Tips for financing your new Gallo Builder's Home
Questions to Think About:
How much money do you have for a down payment/ closing costs?
How long do you want to make payments on your mortgage- 15 to 30 years?
What kind of mortgage is best for you?
What is your credit score?
Have you sufficiently researched market interest rates?
How long do you plan to live in your new home?
Types of Mortgages and Definitions:
So you’ve decided to buy a new Gallo Builder’s home and now you have to figure out how you will pay for it. There are many options available and it is important to understand what option is right for you. Below are only some of the most common options available, speak with a professional for more information on financing your new Gallo Builder’s home.
Adjustable-rate Mortgage (ARM)- With an ARM, interest rates can increase and decrease according to market interest rates. This will affect your monthly payments, making them higher or lower according to the market interest rate at the time. ARMs generally start with a low introductory rate, lower than most fixed rates, and then later increase to match market interest rates. Adjustments in monthly payments depend on what plan you have. They may change every year (most plans do), every three years, five years, or seven years until the loan is finally paid off. When considering an ARM, be sure to know how much the rate can increase in the first adjustment period, how much it can increase over the life of the loan, and whether or not it can be converted into a fixed-rate mortgage. Note: ARMs are great if you plan to sell your home before the first adjustment period.
Balloon Payments- A balloon requires the borrower to make initial monthly payments for a set amount of time and then pay off the entire loan in full or apply for refinancing.
Federal Home Loan Mortgage Corporation (Freddie Mac)-
Nicknamed Freddie Mac, the Federal Home Loan Mortgage Corporation is a stockholder-owned corporation, chartered in 1970, that purchases residential mortgages in the secondary market from savings and loans, banks, and mortgage bankers and then sells them to investors. This provides investors with funds for new homebuyers.
Federal National Mortgage Association (Fannie Mae)- Nicknamed Fannie Mae, the Federal National Mortgage Association is a government sponsored, publicly-owned, corporation chartered in 1938 that purchases mortgages from lenders and resells them to investors. Fannie Mae packages mortgages backed by the Federal Housing Administration, but also sells some non-government-backed mortgages.
First-Time Buyer Programs- First-time buyer programs are offered by many lenders to buyers who haven’t saved a lot of money for a down payment or closing costs, who have an unstable income, who have poor credit or no credit, or who have a lot of long-term debt. They are designed to give qualifying first-time buyers lower monthly payments. Be aware that you may have to meet certain requirements for income and property-value limitations. Also, programs that have government subsidies may charge a "recapture tax" if you sell your house too soon. This penalty is designed to reduce improper use of the programs. Ask your lender if you qualify.
Fixed-Rate Mortgage (FRM) – The FRM is the most popular of mortgages, with one fixed interest rate that you pay from the start to the end of your mortgage. This is great if you like to plan ahead because monthly payments are always the same. FRMs have higher interest rates and therefore, higher monthly payments than other mortgage loans, but there is always the option of refinancing later, when interest rates are lower. However, you will have to pay closing costs in order to do so. Note: FRMs are great for people who intend to remain in their home for a long period of time (ten years or more).
Graduated-Payment Mortgage (GPM)- A GPM starts with low initial monthly payments that gradually increase over 3, 5, 7, or 10 years. The initial payments are the lowest the borrower can pay then they increase by a certain set percentage over a predetermined amount of years until the borrower is paying a fixed monthly payment much higher than his or her original monthly payment. In the end the borrower pays more interest than he or she would with a different plan, but the option is attractive for first-time buyers who need initial low monthly payments and whose income will increase over time.
Home-Equity Line of Credit (HELOC) - This kind of borrowing creates a reserve in your mortgage for emergency payments or a decrease in a payment. For example if your mortgage is $1300 a month and one month you have extra money and decide to pay an additional $1000 then that money is put in a reserve and one month if cash in-flow is really low, you could make a mortgage payment of only $300.
“The flexible mortgage would base the borrower's payment obligation on the loan balance. A schedule of required balances, declining month by month over the life of the loan, would be part of the contract. If the borrower made all the scheduled payments, his balances month by month would correspond exactly to the required balances. But if he paid more in some months, his actual balance would fall below the required balance, the difference constituting a "reserve account," which he could draw on by paying less later on.
For example, the loan is for $160,000 at 5.5 percent for 15 years, with a monthly payment of $1,307. The borrower receives a bonus every Christmas from which he pays an extra $1,000 on his mortgage. With each extra payment, the gap between his actual balance and the required balance widens. If he does this five years running and then loses his job, he can skip his payment entirely in months 72, 73, 74, and 75, and in month 76 he can pay only $575. At that point, the actual balance and required balance are equal, so his ‘reserve’ is exhausted (http://www.americanhomeguides.com)/.”
Interest-Only Mortgages- With an interest-only mortgage the borrower only pays interest, property taxes and homeowner’s insurance on the loan. This generally results in lower monthly payments (You still have to pay off the whole loan, be sure to have a savings plan to pay it off when the time comes). You can often qualify for a larger loan amount with an interest-only mortgage; however, since you aren’t paying any principle on the loan, you are depending on the local housing market to increase the equity of your home. If the market value of your house decreases, then you can end up with an upside-down situation, where you will owe more on your house than its actual value. This generally results with homeowners living in their homes much longer than they anticipated.
Piggyback Financing-When a buyer has a small down payment for a new house say 10% or less most lenders will require the buyer to get an expensive mortgage insurance, called PMI, that can cost up to a couple grand a year. They do this in case the buyer stops making mortgage payments. A buyer can avoid the PMI by “piggyback financing” which will be explained more below. Note: piggyback financing is only for buyers with good credit, typically, above a score of 660.
“Let's say you have enough cash to put 10 percent down on the purchase of a new home. If you borrow a mortgage for 90 percent of the purchase price, the lender will likely charge you for PMI.
Instead of taking out one mortgage, you combine two mortgages to come up with 90 percent financing and thereby avoid PMI. You could combine a 75 percent first mortgage with a 15 percent second mortgage. Or, you might combine a 70 percent first with a 20 percent second mortgage. You could save as much as $100 to $150 per month using piggyback financing, depending on the size of the loans involved (http://www.americanhomeguides.com)/.”
