Tim Bradford   
Loan Officer  
Employee of AMMCorp.net
216-324-8113

 

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General Loan Options


Types of Loans Available

 

Information on Northern Ohio and Cleveland, Ohio home loans, including conventional loans and FHA home loans.

Conventional Loan
This is the most cost-effective loan available. If possible, you would choose Conventional before FHA and non-conforming loans. If you have good credit scores and are not looking to push your borrowing capabilities to the max, then conventional financing probably is for you. There are a full range of products available:

  • 5% Down Payment from your own savings.
  • 0% Down Payment. Available for borrowers with excellent credit.
  • 3% Down Payment. Available for borrowers with excellent credit with limitations.
  • No PMI (Private Mortgage Insurance)-with down payments of 20% (sometimes 15%) 
  • 30 year and 15 year fixed term are most common, when long and short term rates vary little. 
  • ARMs (Adjustable Rate Mortgages) and balloon payments.

FHA
A government-co-insured mortgage. Appropriate for borrowers who:

  • Have credit issues (typically a FICO score below 620) but no late payments in the last 12 months
  • Want to borrow more money than a conventional lender will allow. FHA loans have more generous lending criteria.
  • Want a low down payment.
  • Does not have a down payment coming from their own savings. Gift money can count as a down payment.

If you cannot qualify for a conventional mortgage, then an FHA mortgage may be for you. If you qualify for a conventional mortgage you may want to avoid FHA since it is more expensive. The extra costs of an FHA loan come from:

  • Up-front MIP (Mortgage Insurance Premium) = 1.50% of the mortgage
  • Often require additional certifications on various structural and mechanical items 
  • Appraisals that may add additional requirements to the transaction, which can complicate matters.
  • Additional time to close due to government requirements.
  • Mortgage insurance on a monthly basis in addition to a front end premium

VA
If you are a veteran you may qualify for a VA loan. If you want to close with the least amount of cash as possible and not pay a premium, then VA is the way to go. Not only is VA zero-money down, but you can also have the Seller pay for almost all of your closing expenses. If your agent structures the transaction correctly, you should be able to come to closing with no money required. It's not unheard of to even receive a check at closing.  There is no monthly mortgage insurance change.

Non-conforming loans vary from first time buyer programs with special and advantageous features to loans.  Loans for borrowers with poor credit or those carrying excessive debt.  Those loans usually have unfavorable rates and terms and/or require compensating factors like very large downpayments, additional collateral, or a co-signer.

Variety of Loans Available

 

Information on Northern Ohio and Cleveland Ohio home mortgages and home loans including fixed rate, adjustable rate and hybrid mortgages.

Fixed Rate Mortgage:
There are generally two types:

  • A 30-year fixed mortgage has the same interest rate for the entire 30 year period and is amortized over 30-years (paid in full at the end of the 30th year). You can usually pre-pay and/or refinance whenever you want. This is a conservative loan and has no rate risk. Consequently the rate is usually higher than an adjustable rate mortgage.
  • A 15-year mortgage has a fixed rate but is paid off in 15 years. The monthly payment will be higher but the interest rate will be lower by about 1/2%. If you can afford the higher payment and you like the idea of the mortgage being paid off quicker then this may be appropriate for you. The bank gets less of your money in interest with this option.

Tip: Any loan can be paid off quicker by sending in extra principal payments. Typically if you pay 13 payments a year instead of 12 the period reduces from 30 years to around 22 years on a 30 year mortgage. Payments made earlier in the life of the loan benefit the borrower more than additional payments made later in the life of the loan.

