Types Of Loans
Construction Perm Loan (C/P Loan)
This loan is an interim account established in the home buyers name before ground is broken on a new home. The builder draws the funds necessary to construct your home. This loan also secures end loan financing for the home when the construction is complete. The advantage of this type of loan is that there’s only one loan application, one approval process, and one loan closing which translates into only one set of closing costs. Once the home is ready for occupancy, the loan is converted from a construction loan to a mortgage.
This loan is typically provided to customers who purchase a home that has already begun construction. However, some lenders now offer a Construction Perm Loan also in this scenario. Once the construction of the home is complete, the buyer will close on their End Loan. In the interim, the home’s construction is often financed by the builder.
There are several types of conventional loans available for home buyers today. These loans are favored by banks and many mortgage companies. It requires healthy credit scores and usually some form of down payment.
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Federal Housing Authority Loan (FHA Loan)
FHA loans are common because many home buyers can qualify for them despite blemished credit or a low down payment.
Veterans Administration Loan (VA Loan)
This is a loan guarantee program for Veterans that have honorable served in the military for 2 years or more. This program allows the buyer to finance all of their closing cost, pre-paids, and escrows. (Today many other loans have zero down payment options available. See your lender for details). With this program no down payment is required. The interest rate for VA loans is typically ¼ to ½ percent higher than FHA and Conventional loans. Once a lender approves a loan it is sent to the VA for approval.
Rural Development Loan (RD Loan)
This is a loan guarantee program for buyers that want to build a home in what the Department of Agriculture deems to be a rural area. Like the VA loan, the buyer can include the closing costs, pre-paids, and escrows in the loan. The down payment is $0. Typically RD loans require good credit and a front end ratio less than 30%. (See “Glossary” for details.) Buyers must attend a Home Buyers Training Seminar to be eligible for this program.
Fixed Rate & Adjustable Rate Mortgages
Fixed-rate loans offer a monthly payment that is known and does not change. For this reason fixed-rate mortgage loans remain the most popular type.
Most fixed-rate mortgages are for loan terms of 15 or 30-years. A 30-year loan has lower payments but a slightly higher interest rate. For all of 2006, the average mortgage rate on a 30-year fixed-rate loan was 6.41%, according to data from Freddie Mac. For 15-year mortgages, the average rate was 6.07%. Currently, new home loan mortgage rates are considerably less.
To pay off a fixed-rate loan sooner, check with your lender to make sure you can make prepayments. You should be allowed to make these anytime and for any amount, and at no penalty in some cases.
After an initial fixed rate term the interest rate on an adjustable-rate mortgage (ARM) loan is re-set periodically. This is to keep the rate in line with current market interest rates. For example, a 3/1 ARM loan offers a fixed rate for the first three years, adjusting once a year thereafter. A 5/1 ARM loan offers a fixed rate for the first five years, adjusting yearly thereafter. The lender sets the interest rate by adding a margin to an index rate.
Common indexes include: Cost of Funds Index. The Eleventh District of the Federal Home Loan Bank Board, which covers California, Nevada and Arizona, publishes the Cost of Funds Index. For more information on the index, visit the Web site of the Federal Home Loan Bank of San Francisco. Treasury bill yields. The yield on the 1-year T-bill, adjusted for a constant-maturity security, is widely used.
Most ARM loans have a periodic rate cap and lifetime cap to limit the amount the interest rate can increase each adjustment period and over the term of the loan, respectively.
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