Here’s a run-down on the main types of financing every home buyer should know today. Interest rates are intended for illustration only; ask your Long & Foster Sales Associate or loan officer from Prosperity Mortgage Company, a Long & Foster affiliated company, for current market rates.

Here are some of the financing options at your disposal:

Conventional VA FHA

Lender funded programs Balloon mortgages

A conventional loan is an indebtedness or mortgage made between a lending institution and a borrower without a third party participant, such as VA or FHA. Most types of conventional loans are paid off in equal monthly payments spread over 15, 25, or 30 years. The interest rate stays the same for the life of the loan. Therefore the monthly principal and interest payment also remains constant.

Example: The buyer purchases a $300,000 home. Typically, the lender will require a down payment of $60,000 or 20% of the purchase price. Assuming 7% market rate; $240,000 loan amount; 30 years, $1,597.92 monthly payment. With private mortgage insurance, however, the lender would lower the down payment requirement to 5%, or $15,000 which increases the monthly payment. Lenders refer to private mortgage insurance as “PMI”.

 

Advantage: Fixed rate financing is straight forward and easy to understand. Using private mortgage insurance normally adds up-front costs but new PMI plans allow premiums to be financed or paid monthly.

Example: The veteran agrees to buy a home for $235,000. With no down payment, the loan amount is $239,700 (includes a minimum 2% VA Funding Fee) for 30 years, and say the VA interest rate is 7%, plus “points”. The monthly payment for the $239,700 loan will be $1,595.92.

 

Advantage:No down payment necessary.

With an FHA loan, the down payment can be as low as 2.25% of the purchase price. Points (prepaid interest) may be charged by the lender. Purchasers can choose different rate and point combinations. FHA charges an up-front Mortgage Insurance Premium (M.I.P.) fee. (There is no “up-front” premium on condos.) FHA charges a monthly M.I.P. of .5%.

Example: The buyer of a $200,000 home would make a down payment of approximately $4,500, resulting in a base loan amount of $195,500 and a total loan amount of $198,432 including the financed M.I.P. At a rate of 7%, the monthly principal and interest would be $1,321.37 plus $81.46 for the monthly M.I.P., for an adjusted payment of $1,402.83.

 

Advantage: Low down payment and low interest rates. Fixed or adjustable rates are available. Especially designed for first-time home buyers.

Balloon Mortgages.

A balloon mortgage is typically a loan which must be paid off after a certain period. The advantage they offer is an interest rate that is lower than a mortgage that is made for 30 years. Balloons may range in duration from 5-to-7 or 10 years. If the 30-year fixed rate quote was 7%, the 7-year balloon may be as low as 6.5%, providing lower payments for the 7-year period. One point to consider, however, is that the investor typically does not guarantee to extend the loan past the balloon date even though most balloon plans contain provisions for optional refinancing.

 

Long & Foster^® Realtors^® is not a mortgage lender. These examples are for illustration only and were provided by Prosperity Mortgage^® Company, a Long & Foster affiliated company. The exact terms of any financing are subject to the requirements of the investors in each specific case. Choosing the “best” method depends on the circumstances of the individual. A Long & Foster Sales Associate will be happy to fully explain the home buyer’s options for financing.