Orange County Condo Loan Strategies
Top Condo Loans and When to Use Them
There are home loans for every type of home buyer. The goal here is to match the benefits of a specific loan type with your goals for owning a home. Here's an overview to help match the right loan for your situation:
Objective: Plan to live in your home for many years.
Strategy: Low interest rate over a long period of time. Since you're going to be making payments for years to come, your best strategy may be a fixed rate loan and paying points to get your rate as low as possible.
Objective: Plan to sell or refinance your home in just a few years.
Strategy: Avoid points and closing costs since the difference in interest payments won't typically make up for your out-of-pocket costs at closing. Also try for a smaller down payment. A fixed period ARM is a good choice for holding rates down for a set number of years.
Objective: Want to pay off home loan by the time your children are in college.
Strategy: Shorter term loans such as a 15 year fixed rate home loan are a smart way to ensure you can use income for other goals later in life. Plus you build equity faster.
Objective: Want to budget for a fixed payment each month.
Strategy: A fixed rate loan has a principal and interest payment that stays the same for the entire term of the loan.
Objective: Comfortable with periodic changes to interest rate if it means you can get more home now.
Strategy: Adjustable rate mortgages are a great solution for people with incomes that are going to grow and will quickly refinance or be able to afford a larger payment in a few years should interest rates rise.
Fixed Rate Home Loans
Some people just like certainty in their life. And though you can't count on the weather, you can count on a fixed rate home loan. It will have the same interest rate for the entire life of your loan. And you can choose a variety of repayment terms, with 15, 20 and 30 years the most common.
Fixed rate loans are a good choice if you:
- Like the new rate and want to keep it for the life of your loan.
- Plan to stay in your house a long time.
- Prefer the security of a fixed principal/interest payment over one that changes periodically.
Fixed Loan Products:
30 Year Fixed Rate Home Loan
- Lowest monthly payment of the fixed rate loan choices.
- Keeps home loan payments affordable by extending them over a long period of time.
- Provides maximum tax-deductible interest (ask your tax advisor).
20 Year Fixed Rate Home Loan
- Helps you pay off your home faster and build equity quicker than 30 year home loan.
- Has a lower interest rate than a 30-year loan (but higher monthly payments).
- Saves considerable money on total interest paid over the life of your loan.
15 Year Fixed Rate Home Loan
- Has higher payments than a 30 year or 20 year home loan, but a lower interest rate.
- Saves considerable money on total interest paid over the life of your loan.
- Builds equity in your home faster.
Adjustable-Rate Mortgages (ARMs)
What goes up, must come down. And that's basically the principal of ARMs. The interest rate you pay is adjusted from time to time to keep it in line with changing market rates. This means when interest rates go up, your monthly home loan payments may go up. And, when interest rates go down, your monthly home loan payments may go down.
Now that might sound frightening if you've ever lived in an era when interest rates shot up dramatically. But ARMs have built-in features that reduce the risk your rate will ever go too high.
ARMs are attractive because they offer start rates that are lower than the interest rates of fixed rate home loans. This typically enables you to begin with lower monthly payments and qualify for a larger loan.
Reasons an ARM might be right for you:
- You are planning to move in a few years and consequently aren't concerned about possible rate increases.
- You're confident your income will rise enough in the coming years to handle any increase in payments.
- You need a lower initial rate to afford to buy the home you want.
How ARMs work:
- A start rate, also known as the initial interest rate, gives you a special low monthly payment for a set amount of time (such as 1 year).
- After the start rate period is over, your interest rate is based on the performance of a financial index, such as the average interest rate or yield on Treasury bills. For a better understanding and a historical perspective, see ARM financial indices.
- How often your payments are adjusted based on the index, and how much rates and payments increase at each adjustment, depends on your loan terms. A 6-month ARM adjusts every 6 months. A 1-year ARM adjusts once a year
- At each adjustment, the new rate is computed by adding the margin a predetermined amount that remains the same for the life of your loan to your financial index. Example: If the interest rate for the financial index was 5.5% and your margin 2%, then your rate at the time of adjustment would be 7.5%.
- Two "caps" may put a limit on the maximum amount your rate can increase. The periodic cap sets the maximum your rate can go up from one adjustment period to the next. The life cap sets the maximum interest rate for the life of the loan. See How Caps Work.
Some ARMs offer a conversion feature that allows you to convert to a fixed rate loan at certain times during your loan.
Fixed period ARMs
If you're worried by the thought of your payment going up in 6 months or a year, or know exactly when you'll be ready to move to a new home, you might want to look into an ARM that protects you against the possibility of rapid interest rate increases for a set number of years.
A fixed period ARM starts with a lower rate than standard fixed rate loans. Your rate then stays the same for the first 3, 5, 7, or 10 years, depending on the fixed period ARM you choose. At the end of that period, your interest rate adjusts every year like a regular ARM according to a financial index (that's why some lenders call them 3/1, 5/1, 7/1 and 10/1 ARMs).
Fixed period ARMs work for people who:
- Plan to be in a home for a short time
- Expect to gradually increase their income and want a few years at a set payment level before potentially paying more
- Intend to refinance before the adjustment period begins
The Federal Housing Administration (FHA) and the U.S. Department of Veterans Affairs (VA) offer government-insured loans. These loans have features that make them easier for first-time home buyers to obtain. These features include:
- Low down payments
- Flexible lending guidelines
To get an FHA or VA loan, you apply through an approved lender like Countrywide. In fact, we are one of the top lenders for government loans. At every one of our branches, you work directly with local loan experts experienced with these loans.
FHA Loan features:
- Low down payment (usually 3% of the FHA appraisal value or the purchase price, whichever is lower)
- No maximum income/earning limitations
- Fixed rate and ARM loans available
- Insurance from the federal government replaces private mortgage insurance
- Maximum loan amounts vary by county contact a specialist in these programs for information on your county
VA Loans features:
- No downpayment loans up to $417,000 for qualified veterans.
- Fixed rate loans. ARM loans also available. Ask your loan consultant for details.
- More flexible qualification guidelines than conventional loans
- For eligibility information contact a government specialist
Jumbo Loans Loans over $417,000
Loans for more than this amount are called jumbo or non-conforming loans. They exceed the loan amounts allowed by Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) two government-sponsored enterprises that help facilitate the availability of home loans by investing throughout the country.
Non-conforming loans typically have a higher rate and different requirements for your down payment.