When is refinancing the best option for me?
Consider the following when thinking of refinancing: A lower rate will save you interest over the life of the loan, if you don’t increase the term of the note. In other words, if you have 25 years left on your mortgage, don’t amortize the new loan over 30 years. Instead, keep the term at 25 years, or less, if possible.Will refinancing result in a significant monthly savings?How long will it take to recover the closing costs associated with the refinance?Do you plan on moving any time soon?
Do I need a down payment to purchase my home?
It is possible to purchase a home with no money down if you qualify for a VA loan, or a USDA loan.
An FHA loan requires a 3.5% down payment.
For a fixed rate conventional loan, you may qualify for a 5% down payment, however, it’s a good idea to have at least 10% down. And, if at all possible, 20% down is recommended.
For conventional loans, unless there is a 20% down payment, you will pay Private Mortgage Insurance (PMI). The less down payment, the higher PMI you will pay monthly. Also, if you make a lower down payment on a conventional loan, you will potentially pay a higher interest rate.
VA and USDA loans do not require monthly private mortgage insurance.
A wide choice of home loans and financing options are available in the world today. Bank of Franklin County believes you should be well informed before making your final decision. The following is a brief listing of terminology that may be used by lenders as you explore your financing options. This glossary of terms and definitions associated with all types of loans is general information intended to help educate you, the borrower. It will help you learn about the many options associated with financing that new home, automobile, or college tuition.
FHA (Federal Housing Administration):
The FHA will insure the loan for the lender against loss in case the buyer cannot meet payments. It requires the borrower to carry mortgage insurance through FHA. FHA loans are available with as little as a 3.5% down payment.
VA (Veterans Administration):
This federal agency will guarantee the mortgages offered by private lenders to qualified members of the armed forces, active military personnel, veterans, or their widows. In some cases you can buy a home on a VA loan with no down payment.
Some lenders will work out special terms for properties of very high value that fall outside typical lending standards.
Adjustable Rate Mortgage (ARM):
The interest rate on an ARM is fixed for an initial period, then adjusts based on the fluctuations of the market. The changes in interest rates are tied to a financial index such as the one-year or three-year Treasury bills. The ARM often offers a lower beginning interest rate than a fixed rate mortgage.
If interest rates are low, an ARM may be a good option. This is especially true if its cap (the highest interest you may be charged) is not more than a few points higher than the current fixed rate. ARMs are best for borrowers who do not intend to own their home for many years, want to save money in the short term, or are purchasing or refinancing when interest rates are relatively high.
If you are considering an ARM, be sure you know:
1. What is the adjustment period (the time between interest rate changes)?
2. What index is used to determine interest rate?
3. What is the margin (the percentage added to the index rate each time your loan is adjusted)?
4. Does the initial rate represent an introductory or discounted rate?
5. What is the period adjustment cap?
6. What is the lifetime adjustment cap?
7. Is there a floor interest rate (interest rate that the loan will not fall below)?
These mortgages are offered for short terms usually 5 or 7 years. Payments are based on what you would pay for a 30 year loan. They have low monthly payments, with a final, large payment due at the end of the term. The low early payments may make it easier to get started in a new home, but you must be sure that you will be able to make the final balloon payment. At the end of their term, some balloon mortgages offer the option of extending the same mortgage for the remainder of the 30 year period. Payments will be based on rates at that time.
Fixed Rate Mortgage:
The interest rate on a Fixed Rate Mortgage stays the same for as long as you hold your mortgage, no matter how interest rates change in the financial markets. With this type of mortgage, you know exactly how much you will pay in principal and interest on your home each month. (Remember, if you escrow, your taxes and insurance on your home may change from year to year.)
Home Equity Line of Credit:
A home equity line of credit is a form of revolving credit in which your home serves as collateral. Because the home is likely to be a consumer’s largest asset, many homeowners use their credit lines only for major items such as education, home improvements, or medical bills, not for day-to-day expenses.
With a home equity line of credit, you will be approved for a specific amount of credit. Your credit limit is the maximum amount you may borrow at any one time under the plan. In determining your actual credit limit, the lender will consider balance owed on the mortgage versus the appraised value of the home and your ability to repay loan, by looking at your income, debts, and other financial obligations as well as your credit history.
Many home equity plans set a fixed period during which you can borrow money, such as ten years. At the end of this “draw period,” you may be allowed to renew the credit line. If your plan does not allow renewals, you will not be able to borrow additional money and any outstanding balance will be due once the period has ended.
Once approved for a home equity line of credit, you will most likely be able to borrow up to your credit limit whenever you want. Typically, you will use special checks to draw on your line.
