Loan Options — Which Loan is Right For Me?
Getting the right loan is one of the best ways to ensure your success in real estate. There are many loan options that can make your purchase a win win situation. The ideal end result from any transaction should be satisfactory to all parties involved.
Below is an explanation of just some of the different types of loans available on the market today and who may benefit from using them:
Fixed Rate Mortgage (10-yr., 15-yr. 30-yr.)
Characteristics: Interest rate and payment remain the same for the entire term of loan.
Well suited for borrowers who: Plan to live in the property more than 10 years and like payment stability.
10/1-Year Adjustable Rate Mortgage
Characteristics: Interest rate and payment remain the same for 10 years. Starting the 11th year, interest rate is adjusted every year for remainder of loan.
Well suited for borrowers who: Plan to live in the property more than 10 years, and can accept later payment changes. Or, plan to move within 10 years and want loan to remain in force in case plans change.
“30 due in 7″ Mortgage
Characteristics: Interest rate and payment remain the same for the 7 years. On 8th year, interest rate adjusted to reflect prevailing interest rates and remains same for remainder of loan.
Well suited for borrowers who: Plan to live in property more than 10 years. Can tolerate one payment adjustment. Or, plan to move within 7 years and want loan to remain in force in case plans change.
7/1-Year Adjustable Mortgage
Characteristics: Interest rate and payment remain the same for 7 years. Starting the 8th year, interest rate is adjusted every year for remainder of loan.
Well suited for borrowers who: Plan to live in property more than 7 years. Like initial payment stability but can accept later changes. Or, plan to move within 7 years and want loan in place in case plans change.
7-Year Balloon Mortgage
Characteristics: Interest rate and payment remain the same for 7 years. At the end of seven years, loan is due in full. Borrower must refinance into new loan at prevailing interest rates.
Well suited for borrowers who: Plan to live in property more than 7 years and are willing to refinance at prevailing rates. Or, plan to move within 7 years and like payment stability.
“30 due in 5″ Mortgage
Characteristics: Interest rate and payment remain the same for the 5 years. On the 6th year, interest rate adjust to reflect prevailing interest rates and remains same for remainder of loan.
Well suited for borrowers who: Plan to live in property more than 5 years and can tolerate one payment adjustment. Or, plan to move within 5 years and want loan to remain in force in case plans change.
5/5 & 5/1 Year Adjustable Mortgage
Characteristics: Interest rate and payment remain the same for 5 years. On the 6th year, interest rate is adjusted every 5 years (for 5/5 ARM) and every year (for 5/1 ARM).
Well suited for borrowers who: Plan to live in property more than 5 years, like initial payment stability and can accept later changes. Or, plan to move within 5 years but want loan to remain in force in case plans change.
5- Year Balloon Mortgage
Characteristics: Interest rate and payment remain the same for 5 years. At the end of 5 years the loan is due in full. Borrower must refinance into new loan at prevailing rates.
Well suited for borrowers who: Plan to live in property more than 5 years and are willing to refinance later at prevailing rates. Or, plan to move within 5 and like payment stability.
3/3 & 3/1 Year Adjustable Mortgage
Characteristics: Interest rate and payment remain the same for 3 years. On the 4th year, interest rate is adjusted every 3 years (for 3/3 ARM) and every year (for 3/1 ARM).
Well suited for borrowers who: Plan to live in property more than 3 years. Like initial payment stability and can accept later payment changes. Or, plan to move within 3 and want loan to remain in force in case plans change.
1- Year Adjustable Mortgage
Characteristics: Interest rate adjusted every year, so monthly payment is subject to change every year for entire 30 year loan term.
Well suited for borrowers who: Want lowest rate possible and are willing to accept yearly payment changes. Or, cannot qualify at higher rate programs.
Additional Loan Types
“80/20″: A combination first and second mortgage loan program. It provides you with an 80% loan-to-value first mortgage and a 20% second mortgage loan. You pay 0% down. This is 100% financing.
“80/15/5″: A combination first and second mortgage loan program. It provides you with an 80% loan-to-value first mortgage and a 15% second mortgage loan. You pay only 5% down. This is 95% financing.
