Seward Real Estate Blog

Choosing the Right Mortgage
July 15th, 2008 8:06 PM

Choosing the Right Mortgage

There are many unique loan products available to borrower’s today, but just which option is best for you? The following is a brief description of just a few of the most popular loan products that are available to borrowers:

Federal Housing Authority (FHA) Loan

FHA loans are fully Government backed and insured, and were once very popular. Based upon the new economic stimulus package recently signed into law by the President, refinancing or buying a home with an FHA Loan may now make more sense here in California. This is particularly the case in Santa Barbara County, where the FHA loan value limit formula was raised to $729,750 based upon our higher Median Price. FHA Loans have relaxed credit and debt ratio standards, and you can obtain up to 100% financing with a combination of loans. The FHA rules are loosened, even though conventional /Jumbo Loan requirements have become far more stringent over the last several months. The FHA Rates & Terms are also far more competitive than the current Jumbo Loans, with rates typically a full 1 - 1.5 percent lower. This interest rate spread can save a typical borrower thousands of dollars each year. You may want to consider the more affordable FHA-backed mortgages quickly though, since the higher loan limit is scheduled to end in 2009.

Reverse Mortgages

The AARP definition of a "reverse" mortgage is a loan against your home that you do not have to pay back for as long as you live there. With a reverse mortgage, you can turn the value of your home into cash without having to move or to repay the loan each month. The cash you get from a reverse mortgage can be paid to you in several ways:

  • all at once, in a single lump sum of cash;
  • as a regular monthly cash advance;
  • as a "credit line" account that lets you decide when and how much of your available cash is paid to you; or
  • as a combination of these payment methods.

No matter how this loan is paid out to you, you typically don't have to pay anything back until you die, sell your home, or permanently move out of your home. To be eligible for most reverse mortgages, you must own your home and be 62 years of age or older.

Reverse Mortgages are becoming increasingly popular, and based upon the age limit are primarily suited for retired seniors.

Real Estate Equity Exchange Loans

Real Estate Equity Exchange provides you with money today that you can keep for up to fifty years without interest charges or monthly payments. In exchange, you agree to give the lender a right to a portion of the future value of your home. The company that founded this concept is Rex & Co., a Real Estate Equity Exchange Company. They provide a specialized REX Agreement, which is a real estate purchase agreement. REX & Co. pays the homeowner cash up to 15% of the value of the home for the right to share in an agreed upon percentage of the future increase or decrease in value of the home. If the future value of the home increases, REX & Co. will share in a portion of the gain. Unlike a bank, if the home declines in value, REX & Co. will share in the loss. The term of the REX Agreement is determined by the homeowner and typically lasts until the sale of the property, or 50 years, whichever occurs first. The cash a homeowner receives from REX & Co. can be used for any purpose. Because a REX Agreement is not debt, it carries no interest expense and does not require any monthly payments. You could save thousands of dollars in interest charges compared to a standard mortgage loan, home equity loan or credit card debt with this type of loan.

Mortgage Refinance

Many Mortgage Refinance options are available for you to do debt consolidation or accessing cash from equity that may have built up in your home. Refinance loans can be used to help with many personal financial situations such as reducing monthly payments, home improvements, college tuition and more.

Home Equity Loans

Home Equity Loans and Home Equity Line of Credits (also known as HELOC's or 2nd mortgages) are loans that come fixed or with variable interest rates for getting cash out of available equity in your home. This equity could be used for any purpose such as making home improvements, consolidate debt, vacations, or unexpected expenses.

New Construction Loans

This is typically a short-term loan program that provides funds for the construction phase of a new home. With many lenders, after construction is completed you have the flexibility to select a permanent mortgage solution that best suits your needs to establish permanent financing for the home. Construction home loans provide funding for all construction phases, and payments can also be disbursed directly to the builder saving you time. Many lenders give you the convenience of one loan with the stability of a 15 or 30-year fixed rate program that you lock in before the actual construction begins. These loans allow for a construction phase of up to one year, during which you make interest-only payments at an interest rate slightly higher than your permanent fixed rate.

Conventional Loans

Conventional loans are secured by government sponsored entities or GSEs such as Fannie Mae and Freddie Mac. Conventional loans can be made to purchase or refinance homes with first and second mortgages on single family to four family homes. A conventional loan is basically any kind of lender agreement that is not backed in full by the Veterans Administration or protected by the FHA (the Federal Housing Administration). All told, there are several broad categories of conventional loans. Fixed rate mortgages are simpler in some cases. A home borrower “locks in” at an interest rate, and he or she pays down the principal and interest on the mortgage every month at that rate.

Other so-called conventional loans include conforming loans. Basically, these are arrangements that meet stipulations set forth by Fannie Mae and or Freddie Mac, two very large mortgage trading companies.

While Fannie Mae and Freddie Mac don't actually approve or disapprove of loans, they buy and sell mortgages. Lenders who sign borrowers up with conforming loans may later sell these loans to Fannie Mae or Freddie Mac to get funds for other investments.

Jumbo Loans

Jumbo or Nonconforming loans are instruments which don't meet Fannie Mae or Freddie Mac qualifications, and are also considered a form of conventional loans. Jumbo loans fall outside of Fannie Mae eligibility, but are still considered conventional. A jumbo loan is a loan that's too large to be eligible to be traded by the two main loan purchasers (GSEs). The previous Fannie Mae guidelines for conventional homes put the maximum price for a conventional, conforming loan at just over $415,000 for a single-family arrangement. A larger loan limit has just recently been increased for California. Because jumbo loans are not funded by the government sponsored entities, they usually carry a higher interest rate and some additional underwriting requirements.


Choosing the right type of mortgage depends on many different factors, and one of the best ways to find the "right" answer is to discuss your finances, your plans and financial prospects, and your preferences with a local mortgage professional.


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Posted by William Seward on July 15th, 2008 8:06 PMPost a Comment

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