How To Choose The Right Loan

Posted on December 16, 2019 by Nancy Liu | Category: Real Estate

Most homeowners purchase property with the help of a mortgage.  Your closing cost and monthly payment may vary depending on the different Lenders and the type of mortgage.  There are numerous choices on the current market, but not everyone knows how to choose amongst different types of mortgage options and wide variety of mortgage companies to suit your personal financial qualification. Therefore, we will briefly introduce some of the common loan programs available in this article.

FHA loans 

FHA loans are insured by Federal Housing Administration.  Qualified applicants only need to put in a 3% down payment. This loan is initially designed for soldiers, veteran and their family, the old, the handicap and US citizens with lower income; however, now it is available for most people. It requires the applicant has a steady job of the past two years, with a steady or growing income, has a good credit history without any bankruptcy record in the past 2 years, no record of property foreclosure in the past 3 years, and the mortgage payment should be 30% of the applicant’s gross income.  You can obtain more details about the FHA loan program by contacting your mortgage broker or banks. You can also get more information through the following website and telephone number.

U.S. Department of Housing and Urban Development or call1-800-225-5342

Conventional Fixed Rate Mortgage

This mortgage program keeps a consistent principal and interest throughout the term of the loan, which is Usually 15 years, 20 years, or 30 years.  However, some lenders requires prepayment penalty if the loan was paid off before its maturity. Therefore, if you are looking into paying off the loan early, make sure to consult with your mortgage broker or lender discuss about the terms and conditions on the prepayment penalty.  Some of my clients over looked this condition; when they want to sell or refinance the property shortly after their purchase, they were surprised by the large sum of prepayment penalty added to their payoff amount at closing. 

Adjustable Rate Mortgage

If your budge is lean in the short term or you intend to sell the property soon after your purchase, then you can consider the Adjustable Rate Mortgage (ARM). The feature of ARM is the periodically adjustment to the interest rate based on a variety of indexes; therefore changes the monthly payment. The initial interest of ARM may be very low.   If you choose ARM as your mortgage option, you need pay attention to the adjustment period and conditions to interest rate stated on the Note. For the 1/3 ARM program, the interest rate for the first three years are fixed, but the interest rate will be adjusted annually for the following years; For a 1/5 ARM program, the interest rate for the first five years are fixed, but the interest rate will be adjusted annually for the following years. Applicant should know the indexes that will lead the interest adjustments, and the range of the interest adjustments.  Applicants also need to make sure if there’s prepayment penalty for the loan program you are applying. 

Balloon Mortgage

Balloon Mortgage has its similarities with the conventional fixed rate mortgage in calculations of monthly payment.  The interest rate is usually low and fixed, and the monthly payment is moderate. The term of a Balloon Mortgage is usually around 5 to 7 years, but the monthly payment of balloon mortgage is often calculated according to the calculation of a 30 or 15 year fix rate mortgage. In result, you will have a large amount of remaining balance that needs to be paid off at once when the mortgage becomes mature.  Therefore, the final payment in the end will be a surprisingly large, like an inflated balloon. In this situation, the borrower can pay the ending balance by refinance.  If borrower intends to pay off the loan in a short term, balloon mortgage is a good choice, since it usually has an even lower interest rate than the conventional fixed rate mortgage.

You should always choose the mortgage based on your financial condition and your long term or short term plan on your real estate need.

This article is only for your reference. Please do not apply mechanically to any exact cases. You are welcome to consult our attorneys at Liu & Associates, P.C. For contact information, please click here.