Adjustable Rate Mortgages (ARM)
These loans are fixed for given periods of time, then adjust based on a formula. Typically the rate during the initial period prior to adjusting will be less than more conservative 30-year fixed-rate mortgage. They are most appropriate for borrowers who want to match up the term with how long they think they may own the house: Very short-term ARMs are loans that are fixed for 1 to 3 years then adjust. They are usually referred to as 1 years ARMs, 3/1 ARMs, and 3/3 ARMs. Mid-term adjustables are fixed from five to seven years then adjust. They are usually referred to as 5/1, 5/5 and 7/1 ARMs. Longer ARMs terms are fixed 10 years prior to adjusting. 10/1. How do they adjust ?
The most common adjustment comes every year after the initial fixed period. For example, a three year ARM would adjust in year four and every year thereafter. The typical limit (referred to as a cap) on how much it can adjust annually is typically 2% with a lifetime cap of 6% over the initial rate. It can go up or down depending upon what rates do.

Tip: When shopping rates for ARMs you should also ask about the lifetime interest cap and the maximum cap for each adjustment period. A lender may offer a very low teaser rate (the rate you are quoted) but if the rate can go up 3% each year instead of 2% you may find your savings being quickly erased.

There are some ARMs that only adjust once. These are fixed for the initial term then convert to the 30 year rate at the adjustment period. A three year product would stay fixed for three years, then convert in year four to whatever the 30 year fixed is at that time.

The last kind stay fixed for a given period, then adjust, but the next adjustment period is for the same time frame. It is fixed for three years, adjusts, then fixed for another three years (referred to as a 3/3). Then it adjusts again for another three years.  These are referred to as a buydown (3-1 buydown, 2-1 buydown).

The amount they adjust by is written into the note. It will normally be based on an United States Treasury rate of like duration with a margin. For example: A one year ARM will adjust by looking at the one year treasury note and adding a margin of perhaps 2.75%. These two numbers added together will determine your rate, but not more than the year one cap. Your Agent should be aware of this because the margin is not the same at all banks. If a particular lender has a low initial rate to capture your business but during the adjustment period uses a higher margin than everyone else, then your rate will be more expensive over time. Your Agent should be shopping the margin as well as the rate.

What kind of borrower should be interested in an ARM ?

  • If you know that you will only live in the house for 3 to 5 years, then why pay for the security of a 30-year fixed rate loan? You should see what the rates are for 3 and 5 year ARMs. You can use ARMs to match the term of the loan with the length of time you intend to live in the house.
  • The lower initial rate may help you qualify for a larger mortgage. This is appropriate for buyers who otherwise would not be able to afford the house they want to purchase.
  • If you believe rates will be going down in the next few years. Remember that it is difficult to predict the behavior of rates, especially one to three years into the future.
  • You have expectations of an increasing income. If you are confident that your income will increase enough to cover the potential of increases in your mortgage when it adjusts, then you are minimizing your exposure to risk. It is also appropriate if you have debts or payments that are going to be going away.

Tip: Sometimes the markets can price short term vs long term rates so that one has a clear advantage over the other. There are times when 10- and even 7-year adjustable loans are the same as 30-year fixed. In those cases you would never go with the adjustable. If the difference (spread) on a 5-year ARM is only an 1/8% then you may not go with it. But if it is 1/2% or greater then you may consider the difference worthwhile. Then you can determine the costs of the security that is right for you.

Hybrid Products
These are specialized products. They are literally too numerous to mention all of them. The following examples will give you a good idea of available options:

  • 3% to 0% Down Payment. The better your credit score the cheaper the mortgage available. If you have credit issues these may not be available or be too expensive.
  • First and second mortgages combined. These are sometimes called 80/10/10 or 80/15/5 mortgages. The 80/10/10 is a first mortgage of 80%, a second mortgage of 10% and equity of 10%. The 80/15/5 just changes the proportions. With an 80% first mortgage there is no PMI (Private Mortgage Insurance), which can be expensive and is not tax deductible. The second mortgage interest is generally fully deductible, which will generate a larger tax deduction. The second may also be designed as a line of credit, which allows the borrower to pay it off quickly or pay interest only, and borrow it back if needed.
  • No PMI loans. Some lenders will self-insure the mortgage and not charge you PMI. They add a premium to the mortgage rate. The advantage is that the payment may be less and it will be fully deductible. The disadvantage is the rate premium stays with the mortgage until its is paid off or refinanced.
  • Marginal credit borrowers have many opportunities with B and C lenders. They will pay a premium but they can also refinance when their credit improves and then take advantage of cheaper conventional rates. Usually requires a larger down payment.
  • Buy Down Mortgages. The most common form of a buy down is a 2-1 Buy Down. The first year's rate will be 2% below your note rate. The second year's rate will be 1% below your note rate. Starting the third year the rate will be the note rate. Buy Downs are appropriate for people who want to purchase a more expensive house than they would usually qualify for. (The lender will use the lower initial rate). Don't think you are getting a great deal for free. The lower initial rates are possible because you are borrowing more money up front and the lender is using the excess funds to make up the difference in the mortgage payment during the first two years. For example: If the market rate on a 30 year fixed mortgage is 8% then the 2-1 Buy Down in year three might be 8.25%. That would make the first years's rate 6.25% and the second year rate 7.25%.  This will cause you to pay more the longer you stay in the home.

Tip: Some rates will seem incredibly good...until you look further into them. Be sure to see if the lender is adding origination fees, discount points, and high closing costs. The low rate could be the result of up-front charges you may not initially be aware of.

Things You Should Know About Loans

 

Information on Northern Ohio and Cleveland, Ohio home loans, closing costs, fees, points, insurance and government programs.

POINTS
A point is 1% of the loan amount charged to the borrower at the time of closing. For a $100,000 loan one point is $1,000. Points are used to lower the interest rate since they are simply a pre-payment of interest. A typical yield for one point will be to lower the interest rate by 1/4%. Not all loans require points and you should carefully analyze if it is appropriate for you, since it can be a large up-front expense. Points are pre-paid interest, even if paid by the Seller, and are likely tax-deductible. However not all borrowers will be able to take advantage of the deduction, depending on the particular Buyer's scenario. 

JUNK FEES or LENDER'S FEES
The amount of fees that the lender charges to process the loan. These can vary greatly from lender to lender and should be shopped to get the best deal (see below).

CLOSING COSTS
This is a widely used term that can mean different things to different people. The broadest meaning would include all funds needed for closing, except the Down Payment. But this can be broken down further as follows:

  • Lender's Fees or Junk Fees. These are costs that the lender charges to process the loan. They would include terms like: processing, credit report, underwriting, tax prep, doc prep fee and tax service fee.
  • Origination Fees. Some lenders charge an up-front fee for the right to loan you money. This should be shopped carefully. In some markets people are paying it and if they had shopped more carefully they could have found the same loan with no origination fee. A typical amount can be 1% of the loan amount, which makes this a significant expense to watch, generally lowers the rate by 1/4%.
  • Appraisal. To obtain a loan the home must pass an independent appraisal ordered by the bank. The fee will depend upon the going rate in your market.
  • Title charges. The lender has no control over these and they depend on custom and the market in your area. Expenses may include a fee for processing the closing, a title policy to cover the lender and possibly a title policy to cover the purchaser.
  • Pre-paid items and escrows. The lender will require a few months reserves deposited by the buyer to cover insurance, taxes, and possibly the PMI. Technically these items are not closing costs.
  • Conveyance Fees. The local jurisdiction will charge taxes for transferring title. The amount depends on your locality.
  • Pre-paid Interest. At closing you will pay interest for the rest of the month. If there are five days left in the month then you will only pay for five days interest. If there are 28 days then you will bring a larger check to cover 28 days. If you are cash sensitive then you may want to close at the end of the month.
  • Survey. The lender will require a survey of the property for the title insurance coverage.
  • Miscellaneous expenses. These will depend on your particular deal. They would include items like: repairs, warranties, wood destroying insect reports and treatments, delivery fees, other inspections, casualty insurance for the first year as home owner's, insurance is paid in advance.

