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Government-Insured Loans
The federal government does not make home loans, but it does
provide insurance or guarantees to the lenders who make them.
Government agencies that provide loan guarantees include the
Federal Housing Administration (FHA), the U.S. Department
of Veterans Affairs (VA), and Rural Housing Services (formerly
known as the Farmers Home Administration).
The interest rates on government loans are usually lower than
rates for conventional loans. The rates and fees are set by
the government and not by the individual lenders who make
the loans. Rules and policies regarding how lending decisions
are made (underwriting) are also set by the government and
do not give lenders as much flexibility to deal with borrowers
who need special consideration.
Any qualified buyer may apply for an FHA- insured loan. FHA
down payments are between 3 percent and 5 percent of the purchase
price depending on the type of FHA loan. Only veterans of
the U.S. armed forces are entitled to VA loans. VA loans are
popular because the veteran does not need any down payment.
Fixed-Rate Loans
If you get a fixed-rate mortgage loan, your interest rate
stays the same for the life of the mortgage. This means that
the principal and interest portion of your payment will be
the same in the last year if the loan as it was in the beginning.
Your payment could go up a little, however, if property taxes
and insurance costs go up. A fixed-rate loan is the most common
loan for first-time homebuyers.
Adjustable-Rate Mortgages
Adjustable-rate mortgage (ARM) loans start out at an interest
rate below the fixed rate then adjust on a regular schedule.
ARMs can adjust every year, every six months, or even every
month, depending on the loan program. How much the interest
goes up or down each time depends on the economy. ARM loans
adjust at the same rate as a national economic index like
the one-year Treasury bill rate. The lender uses the index
and adds a margin to determine the new rate. Most ARMs have
a cap. The interest rate can never go higher than the cap.
Caps, margins, and the index are all agreed to when the loan
is made. ARMs usually have interest rates 1 percent to 3 percent
lower than the average fixed-rate loan. Many also have a conversion
provision. This allows a homeowner to change a mortgage loan
from an adjustable-rate mortgage to a fixed-rate mortgage
at a certain point during the life of the loan.
ARM loans allow homebuyers to buy a more expensive home because
the introductory interest rate is low. However, homebuyers
often have trouble when the rates begin to adjust up and the
payments are more than the homeowner realized they would be.
Before you agree to accept an ARM loan, figure out what the
monthly payment will be at the cap or top rate. If you can
make this payment, go ahead with the loan. If this payment
is too high, think again.
Balloon-Payment Mortgages
A balloon-payment mortgage loan has fixed monthly payments
based on a 30-year schedule of payment, but the entire loan
comes due at the end of a set period, usually 5,7, or 10 years.
At that time, you must sell your house, or get a new loan,
called a refinance. If the balloon comes due and you are unable
to sell your home or if the interest rate to refinance is
much higher than your current loan rate, you could be in trouble.
A balloon-payment loan is not recommended for first-time home-buyers.
Annual Percentage Rate
To give customers a true picture of the interest rate they
are paying, lenders have to compute an annual percentage rate
or APR. This rate includes the monthly interest, the Points,
and other fees charged by the lender, such as loan application
fees and processing fees. The APR tells you the total rate
you are paying. When you are shopping for mortgage loan products,
look at the APR to compare the loans' various interest rates.
It is the best measurement of how much your loan really costs.
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