VA Loan (Veterans Administration):
VA loans are for people who are active U.S. military or veterans. These loans typically have slightly better rates than conventional loans and low down payments and require the owner to occupy the home.
Balloon Loans:
Balloon loans typically have a slightly lower rate than a conventional
loan and are mostly the same as a conventional loan with one major exception. At the end of a predetermined year (usually year 5, 7, or 10) the lender calls the loan due. At that time, if the owner hasn't already refinanced the loan or sold the home, they must refinance the loan. This type of loan can be risky if interest rates increase, your financial situation changes for the worse or if the price of homes decreases.
Stated Income Loans:
A Stated Income Loan is typically used by self-employed people who have good credit, but don't show a lot of income. The lender allows the Buyer to state their income to an extent to qualify for the loan. The interest rate and/or down payment might be higher than that on a conventional loan. These loans are not always available due to the added risk to the lender.
Construction Loan:
A construction loan is a temporary loan you get to build a house. Some construction loans allow you to use the equity in your land as part of your down payment. Keep in mind that construction loans are short term interim financing to complete construction and are usually for 12 to 18 months. After construction is complete, the owner refinances into permanent financing. There is much to know about this process and the loans involved. Make sure you have a team of experienced professionals.
Interest Only Loan:
This loan is just as it sounds. Only interest is paid, so the principle (amount you owe) stays the same. This type of mortgage started out as a loan designed for wealthy people who would rather invest their extra money in other investment. It is also used for second mortgages quite frequently.
Some people have used interest only loans to buy more expensive homes. This is risky because if home values decrease you could end up upside down owing more than your home is worth.
Another risk, some interest only loans convert to a 30 year amortization after an initial period forcing the home owner into a higher monthly payment.
JUMBO/Non-conforming Mortgage:
This loan is exactly what it sounds like. It's a loan for expensive homes and typically comes with a higher interest rate and/or down payment that a conforming conventional loan.
15 year vs. 30 year term:
Most people go with a 30 year term on their mortgage because the payment is lower or you can qualify for a higher priced home. There are advantages to 15 year loans if you can afford the extra payment. You get a slightly lower interest rate (usually ¼ to ½% lower), and you build equity in your home quicker.
Building Equity:
- After 5 years of paying on a 15 year mortgage with a 7% interest rate, you would pay off about 22% of the loan.
- After 5 years of paying on a 30 year mortgage with a 7% interest rate, you would pay off just under 6% of the loan.
Some people get a 30 year mortgage to play it safe and then make a larger payment when they can afford it. As long as the mortgage allows prepayments, this can work out fine.
40 year term:
Some lender offer conventional mortgages with 40 year amortization for single family homes. 40 years is a long time to pay a house off compared to traditional 15 or 30 year term, but in some cases it could make sense.
Refinancing your Mortgage:
Keep in mind when you refinance, you start the loan over, so the amortization starts over. If you have a great rate on your mortgage, it usually makes sense to stick with it, otherwise you restart the process of equity building.
To determine if it makes sense to refinance, look at the savings of refinancing and the cost to do the refinance loan. How long it will take to pay the refinance back. How much longer do you plan on owning this home? If your plan is to pay off the home, how many years will a refinance shave off at the same payment you have now?
Another factor, if you have an adjustable rate mortgage there is some risk that the rate will go up. This should be part of the equation when making your decision on a refinance.
The difference between Owner Occupied vs. Investment
If the Buyer intends to occupy the home as their primary residence, there are many mortgages available. The terms of these loans are quite favorable, FHA offer 3.5% down and the interest rates on owner occupied mortgages tend be lower than loans for residential investment. Loans for residential investment up to 4 units tend to require 20% down and the interest rates are almost always higher than the loans for owner occupied.
It may be tempting to investors to try to use owner occupied loans to buy investments, but don’t do it, it’s a federal offense that could result in fines and prison time.
I can assist you in getting pre-approved for a mortgage. This is a logical first step because knowing how much you can afford will keep your search for a home realistic and within budget.
If your plan is to move from one home to another, just putting your home on the market isn’t enough. Your home will need to be ready to show and you’ll need a strategy to accomplish the sale and purchase of another home in a reasonable time frame.
With 10 years selling homes in metro Salt Lake and 20 years in the real estate business, I have many strategies and an in depth understanding of what it takes to help you sell and buy another home. Call or email me if you’d like to take advantage of this opportunity!
Contact SLCHomeBuyer.com and Kevin Coyle
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