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General Loan Options
Types of Loans Available
Information on Northern Ohio and Cleveland, Ohio home loans, including
conventional loans and FHA home loans.
This is the most cost-effective loan available. If possible, you
would choose Conventional before FHA and non-conforming loans. If
you have good credit scores and are not looking to push your
borrowing capabilities to the max, then conventional financing
probably is for you. There are a full range of products available:
- 5% Down Payment from your own savings.
- 0% Down Payment. Available for borrowers with excellent
- 3% Down Payment. Available for borrowers with excellent
credit with limitations.
- No PMI (Private Mortgage Insurance)-with down payments of
20% (sometimes 15%)
- 30 year and 15 year fixed term are most common, when long
and short term rates vary little.
- ARMs (Adjustable Rate Mortgages) and balloon payments.
A government-co-insured mortgage. Appropriate for borrowers who:
- Have credit issues (typically a FICO score below 620) but no
late payments in the last 12 months
- Want to borrow more money than a conventional lender will
allow. FHA loans have more generous lending criteria.
- Want a low down payment.
- Does not have a down payment coming from their own savings.
Gift money can count as a down payment.
If you cannot qualify for a conventional mortgage, then an FHA
mortgage may be for you. If you qualify for a conventional
mortgage you may want to avoid FHA since it is more expensive. The
extra costs of an FHA loan come from:
- Up-front MIP (Mortgage Insurance Premium) = 1.50% of the
- Often require additional certifications on various
structural and mechanical items
- Appraisals that may add additional requirements to the
transaction, which can complicate matters.
- Additional time to close due to government requirements.
- Mortgage insurance on a monthly basis in addition to a front
If you are a veteran you may qualify for a VA loan. If you want to
close with the least amount of cash as possible and not pay a
premium, then VA is the way to go. Not only is VA zero-money down,
but you can also have the Seller pay for almost all of your
closing expenses. If your agent structures the transaction
correctly, you should be able to come to closing with no money
required. It's not unheard of to even receive a check at closing.
There is no monthly mortgage insurance change.
Non-conforming loans vary from first time buyer programs with
special and advantageous features to loans. Loans for borrowers
with poor credit or those carrying excessive debt. Those loans
usually have unfavorable rates and terms and/or require
compensating factors like very large downpayments, additional
collateral, or a co-signer.
Variety of Loans Available
Information on Northern Ohio and Cleveland Ohio home mortgages and home
loans including fixed rate, adjustable rate and hybrid mortgages.
Fixed Rate Mortgage:
There are generally two types:
- A 30-year fixed mortgage has the same interest rate for the
entire 30 year period and is amortized over 30-years (paid in
full at the end of the 30th year). You can usually pre-pay
and/or refinance whenever you want. This is a conservative loan
and has no rate risk. Consequently the rate is usually higher
than an adjustable rate mortgage.
- A 15-year mortgage has a fixed rate but is paid off in 15
years. The monthly payment will be higher but the interest rate
will be lower by about 1/2%. If you can afford the higher
payment and you like the idea of the mortgage being paid off
quicker then this may be appropriate for you. The bank gets less
of your money in interest with this option.
Tip: Any loan can be paid off quicker by sending in extra
principal payments. Typically if you pay 13 payments a year
instead of 12 the period reduces from 30 years to around 22 years
on a 30 year mortgage. Payments made earlier in the life of the
loan benefit the borrower more than additional payments made later
in the life of the loan.
Adjustable Rate Mortgages (ARM)
These loans are fixed for given periods of time, then adjust based
on a formula. Typically the rate during the initial period prior
to adjusting will be less than more conservative 30-year
fixed-rate mortgage. They are most appropriate for borrowers who
want to match up the term with how long they think they may own
the house: Very short-term ARMs are loans that are fixed for 1 to
3 years then adjust. They are usually referred to as 1 years ARMs,
3/1 ARMs, and 3/3 ARMs. Mid-term adjustables are fixed from five
to seven years then adjust. They are usually referred to as 5/1,
5/5 and 7/1 ARMs. Longer ARMs terms are fixed 10 years prior to
adjusting. 10/1. How do they adjust ?
The most common adjustment comes every year after the initial
fixed period. For example, a three year ARM would adjust in year
four and every year thereafter. The typical limit (referred to as
a cap) on how much it can adjust annually is typically 2% with a
lifetime cap of 6% over the initial rate. It can go up or down
depending upon what rates do.
Tip: When shopping rates for ARMs you should also ask
about the lifetime interest cap and the maximum cap for each
adjustment period. A lender may offer a very low teaser rate (the
rate you are quoted) but if the rate can go up 3% each year
instead of 2% you may find your savings being quickly erased.
There are some ARMs that only adjust once. These are fixed for
the initial term then convert to the 30 year rate at the
adjustment period. A three year product would stay fixed for three
years, then convert in year four to whatever the 30 year fixed is
at that time.