There may be limitations on how you use the line. Some plans may require you to borrow a minimum amount each time you draw on the line (for example, $100) and to keep a minimum amount outstanding. Some plans may also require that you take an initial advance when the line is set up.
Depending upon which program best fits the borrowers needs, the initial construction phase may offer a term option of 6, 9 or 12 months. The borrower can request draws to pay for materials, the contractors and any sub-contractors during construction. During the construction period, the borrower is required to make interest only payments based on the outstanding amount drawn from the construction account.
Installment loans are tailored to meet the borrowers’ needs and budget. Installment loans are commonly used to purchase vehicles, recreational vehicles, or to make home improvements. Payments can be made over a short or extended period of time and generally have a better interest rate than unsecured loans.
Unsecured loans are used for everything from vacations to emergency funds. Since unsecured loans are not secured by property, they typically have higher interest rates than secured loans.
Other Helpful Information
In the market place there are numerous types of loans. Many of the terms used by lenders may not be familiar to you. We have listed some of these terms below to give you a general description and a better understanding of the context.
Annual Percentage Rate (APR):
A measure of the cost of credit, expressed as a yearly rate. It includes interest as well as other charges. Because all lenders follow the same rules when calculating the APR, it provides consumers with a good basis for comparing the cost of loans, including mortgages.
An interest-rate cap places a limit on the amount your interest rate can increase or decrease. Interest caps come in two versions: Periodic caps, which limit the interest-rate increase/decrease from one adjustment period to the next. Overall caps, which limit the interest-rate increase over the life of the loan.
Costs that the buyer of a home has to pay at the time of purchase. Closing costs usually include an appraisal fee, title search, and lawyer’s fee. They may also include “points” and other fees (such as one-year homeowner’s insurance and private mortgage insurance, if required). Closing costs are in addition to your down payment and vary from lender to lender.
The maximum amount that may be borrowed under the loan.
The down payment is the difference between the purchase price and the loan amount, and is due at the time of closing. It generally ranges from as little as 3% to as much as 20% of the purchase price. The larger your down payment, the less interest you will have to pay. Loans with minimum down payments typically require a fee for mortgage insurance in addition to your monthly payment.
Money for the down payment may come from a variety of sources, including your savings, the sale or refinancing of another house, a gift or loan from family members, or a secured debt (such as a car loan). Your lender can tell you about the latest regulations regarding down payments.
Note: How much home you can afford will depend upon the interest rates at the time of purchase and the down payment you can provide. Many lenders offer loans for special financial situations. To find out if you qualify, speak to your lender.
Generally lenders limit the amount of funds they will advance based on the equity the borrower has in their home. Equity is calculated by subtracting the outstanding mortgage balance from the fair market value (appraised value).
An arrangement in which a neutral third party holds the funds and documents that change hands during the home selling and buying process. An escrow officer sees that items in the purchase contract are carried out and appropriate parties are paid.
Lenders require home buyers to purchase homeowners insurance. Homeowners insurance is a package policy consisting of different types of coverage for the house, its contents, personal liability claims against the policyholder and other members of the household.
Published rate that serves as a base for the interest rate charged on variable rate loans.
The amount charged per year on a personal or home loan. The rate varies according to the type of loan.
The number of percentage points the lender adds to the index rate to determine the annual percentage rate.
The minimum amount that you must pay (usually monthly) on your account. Under some loans, the minimum payment may be interest only; under other loans, it may include both principal and interest.
Finance charges paid to the lender as part of the closing costs. Each point equals 1% of your total mortgage loan. Points can be negotiable and are sometimes tied to your interest rate. Paying more points to get a lower interest rate may be a good idea if you plan to take a long-term loan.
Making early or extra payments toward the principal (amount of the mortgage). Prepayment can shorten the length of your mortgage and thus, lower your total interest. However, lenders may charge a penalty if you pay off the mortgage early. Be sure to ask about prepayment conditions in your mortgage and read all the documents.
Private Mortgage Insurance:
Insurance the buyer carries to guarantee that the lender is paid off if the buyer defaults (fails to pay) on a mortgage. This is different from homeowner’s insurance. It is generally required for all mortgages with less than 20% down payment. The exact amount depends on the amount of the loan and the size of the down payment.
An interest that a lender takes in the borrower’s property to ensure repayment of debt.
An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly.
Whether you are building a new home, refinancing your current mortgage, or buying an automobile, be smart and educate yourself. To get additional information and answers to your questions about Bank of Franklin County’s loan products, call our Washington office at 636-239-6600 or 636-239-1700, our Krakow office at 636-239-3087, our New Haven office at 573-237-4400 or our toll free number 877-584-6600 and speak with an experienced and dedicated lender.
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