Dale M. Servetnick Realtor, Salesperson Your Maryland 'Net Realtor! Long & Foster Real Estate, Inc.

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When it comes to paying for a home, buyers today have an almost unlimited number of financing options.   Here’s a run-down on the main types of financing. Interest rates are intended for illustration only, and you should ask me to obtain the current information for you. I can also contact one of the loan officers that I work with for current market rates.

Conventional Mortgage

A conventional loan is an indebtedness or mortgage made between a lending institution and a borrower without a third party participant, such as VA or FHA. Most types of conventional loans are paid off in equal monthly payments spread over 15, 25, or 30 years. The interest rate stays the same for the life of the loan. Therefore the monthly principal and interest payment also remains constant.   Terms of a conventional loan vary among lenders, but basically a loan can be obtained with as little as 5% down payment. When the down payment is less than 20%, it is necessary for the loan to have private mortgage insurance to protect the lender. 

• Example: The buyer purchases a $300,000 home. Typically, the lender will require a down payment of $60,000 or 20% of the purchase price. Assuming 7% market rate; $240,000 loan amount; 30 years, $1,597.92 monthly payment. With private mortgage insurance (PMI), however, the lender would lower the down payment requirement to 5%, or $15,000, which increases the monthly payment.
• Advantage: Fixed rate financing is straightforward and easy to understand. Using private mortgage insurance normally adds up-front costs but new PMI plans allow premiums to be financed or paid monthly.

VA Loan

The VA does not lend money; VA guarantees a portion of the loan. Thus the lenders who originate the loans feel comfortable with their risk. Qualified veterans can take out loans up to $240,000 with no down payment. VA-guaranteed loans can be combined with second mortgages and are assumable upon qualifying by any future buyer. Payments may be fixed for full term.

• Example: The veteran agrees to buy a home for $235,000. With no down payment, the loan amount is $239,700 (includes a minimum 2% VA Funding Fee) for 30 years, and say the VA interest rate is 7%, plus “points” paid by either buyer or seller. The monthly payment for the $239,700 loan will be $1,595.92.
• Advantage: No down payment necessary.

FHA Loan

The FHA does not lend money; FHA insures loans against default. This makes lenders willing to finance home purchases on favorable terms. With an FHA loan, the down payment can be as low as 2.25% of the purchase price. Points (prepaid interest) may be charged by the lender. Purchasers can choose different rate and point combinations.

FHA charges an up-front Mortgage Insurance Premium (M.I.P.) fee. This fee can be financed in with the loan or paid in cash at settlement. It is 1.50% of the loan amount, if financed. In addition to the up-front 1.50% fee (which can be financed into the loan), FHA charges a monthly M.I.P. of .5%.

• Example: The buyer of a $200,000 home would make a down payment of approximately $4,500, resulting in a base loan amount of $195,500 and a total loan amount of $198,432, including the financed M.I.P. At a rate of 7%, the monthly principal and interest would be $1,321.37, plus $81.46 for the monthly M.I.P., for an adjusted payment of $1,402.83.
• Advantage: Low down payment and low interest rates. Fixed or adjustable rates are available. Especially designed for first-time home buyers.

Balloon Mortgages

A balloon mortgage is typically a loan which must be paid off after a certain period. The advantage they offer is an interest rate that is lower than a 30-year mortgage. Balloons may range in duration from 5-to-7 or 10 years. If the 30-year fixed rate quote was 7%, the 7-year balloon may be as low as 6.5%, providing lower payments for the 7-year period.

One point to consider, however, is that the investor may but does not have to guarantee to extend the loan past the balloon date even though most balloon plans contain provisions for optional refinancing.

• Example: See example under the heading of "Owner Financing."

NOTE: It is important for me to emphasize that Long & Foster Real Estate, Inc., is not a mortgage lender. While I can help you work through the financing process, it is very important for you to discuss your particular circumstances with an experienced loan officer. The examples shown here are for illustration only and were provided by Prosperity Mortgage Company, a Long & Foster affiliated company. The exact terms of any financing are subject to the requirements of the investors in each specific case. Choosing the “best” method depends on the circumstances of the individual.

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