Which loan program is right for you?

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Fixed vs. Variable Mortgage Rate

Fixed-rate mortgage loan is different than a variable-rate loan.  A fixed-rate mortgage loan is a loan with a fixed interest rate and the rate does not change with either the prime rate or other index rate.  Because of this, your monthly payment will remain the same throughout the entire terms of the loan.  Unlike fixed-rate mortgage loan, variable-rate is not fixed, and the rate charged on the loan varies as market interest rates change.  Generally, most variable mortgage loan will pay a fully indexed rate that is based on the indexed rate plus margin.  Consequently, your monthly payment will vary.

Prior to deciding which interest rate is right for you, make sure you understand the terms of your loan.  Which rate is better for you?  It depends.  Prior to making your final decision on which mortgage option is appropriate for you, it is important to understand the pros and cons of fixed-rate vs. variable rate mortgage loan.

For instance, if you borrow a 30-year $250,000 loan with a fixed-rate at 3%, your monthly payment will be $1,055.00.  This monthly payment will remain the entire term of your mortgage loan.  On the other hand, if you have a variable rate, you monthly payment will vary.  If the interest rate goes up, your payments will increase.  On the contrary, if the interest rate drops, your payments will go down, saving you money.

Adjustable Rate Mortgage Loans

Adjustable rate mortgage (ARMs) are loans with an interest rate that will change or adjust from time to time.  The payments may increase or decrease with the rate changes, based on the terms of your loan and the lender chooses a benchmark rate index.  ARMs have complex rules and structures, and because of such complexities, ARMs may pose risks to you if you do not entirely understand them.  On the other hand, some borrowers believe that fixed-rate mortgage loan is better than ARMs, which is not always the case.  Choosing which rate structure is better will depend on your situation, affordability, risk levels, and/or financial short-term or long-term goals.  ARMs may be a good option for you if you plan to stay in the property for a short period of time.  ARMs may be advantageous to you if you know that you will be relocating in the near future or plan on paying off the loan once fixed-rate term expired.

Advantages of ARMs

  • Low payments for a term period and may have several types of caps limiting the increase on the mortgage rate and the size of the loan payment
  • Less expensive if you plan to only stay at the property at a certain amount of time
  • Predictable low monthly payments for a certain period of time

Disadvantages of ARMs

  • May include a prepayment penalty
  • Rate increases after the initial term ends
  • Potential of high interest rate on your mortgage loan

FHA Mortgage Loans

Federal Housing Administration (FHA) loan is managed by the U.S. Department of Housing and Urban Development (HUD).  The federal government insures the lender against losses that might result from borrower default.  Although these loans are insured by the government, the loans are offered by FHA-approved mortgage lenders.  FHA Loans are available to all types of borrowers.  However, they remain popular with the first-time home buyers because of the low-down payment requirement and lower minimum credit scores than many conventional loans.

Advantages of FHA Loan

  • Low down payment, which is set at 3.5% of the purchase price
  • Does not require you to have a high credit score
  • Easier to use gift for down payment and closing costs with FHA financing
  • Sellers can contribute up to 6% to your closing costs
  • No prepayment penalty
  • May borrow beyond the amount of the purchase price for renovations and repairs through the FHA 203k program

Disadvantages of FHA Loans

  • Pay for mortgage insurance.  You are required to pay an upfront mortgage insurance premium (MIP) of 1.75%
  • Pay additional small monthly fee with each monthly mortgage payment.  Thus, this will increase your mortgage monthly payments

FHA loans are not an option for every borrower.  There is a loan limit, and for some borrowers the limitation precludes them from getting a large loan if they are to purchase a luxury home or they are searching to purchase a home in a hot market.

Veteran Affairs (VA) Mortgage Loans

A Veteran Administration (VA) mortgage loan is guaranteed by the U.S. Department of Veterans Affairs.  The VA dictates the terms of the mortgages and qualifying standards of the loans.  The agency does not directly offer the financing.  It is done through approved private lenders.  VA loans are available to active and veteran service personnel and their families.  The purpose of the loans is to assist service members, veterans, and their surviving spouses with home ownership.

