Notes & updates: None currently.

Government Loans Available to Homebuyers

Several federal, state, and local government programs are available to homebuyers. The two primary federal programs are:

VA Loans. U.S. Department of Veterans Affairs loans are available to men and women who are currently in the military and to veterans who meet eligibility requirements. The VA does not make mortgage loans but backs a portion of the loan you obtain from a bank, savings and loan, or other private lender. If you default, the VA pays the lender the guaranteed amount. This guarantee makes obtaining favorable loan terms with lower down payments easier for veterans. For more information, visit the VA Web site at http://www.va.gov or contact a regional VA office for advice.

FHA Loans. The Federal Housing Administration (FHA), an agency of the Department of Housing and Urban Development (HUD), insures loans made to all U.S. citizens and permanent residents meeting financial qualification rules. Under the most popular program, if the buyer defaults and the lender forecloses, then the FHA pays 100 percent of the insured amount. This guarantee allows qualified people to buy affordable houses. The benefit of an FHA-insured loan is low down payment required, usually about 2 to 5 percent. For more information on FHA loan programs, contact a regional office of HUD or visit the FHA Web site at http://www.hud.gov/mortprog.html.

For information on other governmental loans, contact your local housing offices. They often have programs available for first-time homebuyers purchasing modestly-priced properties.

Difference between Fixed and Adjustable Rate Mortgages

Fixed rate mortgage interest rates and the amount you pay each month remain the same over the entire mortgage term: traditionally 15, 20, or 30 years. Variations are available, including five- and seven-year fixed rate loans with balloon payments at the end.

Adjustable rate mortgage interest rates fluctuate according to the rates set by lending institutions and influenced by the Federal Reserve. Initial interest rates are normally offered at a discounted interest rate that is lower than a fixed rate. Eventually, adjustable rates will fluctuate as the prime rate fluctuates. Different adjustable rates are tied to different financial indices, some of which fluctuate more quickly than others. To avoid constant and drastic changes, adjustable rates typically regulate or cap how much and how often the interest rate or payments can change during a year and over the course of the loan. Variations are available for adjustable rate mortgages, including hybrids that change from a fixed to an adjustable rate after a period of years.

Finding the Least Costly Mortgage

Shopping carefully for a mortgage can save significant money. Everything equal, a quarter-point difference in interest rates can mean saving thousands of dollars over the life of a mortgage.
Interest rates alone do not a mortgage make. Fees make up the majority of upfront costs of a mortgage: including loan application fees, credit check fees, private mortgage insurance if you are making a low down payment, and points. Because points constitute the largest portion of lender fees, understanding how they work is important. One point is 1 percent of the loan principal. Your fee for borrowing $250,000 at two points is $5,000. A direct relationship exists between the points that lenders charge and the interest rates they quote. The more points you pay, the lower your interest rate should be, and vice versa.

Comparing Loans according to Annual Percentage Rates

The annual percentage rate can be used to compare loans. Lenders must disclose the APR to borrowers. The APR can be misinterpreted because calculating the cost of the loan at a yearly rate assumes the loan will not be repaid before the end of the term. People generally repay loans prior to the end of the term. Financial institutions can differ in method of calculating costs included in the APR such that identical loans and points may have differing annual percentage rates.

Prior to comparing points to interest rates, factor the number of years you plan to own your home. The longer you live in your home, the better off you will be in paying more points in return for a lower interest rate. If you may sell or refinance your house within two or three years, you may be better off with a loan with as few points as possible.

A loan officer or broker can guide you through the options. Or you can check Online Mortgage and Financial Calculators such as http://www.homepath.com to compare combinations of interest rates and points. This Fannie Mae Web site includes a variety of information on mortgages and can be a great resource for new homebuyers.

Mortgage rate information is widely available online. You can research rate information, program qualification, points, terminology, and concept related to mortgages. And even if you are considering a loan you found via more traditional approaches, you can check the Internet to see if you have been offered the best terms.

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