The last kind stay fixed for a given period, then adjust, but
the next adjustment period is for the same time frame. It is fixed
for three years, adjusts, then fixed for another three years
(referred to as a 3/3). Then it adjusts again for another three
years. These are referred to as a buydown (3-1 buydown, 2-1
The amount they adjust by is written into the note. It will
normally be based on an United States Treasury rate of like
duration with a margin. For example: A one year ARM will adjust by
looking at the one year treasury note and adding a margin of
perhaps 2.75%. These two numbers added together will determine
your rate, but not more than the year one cap. Your Agent should
be aware of this because the margin is not the same at all banks.
If a particular lender has a low initial rate to capture your
business but during the adjustment period uses a higher margin
than everyone else, then your rate will be more expensive over
time. Your Agent should be shopping the margin as well as the
What kind of borrower should be interested in an ARM ?
- If you know that you will only live in the house for 3 to 5
years, then why pay for the security of a 30-year fixed rate
loan? You should see what the rates are for 3 and 5 year ARMs.
You can use ARMs to match the term of the loan with the length
of time you intend to live in the house.
- The lower initial rate may help you qualify for a larger
mortgage. This is appropriate for buyers who otherwise would not
be able to afford the house they want to purchase.
- If you believe rates will be going down in the next few
years. Remember that it is difficult to predict the behavior of
rates, especially one to three years into the future.
- You have expectations of an increasing income. If you are
confident that your income will increase enough to cover the
potential of increases in your mortgage when it adjusts, then
you are minimizing your exposure to risk. It is also appropriate
if you have debts or payments that are going to be going away.
Tip: Sometimes the markets can price short term vs long
term rates so that one has a clear advantage over the other. There
are times when 10- and even 7-year adjustable loans are the same
as 30-year fixed. In those cases you would never go with the
adjustable. If the difference (spread) on a 5-year ARM is only an
1/8% then you may not go with it. But if it is 1/2% or greater
then you may consider the difference worthwhile. Then you can
determine the costs of the security that is right for you.
These are specialized products. They are literally too numerous to
mention all of them. The following examples will give you a good
idea of available options:
- 3% to 0% Down Payment. The better your credit score the
cheaper the mortgage available. If you have credit issues these
may not be available or be too expensive.
- First and second mortgages combined. These are sometimes
called 80/10/10 or 80/15/5 mortgages. The 80/10/10 is a first
mortgage of 80%, a second mortgage of 10% and equity of 10%. The
80/15/5 just changes the proportions. With an 80% first mortgage
there is no PMI (Private Mortgage Insurance), which can be
expensive and is not tax deductible. The second mortgage
interest is generally fully deductible, which will generate a
larger tax deduction. The second may also be designed as a line
of credit, which allows the borrower to pay it off quickly or
pay interest only, and borrow it back if needed.
- No PMI loans. Some lenders will self-insure the mortgage and
not charge you PMI. They add a premium to the mortgage rate. The
advantage is that the payment may be less and it will be fully
deductible. The disadvantage is the rate premium stays with the
mortgage until its is paid off or refinanced.
- Marginal credit borrowers have many opportunities with B and
C lenders. They will pay a premium but they can also refinance
when their credit improves and then take advantage of cheaper
conventional rates. Usually requires a larger down payment.
- Buy Down Mortgages. The most common form of a buy down is a
2-1 Buy Down. The first year's rate will be 2% below your note
rate. The second year's rate will be 1% below your note rate.
Starting the third year the rate will be the note rate. Buy
Downs are appropriate for people who want to purchase a more
expensive house than they would usually qualify for. (The lender
will use the lower initial rate). Don't think you are getting a
great deal for free. The lower initial rates are possible
because you are borrowing more money up front and the lender is
using the excess funds to make up the difference in the mortgage
payment during the first two years. For example: If the market
rate on a 30 year fixed mortgage is 8% then the 2-1 Buy Down in
year three might be 8.25%. That would make the first years's
rate 6.25% and the second year rate 7.25%. This will cause you
to pay more the longer you stay in the home.
Tip: Some rates will seem incredibly good...until you
look further into them. Be sure to see if the lender is adding
origination fees, discount points, and high closing costs. The low
rate could be the result of up-front charges you may not initially
be aware of.
Things You Should Know About Loans
Information on Northern Ohio and Cleveland, Ohio home loans, closing
costs, fees, points, insurance and government programs.
A point is 1% of the loan amount charged to the borrower at
the time of closing. For a $100,000 loan one point is $1,000.
Points are used to lower the interest rate since they are
simply a pre-payment of interest. A typical yield for one
point will be to lower the interest rate by 1/4%. Not all
loans require points and you should carefully analyze if it is
appropriate for you, since it can be a large up-front expense.
Points are pre-paid interest, even if paid by the Seller, and
are likely tax-deductible. However not all borrowers will be
able to take advantage of the deduction, depending on the
particular Buyer's scenario.
JUNK FEES or LENDER'S FEES
The amount of fees that the lender charges to process the
loan. These can vary greatly from lender to lender and should
be shopped to get the best deal (see below).
This is a widely used term that can mean different things to
different people. The broadest meaning would include all funds
needed for closing, except the Down Payment. But this can be
broken down further as follows:
- Lender's Fees or Junk Fees. These are costs that the
lender charges to process the loan. They would include terms
like: processing, credit report, underwriting, tax prep, doc
prep fee and tax service fee.
