Financing Options

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Obtaining a loan and financing the purchase of real estate is a complex process. A REALTOR can give you information about the many kinds of mortgage loans available today. Until recent years, a fixed rate loan was the standard way to borrow money. With this type of loan, the interest rate does not change and the monthly payments remain the same for the life of the loan. Because interest rates have fluctuated in recent years, alternative mortgages have been developed to better meet the borrower's need for affordable home financing, and to meet the lender's need to earn a profit even when interest rates change.

The most common of these alternative loans is the ARM, or Adjustable Rate Mortgage. ARMs allow the lender to adjust the interest rate of the loan at scheduled, agreed-upon times. The rate is tied to an index such as the US Treasury Bill. If the interest rate is adjusted upward, monthly payments go up-if adjusted downward, payments go down as well. Interest rate caps place a limit on the amount the interest rate can increase or decrease each year as well as during the life of the loan.

In an effort to make affordable housing possible for lower income consumers, there are certain government agencies that guarantee or insure home loans. These agencies are the Federal Housing Authority (the FHA), the Department of Veterans Affairs (the DVA or the VA) and the Department or Housing and Urban Development (HUD). These agencies do not actually make loans. Instead, they act as co-signers promising to pay lenders the amounts due on loans in case of default. This protects lenders from losing thousands or dollars and makes it possible for people with lower incomes to qualify for loans. FHA, DVA or VA and HUD work directly with lenders in your community. You will want to talk with your lender to determine if you can qualify for one of these insured or guaranteed loans.

The National Affordable Housing Act of 1990 created the Home Investment Partnership Program for low-income, first-time home-buyers. In this state, the Missouri Housing Development Commission or MHDC manages the program. Private, not-for-profit, government-chartered corporations such as "Fannie Mae" (the Federal National Mortgage Association) and "Freddie Mac" (the Federal Home Loan Mortgage Corporation) buys loans from lenders. This allows the lender to turn a loan that may take 30 years to collect into immediate cash that can be loaned to another home buyer now. The next step is for Fannie Mae or Freddie Mac to combine several million dollars of loans into a pool which is commonly called the "secondary market." Then, investors can buy stocks that pay returns as home owners pay each month's mortgage payment. So as you can see, when you buy a home today, you trigger many business transactions that benefit our national economy.

If you and the REALTOR determine that you most likely qualify for some type of loan, you might want to make an appointment with a loan officer at a bank, mortgage company or savings and loan to discuss different loan options. The lender can pre-qualify you for a loan; the next step is pre-approval. Being approved before you look for a home will determine your price range and avoid later disappointment.

The approval process includes a comprehensive credit report, employment verification, verification of income, appraisal of the property and other requirements.

Before you visit a lender, take a moment to go over these basic facts about loans, mortgages and payments:

• The money borrowed for the purchase of a home is the principle.
• Interest is the money payed for the use of the lender's funds.
• A home mortgage loan is amortized, that is, paid off in a series of regular payments over a specified number of years. The payments are determined by the a.) Amount of the loan, b.) How long it will take to repay it, and c.) the rate of interest paid for the loan. Therefore, the shorter the term, the higher the monthly payments. The longer the term, the lower the monthly payments. For some buyers, it is important to pay off the loan faster; with other, lower monthly payments is the necessity.

Once you find a loan that is compatible with your income and other financial obligations such as automobile loans, student loans or credit card payments, it's finally time to look for a house which is right for you and your lifestyle. There are many factors to consider. Click the Buying/Selling Tips Icon below to continue.

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