What Loan Program Is Best For Me?
Fixed Rate Mortgages
Adjustable Rate Mortgages
Home Equity Line of Credit
Fixed Rate Mortgages
A Fixed Rate Mortgage ensures that your payments will stay the same over the life of the loan. This has the obvious advantage of enabling you to calculate your monthly expenses without worrying about fluctuations in your mortgage payments over time.
You pay a slightly higher interest rate than you would with an Adjustable Rate Mortgage Loan (ARM), to get the lender to commit to lending you money over the full term of the mortgage. However, if interest rates fall, you may always opt to refinance to a lower rate for the purpose of simply lowering your payment, or cashing out all or some of the equity you have accrued.
Fixed Rate Mortgages are typically available with terms of 10, 15, 20, 25 or 30 years. To calculate mortgage payments (amortization), the loan amount is divided by the number of months in the term, and tax and insurance are added. Payments for 15 and 20 year terms, will be higher than a 30 year loan because they are amortized over a shorter period of time. The shorter this period, the higher the actual payment, but the greater the savings in the amount of interest paid over the life of the loan. For example, a 15 year fixed term will result in paying off your mortgage in 1/2 the time, with huge savings to you in the interest you will pay. This could be an important consideration if you are nearing retirement or have other large expenses to cover, such as your child's education.
Use the loan calculators on our Loan Info page to compare these programs based on your current loan amount or that of a purchase you are considering. Be sure to add in monthly estimates for property tax and hazard insurance (the "T I" in "PITI") for a more accurate payment projection.
Adjustable Rate Mortgages
Sometimes it is more important for you to have a lower initial rate, resulting in a lower payment, so that you will be able to qualify for the home you have chosen. Perhaps you plan to move in a few years and are not concerned about possible interest rate increases. Maybe you are confident that your income will increase enough in the coming years to compensate for periodic increases in your interest rate, and subsequently larger mortgage payments that accompany an Adjustable Rate Mortgage Loan (ARM).
If the scenarios described above are similar to your situation, you may wish to consider the substantial savings available to you with an Adjustable Rate Mortgage (ARM). It's important to note that you have the option of refinancing your loan at the completion of the fixed period, to a new ARM loan or a longer fixed rate term.
With an ARM, your interest rate is fixed for a given period of time, depending on the term you have chosen, typically 1, 3, 5 or 7 years. ARM loan rates are typically lower than the longer fixed rate terms described in this section. Your interest rate will increase each year after completion of the fixed period. These predetermined adjustments define the amount of interest rate increase you may incur during each adjustment period, and also the maximum interest rate you could be charged over the life of the loan.
One cap limits the amount that your interest rate can go up during each adjustment period. For example, an ARM that adjusts annually may cap the yearly interest rate increases at 2 percent, meaning the adjusted interest rate can never be more than 2 percent higher than the year before.
The other cap sets the limit on the total amount of interest adjustments over the life of your loan. An ARM that has a lifetime rate cap of 6 percent, means that the highest adjusted interest rate you will ever be required to pay is no more than 6 percent above the original rate. Using this example, an ARM with an introductory rate of 5 percent and a lifetime cap of 6 percent, means that the highest interest rate you will ever pay would be 11 percent.
You will receive ample notice regarding these adjustments to your rate, allowing you to decide whether to continue at the present rate or refinance your loan to a lower rate.
A US Department of Veteran's Affairs (VA) Loan allows qualified veterans to buy a house costing up to $412,000 without a down payment. Additionally, the qualification guidelines for VA Loans are more flexible than for either FHA or Conventional Loans. For qualified veterans, this can be a very attractive option.
To determine your eligibility, contact your nearest VA regional office. Loan Officers at NOVA will be able to answer your questions and determine which options will be the most advantageous for you.
If a conventional loan falls within Fannie Mae's and Freddie Mac's loan limits, it is referred to as a Conforming Loan. If the loan amount exceeds the maximum permissible loan amount of these two agencies, it is called a JUMBO, or Non-Conforming Loan.
Conventional lenders typically insist that the borrower put down more than 20% on a JUMBO loan. Interest rates on JUMBO loans generally run between 3/8% to 1/2% higher than Conforming Loans. The difference in the interest rate between Conforming and JUMBO loans is higher when mortgage money is not plentiful. The difference typically decreases with the abundance of mortgage money.
Construction Loans are specialized and require a lender with knowledge of the process.
One Time Close Construction
When rates are low it's the ideal time to take advantage of the One Time Close Construction Loan. Your rate will never change from the beginning of construction through the life of the loan. And, you pay only one set of closing costs.
Two Time Close Construction
When interest rates are on the rise, it's usually better to do a Two Time Close Construction Loan because the initial loan covers only the cost of construction and can be configured as an "interest only" loan. 3/1 or 5/1 ARMs (Adjustable Rate Mortgages, fixed for 3 or 5 years), are usually recommended for this purpose because they traditionally carry a lower interest rate. Lower interest rates help to keep payments low during the construction process.
With a Two Time Close construction loan, you are charged with 2 sets of closing costs, one for the construction loan and another for the permanent loan. However, some lenders will waive costs on the construction loan if you commit to doing the permanent loan with them. With a Two Time Close, you also have the option to lock your permanent rate at the time the construction loan is originated, with a "float down" option. At the end of construction, you have the option of choosing the locked rate or the current rate for your permanent loan, whichever is lower.
Construction loans used for new homes generally pay the builder or general contractor in installments or "draws", as each previously agreed upon stage of construction is satisfactorily completed. Interest is paid by the borrower on these construction funds as they are dispersed. After completing a project, the construction financing is usually converted into a permanent, long-term mortgage.
Construction loans may also be the most appropriate choice for extensive remodeling projects because in most cases, they provide the owner with more money than can be accessed from the home's equity through a Cash-Out Refinance.
Home Equity Line of Credit (aka HELOC)
Equity can be defined as the difference between what your house is worth in today's market, and how much you currently owe for the property. For example, if your home is appraised at $225,000 and you have an outstanding balance of $75,000, then you have $150,000 of home equity.
With this in mind, a Home Equity Loan is basically a line of credit secured by a second mortgage on a property. You can borrow against what you have already paid, so long as you don't exceed the maximum loan amount previously agreed to by you and the lender.
Balloon Loans require level payments (such as a fixed rate loan), but come due before their maturity rate (typically three to ten years after the start date). When a Balloon Loan comes due, the loan's entire remaining principal balance is due and payable. Balloon Loans often offer a lower rate of interest in comparison to a fixed rate loan, but they can be risky, since refinancing is not always an option.
If you find yourself in the position of having to buy a new house before selling your old one, you may benefit from a Bridge Loan. A Bridge Loan enables you to borrow against the equity that is tied up in your old home until it sells. There are several risk factors to consider before deciding that a Bridge Loan is right for you.
If your old house doesn't close quickly, you could wind up paying for two houses longer than you had anticipated. This effectively forces you to pay three mortgages (the first one for your old home, the second for the Bridge Loan and the third for your new home). Combine this with the prospect of paying two property tax bills, two premiums for homeowners insurance and two sets of utility bills. These can add up quickly.
One more potential pitfall is the state of the market. If property prices plummet while you're still trying to sell the old house, you may not be able to sell it for enough money to pay off all your outstanding loans. The holder of the Bridge Loan may then be able to foreclose on your new home to make up for the shortfall.