Advantages of VA Loans

  • VA loans have generous terms
  • No requirement for a down payment unless your purchase price exceeds the established property value or required by the lender
  • Does not require private mortgage insurance premium requirement, and closing costs are limited
  • Lenders do not charge a prepayment penalty if you pay off the loan early
  • VA provides assistance to help you avoid default should you find yourself in such predicament

Disadvantages of VA Loans

  •  Sellers are more resistant to VA financing because in the past, the process was more complex and took longer than the conventional mortgages
  • Only a limited amount of approved VA lenders, and the approval process could be longer
  • VA loans come with an upfront charge called VA funding fee
  • The VA collects the fees to insure loans made under the program. Regular military servicemen pay about 2.15% for the first use, and 3.3% for subsequent use.  Reserves and national guard servicemen pay 2.4% for the first use, and 3.3% for subsequent use.

USDA Loans

The U.S. Department of Agriculture (USDA) loans, also known as Section 502 loans, offer substantial benefits and provide affordable homeownership opportunities to low-to-average income to purchase a home in an eligible rural area. The purpose of the loans is to stimulate economic growth in rural and suburban communities in the U.S.  The loans are issued through private lenders and guaranteed by the federal government.  Because USDA loans are guaranteed by the federal government, lenders generally offer homebuyers advantageous rates and terms.

Advantages of USDA Loans

  • Some of the benefits with USADA loans include zero down payment
  • Competitive interest rates
  • Low mortgage insurance and no pre-payment penalty
  • Seller can pay closing costs and no cash reserves required
  • Flexible credit requirements and zero down payment

Disadvantages of USDA Loans

  • Some of them include geographic restrictions
  • Mortgage insurance may be financed into your loan
  • Income limitations and only available to single family-owner occupied financing.

Conventional Loans

Conventional loans are not guaranteed or insured by the government.  They are either conforming or nonconforming mortgages.  Conforming mortgages are loans that conform to the guidelines established by Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that purchase mortgages from lenders and sell them to investors.  Nonconforming mortgage are loans that do not conform to the GSE guidelines.

Conventional loans are held by mortgage lenders as their portfolio loans.  Because these loans belong to the lenders, whom set their own guidelines and do not sell them to investors, the loans have features in which other mortgages do not have.  Conventional loans offer a number of benefits if you have sufficient cash on hand to make a 20% down payment.  If you do, the lenders do not require you to pay mortgage insurance, which could save you money with all things considered.

Advantages of Conventional Loans

  • Some lenders even allow you to borrow beyond the home’s value so that you can have the extra funds for home improvement purchases
  • Conventional loan market generally speaking is a competitive place, and because of this, some lenders may be flexible to waive some of the fees or closing costs associate with the purchasing of a home
  • Usually require less paperwork in comparison to government insured loans
  • Lenders can be flexible and allow you to use your investments such as stocks and bonds as a security for a mortgage

Disadvantages of Conventional Loans

  • Higher down payments, usually 20% in comparison to FHA and VA loans
  • Closing costs and fees must be paid at settlement and cannot be rolled into the mortgage

Because lending does not have a one-size fits all solution, it is important for you to understand your options and determine which one will fit your needs and qualifications.

Bridge Loans

What is exactly a bridge loan and when do you need it?  Bridge loans are used in real estate and other business type transaction.  In real estate, bridge loans are short-term loans (usually less than a year), secured by your existing home or assets.  The loans bridge the gap between the sales price of a new home and homebuyer’s new mortgage.  Bridge loans are short-term financing used until you secure permanent financing an existing obligation.   Basically, you use the equity in your current home for the down payment on the purchase of a new home while waiting to sell your home.

Advantages of Bridge Loans

  • Allow you to use your equity in the current home for the down payment on the purchase of a new home while waiting to sell your old home
  • Give you extra time and the cash flow needed to purchase a new home
  • Might gain a few months free of payments
  • Can still buy a new home even after removing the contingency to sell under certain circumstances

Disadvantages of Bridge Loans

  • Must be able to qualify to own two homes
  • The stress of handling two mortgages at once plus the bridge loan interest
  • The interest rates are generally high than other credit options such as home equity line of credit
  • May be making two payments, one for the bridge loan and the other for the mortgage until your old home is sold
  • Because of the risk involved, lenders have more requirements and restrict approving process. They only offer real bridge loans to borrowers with excellent credit ratings, low debt to income ratios, and significant home equity in their existing property

Because considering a bridge loans, it is important for you to take into consideration of the costs involved before using it.

