After a rough few years in the real estate market, people are beginning to gain their optimism back about investing in real estate again. The last few years also put the mortgage industry in the forefront, perhaps not in the best light, but in the forefront nevertheless. That attention – coupled with the discovery that bad mortgages may have contributed to the real estate decline, has resulted in a restructuring of mortgage practices and increased government oversight over the industry.
The good news is that mortgage rates today are quite low compared to a few years ago. If you are borrower today, and you are shopping for the right mortgage to finance your real estate investment or refinance your home, there are several types of mortgages to choose from. Today, there are a diverse group of mortgage loans available to you, in some cases even if you have had extenuating circumstances that resulted in you having to default on a loan, short sale, foreclose or do a deed in lieu, you may be able to still buy a home if you meet the requirements. Whether you are buying or considering a refinance, consider having a conversation with a reputable loan officer who can help you customize your mortgage to fit your real estate goals.
Here are some of the types of mortgages available to you:
The Conventional Mortgage
A conventional home mortgage is a type of fixed-rate loan set to amortize over 30-years. With this loan, you have a definite interest rate set for the duration of the mortgage. When you make a payment, that payment contributes to a reduction in the principal balance and interest on the loan. The benefit of the conventional mortgage is that you will always know the amount of each payment. The only fluctuations that occur usually come from changes in home insurance and property tax costs. Just remember that the interest rate you have remains the same for the term of the loan. When interest rates are low, this is to your advantage. However, the disadvantage is that the rate will not adjust if the market rate goes lower than your mortgage rate. Depending on your circumstances, you may be able to refinance your loan for the lower rate.
Types of Fixed-Rate Mortgages
In addition to the 30 year conventional mortgage. You can choose from 15 year, and 20 year mortgages as well. These mortgages due to the shorter duration of the loan, will result in larger monthly payments, however; you gain the benefit of paying less in interest, building equity faster and moving faster towards outright ownership of the home.
When you get an adjustable rate mortgage, typically referred to as an ARM loan, you are getting a mortgage loan that adjusts after an agreed amount of time. Usually the interest rate on the loan is fixed for five, seven or ten years, after which, the rate will adjust to a different rate. The adjustable or variable rate is calculated by adding the lender margin to an index like the LIBOR. LIBOR stands for London InterBank Offered Rate. Let’s suppose that the lender margin is 0.45 percent and the LIBOR is 5 percent. Then your ARM interest rate, would then be 5.45 percent. The benefit to you when you utilize and ARM loan for your real estate transaction, is that it may result in lower loan payments when the interest rates are lower than the stated fixed rate. Keep in mind that the opposite is true and is something you should keep in mind when considering this type of loan. So how are you protected in a situation like this? Typically, interest rates are only permitted to change by 2 percent per year and 6 percent for the life of the loan.
FHA loans are federally backed loans. The Federal Housing Administration was designed to insure loans in order to provide financing for people that do not qualify for conventional loan programs. FHA-insured loans do not have as strict or rigid underwriting guidelines as Fannie Mae or Freddie Mac, therefore making it more accessible to people with less than ideal financial requirements.
FHA Back to Work Program
The Federal Housing Administration recently released new guidelines for borrowers who “experienced periods of financial difficulty due to extenuating circumstances” that would allow them to purchase a home with an FHA loan 12 months after a short sale or foreclosure.
Known as the “FHA Back To Work – Extenuating Circumstances Program”, the FHA removed the familiar waiting periods that typically followed a credit event that resulted in a default on a loan, and subsequent loss of the home.
This FHA loan program allows borrowers who were harmed financially due to loss of a job and/or a decrease in earnings of 20% or more that lasted 6 months or more. If the borrower can meet the criteria of the FHA Back To Work – Extenuating Circumstances Program, they could be eligible to obtain FHA mortgage financing after re-establishing good credit for 12 months after a short sale or foreclosure.
HARP Loan Programs
The Home Affordable Refinance Program (HARP) 2.0 provides a way for underwater homeowners to refinance their mortgages when they owe more than their homes are worth. If you are a homeowner who is in a home where you owe more than it is worth, then this is a loan you aught to consider. In an effort to help stabilize the housing market, the government deployed the program to help homeowner’s who either do not have enough equity for a traditional refinance and desire to refinance at today’s lower rates.
For homeowners with mortgages guaranteed or owned by Fannie Mae or Freddie Mac, you may qualify for a HARP loan if your existing mortgage was sold to Fannie Mae or Freddie Mac on or before May 31, 2009, you have good payment history in the last 12 months and you have not refinanced under the HARP program previously.
Finding the Right Loan for You
There are more loan programs than what is listed here and, while educating yourself abut the types of mortgages that are available to you is a step in the right direction, your best chance at getting the right type of financing for your real estate asset is to speak with a reputable loan professional in your area. They are usually very knowledgeable about the market, current rates and current mortgage programs. They will also walk you through the process of getting a loan and be there through some of the complication that occur during the loan process.