Financing Your New Home I. Preliminary Considerations: Many people assume that they will get a conventional 30-year fixed-rate loan. This may ultimately be the best option for you. However, given the growing competition in the marketplace, you can now choose from an increasing variety of loans and may find another loan that better matches your long-term plans and goals. When selecting a loan, you should seriously consider not only your present situation, but your future plans as well, For example, you may want to consider the following and then decide whether your loan choice suits your plans:  How long do you plan to live in this home? If you are pleased with the area where you live now and do not anticipate moving soon, you may wish to select a loan with the best rate for the long term.  How long do you think you will remain in the same job? If you are not sure, you may want to obtain a loan that ties up only a minimal portion of your income.  Do you plan to make any family changes? If you plan on having children or a parent or in-law move in with you, you should consider whether your current home is large enough. You may want to obtain a loan that keeps sufficient capital available to make any necessary additions to your home. You may also be able to prepay principal to build up additional equity and then obtain a home equity loan or refinance your current loan to get cash out to make improvements.  Will you be financing your children's education and if so, when? You may want to obtain a 15-year loan to build up equity sooner and pay a lower interest rate. You may alternatively wish to pay more principal on a long term loan to free more equity before you incur the education expenses.  What are your long-term financial goals? A mortgage provides you with a payback in the form of a mortgage interest deduction, but your investment needs will vary depending upon your current age and financial goals, which should be given due consideration to ensure that you adequately disburse your finances between your home loan and other retirement savings plans. II. Types of Loans Conventional Fixed Rate Mortgages A conventional mortgage is one that is not insured or guaranteed by the federal government. A conventional fixed-rate mortgage has a set interest rate and payment which does not change over the life of the loan. This type of loan is fully paid off in a set number of years, usually 15, 20 or 30. Part of each payment pays back the money you borrowed (principal), and the rest is the lender's income for making the loan (interest). Adjustable Rate Mortgages When interest rates soared in the early 1980s, many people were completely priced out of the home-buying market. Lenders responded with a new kind of loan that tied mortgage interest to a variable financial index, such as U.S. Treasury Bills, in order to go below conventional loan rates. The lender added an extra two or three percent (known as the margin) to create the adjustable rate mortgage (ARM). Early in the loan, interest rates on an ARM are below conventional fixed-rate mortgages. These loans are worth considering if you are stretching your budget now or if you plan to be in your home only a short time. In exchange for a low rate at the beginning, this loan is set up so that the monthly payment can fluctuate (because the loan is tied to an index that can go up and down), unlike a fixed-rate loan where the monthly payment is locked in. However, the payment will not change every month. Most ARMS are adjusted every year or every three years, within proscribed limits as to how low and how high the payments can go (a cap), all of which should be clearly spelled out in your loan agreement. To help you better understand ARM terms, consider that a 3/1 ARM has a fixed rate for the first three years of the loan and is then adjusted once every year throughout the term of the loan to reflect the current economic conditions. A 5/1 ARM is fixed for the first five years of the loan and is then adjusted once a year for the term of the loan. In deciding whether an ARM suits your needs, consider the following: What would the interest rate be when fully adjusted? Is there any prepayment penalty? When will the rate adjust? How will it adjust on the first change date? How will it adjust over the term of the loan? Convertible Adjustable-Rate Mortgages (or Hybrid Mortgages) Lenders have devised many options for combining the affordability of an ARM with the certainty of a fixed-rate loan. A convertible mortgage has fixed and variable rates that change on a schedule. For example, your mortgage may start as an adjustable rate loan, but would have a provision which allows you to convert the loan to a fixed-rate mortgage at designated times. Alternatively, you may pay a fixed rate for the first three, five, seven or ten years of the loan and then go to an adjustable rate schedule for the rest of the loan. You will probably have to pay upfront fees for a convertible loan, but this may be a good option for you depending upon your needs at the beginning of the loan and your future plans. Balloon Mortgages This is a conventional, fixed-rate mortgage with monthly payments which are amortized in a manner similar to a 20 or 30 year mortgage. However, the monthly installments are generally not large enough to repay the entire loan by the end of the term (the amortization period is longer than the payback period). As a result, at the end of the term (one, five or seven years), you will be required to make a lump sum payment of the remaining principal. Your lender may, but is not required to, extend your loan to the amortization period at a fixed rate to be determined by market rates in effect at the time of extension. You should read your loan disclosure documents to ascertain what conditions your lender will impose upon you to extend at the end of the initial term. Government Loans FHA Loans These loans are insured by the Federal Housing Administration (FHA). The FHA provides mortgages to buyers who make a downpayment as small as three percent. First-time buyers may want to consider this type of loan. FHA loans require the purchaser to pay FHA mortgage insurance, with a portion paid up front at the closing and the balance paid with the monthly payment. VA Loans VA loans are available to those who have served in the military and their surviving spouses. The program features 100% financing with no private mortgage insurance requirement. There is a requirement of an up front VA guaranty fee, which may be financed in the loan. You will usually only be required to have available funds of approximately 2% of the closing costs (may be a gift). More than 29 million veterans and service personnel are eligible for VA financing. VA loans offer the following advantages: 1. No downpayment is required in most cases. 2. The loan maximum may be up to 100 percent of VA established reasonable value of the property, with a maximum loan amount of $203,150. 3. There is no monthly mortgage insurance premium to pay. 4. There is a limitation on the buyer's closing costs. 5. These are 30 year loans with a choice of repayment plans. 6. The mortgage is assumable, subject to VA approval of the assumer's credit. 7. You have a right to prepay the loan without penalty. VA loans can be used to buy a home, build a new home, to simultaneously purchase and improve a home, and to refinance an existing home loan or an existing VA loan. You will be required to meet eligibility requirements. For example, veterans who served on active duty and were discharged under conditions other than dishonorable discharge during World War II, Korean conflict, and Vietnam era must have at least 90 days of service. Veterans with service only during peacetime and active duty service personnel must have had more than 180 days of active service. Veterans who began service after September 7, 1980, or officers with service beginning after October 16, 1981 must have served at least 2 years. To request a Certificate of Eligibility for a VA home loan, or other information, contact your local/state VA office at 1-800-827-1000. Special Loan Programs Nehemiah Nehemiah will gift up to 3% of the final sales price to a qualified Nehemiah buyer for down payment and closing costs. Nehemiah is a private California non-profit housing corporation, which gifts its own money from a preexisting trust fund. Nehemiah is not a government program. The Nehemiah Program gifts money to qualified buyers to purchase Nehemiah properties throughout the United States.