Cash-Out Refinance Loans

A cash-out refinance is a mortgage refinancing option in which the new mortgage is for a larger amount than your existing loan amount.  Basically, you are converting your home equity into cash.  Thus, with cash-out refinance, you borrower more than you owed on your mortgage and use the difference for anything you want with the money.

Advantages of Cash-Out Refinance

  • Usually give you access to lower interest rates than credit cards
  • Use the extra money for home improvements and renovations
  • Use for debt consolidation and use to boost your retirement savings or build up a college fund

Disadvantages of Cash-Out Refinance

  • Increase your loan balance and leave no equity in your property
  • Restart the clock on all your housing debt, and increase your interest costs on the loan
  • Require you to pay closing costs for refinancing the loan
  • Slightly harder to qualify and sometimes the costs are a little higher

Cash-out refinance can be a good tool to use if you need money for projects or debt consolidation.  However, it’s important to compare options before making your final decision of what is cost-effective for you.

Home Equity Loans

Home equity loan allows you to borrow against the equity in your home with a fixed interest rate and monthly payment.  You receive the funds in a lump sum.

Advantages of Home Equity Loan

  • Secure a low and fixed interest rate with scheduled fixed monthly payments
  • Some home equity loans do not have any fees
  • May borrow a lump sum to make purchases

Disadvantages of Home Equity Loan

  • Require you to have a lot of home equity to qualify
  • Generally home equity loan rates and terms are more favorable to borrowers with good and excellent credit score and history

It is important to understand the terms of your loan prior to making any committing to it.  You generally have the right to cancel the loan for any reason without penalty within 3 days after signing the loan documentation.

Home Equity Line of Credit (HELOC)

Home Equity Line of Credit (HELOC), like second mortgage, functions as a revolving credit line.  They generally have a draw period in which you can access the money. You can draw money from this credit line when needed instead of taking a lump sum amount.  How does HELOCs work?  You apply with a lender, and the lender verifies your income and reviews an appraisal of your home.  The lender requires you to demonstrate the ability to repay the HELOC.  After reviewing all the required documentation, the lender will determine the amount of your credit line.  Once you have been approved, you will be given an account card or checks to use the credit line as you deem appropriate.

Advantages of HELOCs

  • Financial flexibility and tax advantages and no restrictions on use of funds
  • Lenders do not charge a fee to draw funds from HELOCs
  • Caps on rate increases and interest rate may be lower than unsecured credit cards
  • Giving you the repayment freedom to pay the principle whenever you like

Disadvantages of HELOCs

  • Have adjustable rates, and therefore rates potentially could rise over time
  • Failure to make HELOC payments could cause potential foreclosure
  • Risking of more debt
  • There are uncertainties associated with HELOCs. Changes in the value of your home or credit, the lender may reduce your credit line or freeze your HELOC altogether.

HELOCs might be attractive because of their low introductory rates.  Prior to getting a HELOC, make sure you understand the terms of your loan before sign the dotted line.

Commercial Real Estate Loan

What is a commercial real estate loan?  A commercial real estate loan is a mortgage secured by a lien on commercial property as opposed to residential property.  Commercial properties are income-producing real estate that is used for business purposes.  This include office, retail, warehouse, multi-family unit (5+ units), mixed-used property, and other types of properties.

Because of the risk involved, commercial real estate loans are more expensive than residential loans.  Lenders generally consider the nature of the collateral, financial ratios when evaluating the loans, and the creditworthiness of the borrowers.  Depending on the wholesale lenders, the terms of the loans may range from 5, 7, 10, 20, 25, to 30.  The interest rates may be fixed, variable, or ARMs.

Types of Commercial Real Estate Loans

  • Permanent Loans are first mortgages on a commercial property. It has some amortization and a term of at least five (5) years written into the contract.
  • Small Business Administration Loans (SBA) are guaranteed by the SBA, a government agency. The loans are written by traditional and non-traditional lenders.  There are different SBA loans for different types of borrowers.  The most popular one is the SBA 7(a) loan, which provides financial assistance to small businesses.
  • Bridge Loans are generally used when a borrower is waiting for longer-term financing or attempting to refinance an existing loan. It is a short-term loan on a commercial property ranging from six (6) to three (3) year term, depending on the situation and the lenders.

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