and, if needed, changed to reflect changes in the national average price for single family homes. The current loan limit applies to all conventional mortgages delivered after January 1, 2006.

2006 Conventional Loan Limits

First mortgages

One-family loans: $417,000
Two-family loans: $533,850
Three-family loans: $645,300
Four-family loans: $801,950

Jumbo

Loans which are larger than the limits set by Fannie Mae and Freddie Mac are called jumbo loans. Because jumbo loans are not funded by these government sponsored entities, they usually carry a higher interest rate and some additional underwriting requirements. A strategy to lower your overall interest payments if your purchase or refinance balance is above $417,000 is to use a combination of both first and second trust money, referred to as an 80/10/10, 80/15/5 or 80/20. Every situation is different, but it is one more option to consider.

FHA Loans

FHA Loans have several advantages over conventional loans, including lower down payments and more relaxed credit-qualifying guidelines. The federal government created FHA loan programs to encourage homeownership throughout the country. The FHA can help people to obtain a loan with little or no down payment. The FHA does not supply the loan; it simply insures the loan to limit the risk to the lender. The benefits of a FHA mortgage are:

• A 3% down payment, as opposed to a 5% down payment on traditional loans
• Low monthly mortgage insurance
• Low closing costs, which are regulated by HUD
• No credit score requirements
• Qualify for a loan two years after a bankruptcy
• Qualify for a loan three years after a foreclosure

The FHA loan guidelines are more relaxed than conventional loan guidelines; this includes less strict regulations about past bankruptcies and/or foreclosures, job requirements, use of alternative credit, and debt-to-income ratios. The FHA ensures that their interest rates remain competitive with the interest rates of conventional loans.
FHA loans were originally created to help first-time buyers; people who are not first-time buyers may qualify, however, the FHA does not allow anyone to have more than one FHA-insured loan at a time.

The borrower is required to pay an insurance premium upfront, but this premium can be financed into the loan amount directly. The borrower must also pay a monthly premium, which is .5% of the total loan amount divided equally over 12 months. Unlike a conventional loan, the FHA requires a termite report and clearance, as well as a few other property condition standards, to qualify for a loan.

FHA Refinancing

You may refinance a conventional loan to a FHA loan. Options include: Cash-out Refinancing, Rate Refinancing or Term Refinancing. The FHA offers borrowers debt-consolidation programs, and the option to consolidate two mortgages into one FHA mortgage. The benefits of FHA loans, such as low closing costs and more relaxed credit and income qualifications, also apply to FHA refinances. Streamline refinancing is the only type of FHA refinance that requires the original loan to be FHA-insured.

Adjustable Rate Mortgages

The concept of an Adjustable Rate Mortgage is confusing for many homeowners. Adjustable Rate Mortgages are typically popular with homeowners looking for lower interest rates and monthly payment amounts.

Adjustable Rate Mortgages offer lower interest rates and payments even when interest rates are rising by offering homeowners an introductory interest rate for a specified period of time. When you see a mortgage offer with an unusually low interest rate, 2.5% for example, this is an introductory rate which your payments will be based on for specified period of time.

How Adjustable Rate Mortgages Work

The introductory period offers a fixed interest rate for a period of time specified in your loan contract. This period of time is typically 3, 5, or 7 years; however, this duration varies from one lender to the next. During this period of time the interest rate and monthly payment amount will not change.

When the Mortgage Adjusts

At the end of your introductory period the mortgage lender will adjust the interest rate and your monthly payment amount. The lender will use whatever financial index your mortgage is tied plus their markup. Many homeowners refinance their mortgages prior to the expiration of the introductory period. If you are concerned with rising interest rates, refinancing your mortgage to a fixed rate loan will save you peace of mind.

Interest Rate and Payment Caps

Caps protect homeowners from excessive changes in their monthly payments or interest rates. Make sure your Adjustable Rate Mortgage has both interest rate and payment caps. Mortgages without rate caps are prone to negative amortization when the payments do not rise enough to cover the increase in the interest rates.

Adjustable Rate Mortgages can be beneficial if used correctly. An example might be you plan to move before the mortgage adjusts and you want to take advantage of the lower rate. Just be certain there is no prepayment penalty for paying off the mortgage.