- Origination Fees. Some lenders charge an up-front fee
for the right to loan you money. This should be shopped
carefully. In some markets people are paying it and if they
had shopped more carefully they could have found the same
loan with no origination fee. A typical amount can be 1% of
the loan amount, which makes this a significant expense to
watch, generally lowers the rate by 1/4%.
- Appraisal. To obtain a loan the home must pass an
independent appraisal ordered by the bank. The fee will
depend upon the going rate in your market.
- Title charges. The lender has no control over these and
they depend on custom and the market in your area. Expenses
may include a fee for processing the closing, a title policy
to cover the lender and possibly a title policy to cover the
- Pre-paid items and escrows. The lender will require a
few months reserves deposited by the buyer to cover
insurance, taxes, and possibly the PMI. Technically these
items are not closing costs.
- Conveyance Fees. The local jurisdiction will charge
taxes for transferring title. The amount depends on your
- Pre-paid Interest. At closing you will pay interest for
the rest of the month. If there are five days left in the
month then you will only pay for five days interest. If
there are 28 days then you will bring a larger check to
cover 28 days. If you are cash sensitive then you may want
to close at the end of the month.
- Survey. The lender will require a survey of the property
for the title insurance coverage.
- Miscellaneous expenses. These will depend on your
particular deal. They would include items like: repairs,
warranties, wood destroying insect reports and treatments,
delivery fees, other inspections, casualty insurance for the
first year as home owner's, insurance is paid in advance.
PRIVATE MORTGAGE INSURANCE (PMI)
When you put less than 20% down on a house you will have to
pay PMI. It is an insurance policy that protects the lender
and pays part of the principal balance upon default. The lower
the down payment the higher the PMI rates, since there is a
greater risk of default. For a $150,000 house with 5% down the
PMI can run $80 per month and since it is not interest, it is
not tax deductible. Some lenders will not require PMI with 15%
down and no premium in rates.
How to avoid PMI:
- Some lenders will self-insure and not require PMI. They
cover the risk by increasing the interest rate. With a
competitive lender the higher payment may still be less than
the lower rate payment plus PMI. It also has the advantage
of being tax deductible. The disadvantage is the rate
premium is added for the life of the loan. These loans are
very appropriate for low Down Payment borrowers who will be
in the house 4 to 6 years, hence not likely to achieve 20%
- 80/10/10 loans. First mortgage of 80%, second mortgage
of 10% and equity of 10%. Instead of PMI you have the second
mortgage which is fully deductible.
- Put down 20% equity (sometimes 15% with some lenders
with borrowers with excellent credit).
How to get rid of PMI:
When your loan to value equals at least 20% (some lenders
may require as high as 25%) you can petition to have the PMI
removed. You will have to pay for an appraisal to verify the
value. You can achieve this benchmark by putting more equity
into the house and by having the home appreciate in value. You
also need to make all of your payments on time. Making certain
home improvements may also increase your equity and providing
documentation to support the improvements.
When you receive rate quotes most lenders will honor that rate
if you close within the next 30 to 45 days. If you want to
lock in a rate for longer than 45 days you will likely pay a
premium. The longer the lock, the higher the premium.
If you are in contract and have a rate lock, some lenders
will drop your rate if market rates drop prior to closing.
Typically there is a change related to this.
When building a house, the advantage of using the Builder's
financing is they will give long-term rate locks without the
large premiums. If you are custom building a home many Lenders
will give a construction loan that converts to a permanent
loan with the rate locked in at the beginning.
PRE-APPROVED vs PRE-QUALIFIED
A lender or real estate Agent can pre-qualify you. All it
means is that someone has looked at your income, your debts
and your credit and determined the amount and type of
mortgage you could qualify for.
When a lender pre-approves you, it means you have made a
formal loan application and taken the next step past
pre-qualification. The approval may be contingent on
verification of your income, down payment, appraisal and other
misc. items. Being pre-approved may give you added strength
when negotiating because the Seller will feel more secure
about your ability to close. Being pre-approved does not
prohibit you from shopping for rates when you are in contract
and switching Lenders if you can find a better deal later.
MISC GOVERNMENT PROGRAMS
- Down Payment Assistance Grants. These are grants that
the State or local government gives to borrowers for their
Down Payment. They are available on a periodic basis and you
must qualify based on income, purchase price, and/or number
of people in your household. The income limit changes for
each county and the availability is hard to predict. You
would be well advised to check with a qualified Lender to
see if you qualify and if the the funds are available. You
can not reserve them in advance. Once you are in contract
then you can apply. Be patient. It is a government program
so approval can take around 45 days.
- First Time Home Buyer: This "bond" money is intended for
first time home buyers only. It is used to lower your
interest rate to a below market rate. You must qualify by
not exceeding the income limit for your county. The income
level for bond money is higher than Down Payment Assistance
Grants. Typically, if you have not owned a home for two or
more years, you are considered a first time home buyer.
Remember that you will need to give more time in a contract
to close as each of these processes takes additional time to