Top Ten Ways To Finance Your Home Purchase

Top Ten Ways To Finance Your Home Purchase

Fortunately, in today's world, buyers have a multitude of mortgage options available for home purchases. And, that is certainly beneficial to many buyers with unusual mortgage needs. Chances are you will find a mortgage that works for you. Always check with your lender for specific loan information, as points, fees and interest rates do vary. Interest rate examples shown here are for illustrative purposes only and may not reflect current rates.

Adjustable-Rate Mortgage.

The interest rate is adjusted up or down periodically based on a financial market index (such as Treasury bills). Monthly payments start lower than for fixed-rate mortgages. The initial rate is set for a specified period -- 1, 3, 5, 7, or 10 years -- and then rates adjust on a schedule, say, annually. The adjustments generally are limited by annual caps and a life-of-the-loan cap.

Down Payment: $10,000

Mortgage Amount: $90,000

Term of Loan: 30 years

Interest Rate: 4.5% (until first rate adjustment)

Monthly Payment: $456 (until first rate adjustment)

Fixed-Rate 30-Year Conventional Mortgage.

A fixed-rate conventional loan is made by a commercial lender for 30 years. Monthly payments (excluding taxes) remain unchanged for the life of the loan. Most lenders allow mortgages with as little as 5% down, but require private mortgage insurance for loans with less than 20% down.

Down Payment: $10,000

Mortgage Amount: $90,000

Term of Loan: 30 years

Interest Rate: 5.5%

Monthly Payment: $511

Fixed-Rate 15-Year Conventional Mortgage.

This is similar to the 30-year conventional mortgage, except the loan is repaid in half the time. Interest rates are typically lower than for a 30-year loan, and interest paid over the life of the loan is less, but the monthly payments are usually slightly higher. Government-backed loans -- VA and FHA -- are also available in 15-year terms.

Down Payment: $10,000

Mortgage Amount: $90,000

Term of Loan: 15 years

Interest Rate: 5.0%

Monthly Payment: $712

Two-Step Loan.

This 30-year loan is a cross between the ARM and a conventional loan. The mortgage carries a fixed rate for 5, 7 or 10 years and then adjusts to market interest rates once for the remainder of the loan. The initial rate is generally lower than a fixed-rate conventional mortgage, but the second step of the two-step mortgage is often conditional on the lender's approval.

Down Payment: $10,000

Mortgage Amount: $90,000

Term of Loan: 30 years

Interest Rate: 4.875% (for first 2 steps)

Monthly Payment: $476 (until adjustment)

Federal Housing Authority (FHA) Loan.

These are government-insured loans so homeowners can make a smaller down payment than on conventional loans. The limits on FHA loans are high enough to handle moderately priced homes in many parts of the country. FHA loans are assumable for future buyers who qualify.

Down Payment: $10,000

Mortgage Amount: $90,000

Term of Loan: 30 years

Interest Rate: 5.625%

Monthly Payment: $550

VA Loan.

These are loans for qualified veterans backed by the Department of Veterans Affairs with low or no down payment required. These mortgages are subject to the VA mortgage funding fee, depending on the size of the down payment. VA loans can be combined with second mortgages and are assumable to qualified buyers.

Down Payment: None

Mortgage Amount: $100,000

Term of Loan: 30 years

Interest Rate: 5.625%

Monthly Payment: $576

Seller Financing.

Sellers may take back a loan against their equity in the property in the form of a first or second mortgage. One approach to owner financing is to use a balloon mortgage calculated and repaid for 5 or 7 years as a 30-year mortgage, but then the balance of the loan is due in a lump sum.

Down Payment: $15,000

Mortgage Amount: $85,000

Term of Loan: 5 years

Interest Rate: Negotiable

Monthly Payment: Depends on rate

Assumable Mortgage.

A buyer takes over the existing mortgage -- usually FHA, VA or ARM -- at its current interest rate, with the concurrence of the lender. An assumption may have a lower rate than those currently available, and taking over the mortgage may save on closing costs. The down payment makes up the difference between the sales price and the balance on the loan.

Down Payment: $30,000

Mortgage Amount: $70,000

Term of Loan: Time remaining on loan

Interest Rate: Same as seller had

Monthly Payment: Same as seller was paying

Wrap-Around Mortgage.

Here a new mortgage incorporates an older, assumable loan to help bridge the gap between the loan balance and home sales price. The interest rate is often below market, but higher than the rate the old mortgage carries. Payments are made to the new lender or the seller, who forwards part of the payment to the first lender. The term of the mortgage is the time remaining on the original loan.

Down Payment: $10,000

Mortgage Amount: $90,000

Term of Loan: Time remaining on original loan

Interest Rate: Somewhat higher than on old loan

Monthly Payment: Depends on rate, term

Buy-Down Mortgage Plan.

The seller or a third party provides additional cash to the lender in exchange for a lower interest rate for the buyer. Approaches vary among permanent buy-downs, multi-year and graduated plans.

Down Payment: $10,000

Mortgage Amount: $90,000

Term of Loan: 30 years

Interest Rate: 4.75% (initial)

Monthly Payment: $469 (until subsidy diminishes or expires)