“80/1010″: A combination first and second mortgage loan program. It provides you with an 80% loan-to-value first mortgage and a 10% second mortgage loan. You pay only 10% down. This is 90% financing.
Seller Financing
Seller financing is when a seller helps to finance a real estate transaction by taking back a second note or even financing the entire purchase if the seller owns the home free and clear. Usually sellers do this when a buyer has difficulty qualifying for a conventional loan or meeting the purchase price.
Seller financing differs from a traditional loan because the seller does not give the buyer cash to complete the purchase, as does a lender. Instead, it involves extending a credit against the purchase price of the home while the buyer executes a promissory note and trust deed in the seller’s favor.
These special circumstances must be acceptable to the lender who makes the first mortgage on the property. The necessary paperwork is prepared by the title or escrow company after the terms are worked out between the buyer and seller.
The interest rate on an owner-carried loan is negotiable. Ask your agent to check with a lender or mortgage broker to determine the current rate on institutional first (or second) loans. Seller financing typically costs less than conventional financing because sellers don’t charge loan fees (points).
Interest rates on an owner-carried loan will also be influenced by current Treasury bill and certificate of deposit rates. Sellers usually aren’t willing to carry a loan for a lower return than they would earn if their money was invested elsewhere.
Seller financing offers tax breaks for sellers and alternative financing for buyers who can’t qualify for conventional loans. The advantage to the buyer is that by combining your down payment and the second mortgage from the seller, you may be able to avoid paying mortgage insurance and save yourself some money.
If such a carry-back is part of your offer, you should include the terms you wish to pay on such a second mortgage. Keep in mind that your first trust deed lender needs to know this information so they can underwrite your loan, and they have certain minimum requirements. The minimum term of the second mortgage can be five years. The minimum payment can be “interest only.” Longer mortgage terms and payments that also include principle are also acceptable.
If you are a seller, the risks you face are the same as those facing any lender: Is the borrower a good credit risk? Will the property hold enough value over time to allow for the repayment of all loans made against it?
You should run a full credit check on the borrower, require hazard insurance on the property and include a due-on-sale clause. There also are financing, disclosure and repayment-term requirements that need to be met. It is wise to consult a lawyer when putting together this kind of transaction.
If you are a seller considering such an arrangement, it is critical to thoroughly evaluate the creditworthiness of the buyer first. Fear of default makes many sellers reluctant to take back a second. But seller financing can bring a higher price plus complete the sale sooner in some situations. For more information, contact the Internal Revenue Service for a copy of its Publication 537, “Installment Sales.”
AITD (All Inclusive Trust Deed)
An All Inclusive Trust Deed secures a wrap-around loan, which incorporates an existing loan, with a new loan made by the Seller of a property.
For example, the sales price is $200,000, there is an existing first trust deed securing a loan with a balance of $150,000, with an interest rate of 7%, the Buyer has $20,000 cash to put down; therefore, an AITD is created in the amount of $180,000 at 8%. The AITD wraps around the existing $150,000 at, and the Seller makes 1% on the $150,000 at 8%, on the $30,000, thereby effectively increasing the yield.
The Buyer makes payments based upon the $180,000 balance, and the Seller makes the payments on the existing loan secured by the first trust deed.
The terms of the AITD, such as rates, maturity date, payment amount, late charges and prepayment penalty are completely negotiable.
In the event the first trust deed and note contains a “Due On Sale Clause,” the parties will want to seek legal and tax counsel as to the ramifications of doing an AITD.
Express Loan Item Checklist
If you have these items in order, it will expedite the loan process:
- Reserve Statements
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- Bank
- IRA
- Savings Account
- Stocks
- Bonds
- Certificate of Deposit
- Trust Funds
- Pay Stubs : Payroll verification for the last 2 months
- Tax Returns : Provide copies of your tax returns for the last 2 years
- Divorce records (if applicable)
- Bankruptcy records (if applicable)
- Current Loan Statement or Rental Agreement
- A Verification of Deposit
- Other Sources of Income
- Verification of Relationship
Tonja Demoff Companies seeks to empower you with the information you need to make a good decision and gain your satisfaction and business for life. We are with you through every step of the loan process to assist you in any way.
