Choosing the Right Loan
Choosing the right loan for you depends on many factors.
While many websites offer mortgage calculators to give you an idea of housing affordability etc, we would caution against giving much weight to their results. They work for a very narrow range of loan products, without consideration of a borrower’s individual factors. To oversimplify the process may leave clients with a qualifying amount that is arbitrary and inaccurate.
A true mortgage advisor understands the big picture. Lots of factors come into play in choosing the right loan. Among them are:
- Credit worthiness (also reviewing credit reports and expunging erroneous information)
- Debt and payment minimums (some of which may be excluded)
- Debt to income ratios
- Cash flow and projections
- Overall financial goals of asset accumulation and passive income
- Projected timeframe for ownership
- The payment the borrower is comfortable with
- Goals for loan payoff and term reductions
- Equity position / loan to value ratio
There are literally thousands of loan products. Below are some basic loan product categories with descriptions. Some descriptions are overlapping. For example, a combo loan may be adjustable and have a balloon.
- Fixed rate The interest rate doesn’t change during the term of the loan.
- Adjustable (ARM) The interest rate and monthly payment adjust throughout the loan period in accordance with the loan contract. Some loans can start out fixed, and become adjustable after 3 to 7 years.
- Convertible The loan can be changed from an adjustable to a fixed rate, usually at some pre-determined windows in time.
- Conforming A loan eligible for purchase by the two major Federal agencies that buy mortgages, Fannie Mae and Freddie Mac. The loan limits THROUGH THE END OF DECEMBER 2008 ONLY are $729,750 for a single family house, $934,200 for 2 units, $1,129,250 for 3 units, $1,403,400 for four units .
- Jumbo Loans that exceed the conforming loan amounts referenced above.
- Government The most common government loans are:
- FHA (Federal Housing Authority) Insured mortgages
- VA (Veteran’s Administration) Loans for veterans of the US armed forces.
- Conventional A non-government loan.
- Balloon Loans which have a lump payment at the end of the term which is greater than the individual payments to that point (usually a hefty lump). A ‘30 due in 7’ means the loan payments along the way are based on 30 year amortization. At the end of 7 years the remaining balance of the loan must be paid off. However, an option is to refinance the loan before the balance is due, or sell the property.
- Combos These loans are often referred to as 80/10’s, 80/15’s or 80/20 loans. They provide a way to avoid mortgage insurance.
- Interest Only The required payments pay the interest only. These loans will either have a balloon, or they convert to a fully amortized loan at some point.
- Negative Amortized A ‘Neg Am’ loan accrues a greater principal balance. In other words, instead of paying down the loan during the term, the amount required to payoff the loan increases over time.
- Seller Financing A transaction in which the seller is providing either part or all of the financing for the buyer.