PRIVATE MORTGAGE INSURANCE (PMI)
When you put less than 20% down on a house you will have to pay PMI. It is an insurance policy that protects the lender and pays part of the principal balance upon default. The lower the down payment the higher the PMI rates, since there is a greater risk of default. For a $150,000 house with 5% down the PMI can run $80 per month and since it is not interest, it is not tax deductible. Some lenders will not require PMI with 15% down and no premium in rates.

How to avoid PMI:

  • Some lenders will self-insure and not require PMI. They cover the risk by increasing the interest rate. With a competitive lender the higher payment may still be less than the lower rate payment plus PMI. It also has the advantage of being tax deductible. The disadvantage is the rate premium is added for the life of the loan. These loans are very appropriate for low Down Payment borrowers who will be in the house 4 to 6 years, hence not likely to achieve 20% equity anyway.
  • 80/10/10 loans. First mortgage of 80%, second mortgage of 10% and equity of 10%. Instead of PMI you have the second mortgage which is fully deductible.
  • Put down 20% equity (sometimes 15% with some lenders with borrowers with excellent credit).

How to get rid of PMI:

When your loan to value equals at least 20% (some lenders may require as high as 25%) you can petition to have the PMI removed. You will have to pay for an appraisal to verify the value. You can achieve this benchmark by putting more equity into the house and by having the home appreciate in value. You also need to make all of your payments on time. Making certain home improvements may also increase your equity and providing documentation to support the improvements.

RATE LOCKS
When you receive rate quotes most lenders will honor that rate if you close within the next 30 to 45 days. If you want to lock in a rate for longer than 45 days you will likely pay a premium. The longer the lock, the higher the premium.

If you are in contract and have a rate lock, some lenders will drop your rate if market rates drop prior to closing.  Typically there is a change related to this.

When building a house, the advantage of using the Builder's financing is they will give long-term rate locks without the large premiums. If you are custom building a home many Lenders will give a construction loan that converts to a permanent loan with the rate locked in at the beginning.

PRE-APPROVED vs PRE-QUALIFIED
A lender or real estate Agent can pre-qualify you. All it means is that someone has looked at your income, your debts and your credit and determined the amount and type of mortgage you could qualify for.

When a lender pre-approves you, it means you have made a formal loan application and taken the next step past pre-qualification. The approval may be contingent on verification of your income, down payment, appraisal and other misc. items. Being pre-approved may give you added strength when negotiating because the Seller will feel more secure about your ability to close. Being pre-approved does not prohibit you from shopping for rates when you are in contract and switching Lenders if you can find a better deal later.

MISC GOVERNMENT PROGRAMS

  • Down Payment Assistance Grants. These are grants that the State or local government gives to borrowers for their Down Payment. They are available on a periodic basis and you must qualify based on income, purchase price, and/or number of people in your household. The income limit changes for each county and the availability is hard to predict. You would be well advised to check with a qualified Lender to see if you qualify and if the the funds are available. You can not reserve them in advance. Once you are in contract then you can apply. Be patient. It is a government program so approval can take around 45 days.
  • First Time Home Buyer: This "bond" money is intended for first time home buyers only. It is used to lower your interest rate to a below market rate. You must qualify by not exceeding the income limit for your county. The income level for bond money is higher than Down Payment Assistance Grants.  Typically, if you have not owned a home for two or more years, you are considered a first time home buyer. 

Remember that you will need to give more time in a contract to close as each of these processes takes additional time to complete.
 


 

Questions, comments, or suggestions?
Please contact us:
American Midwest Mortgage Corp.
Telephone: 216-324-8113


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Tim Bradford an employee of American Midwest Mortgage Corp-- OHIO MB.803389/LO.007173 ---- NMLS CO.142066/LO.250013
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