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Homeowner Financing: FAQs

  1. What is an ARM?
  2. How do you choose between fixed and adjustable rates?
  3. How do I monitor my ARM loan?
  4. What is an FHA loan?
  5. What is an VA loan?
  6. What is a Balloon mortgage?
  7. What is a convertible loan?
  8. What is an impound account?
  9. Do all loans require impound accounts?
  10. What is amortization?

What is an ARM?

An ARM is an adjustable-rate mortgage whose interest rate can go up or down. Adjustable-rate mortgages "are tied to an index which is a measure of the lender's cost of borrowing money. As the index rises, so will the interest rate on the adjustable loan," according to Dian Hymer, author of "Buying and Selling a Home, A Complete Guide," Chronicle Books, San Francisco; 1994. v Common indexes include Treasury Securities (T- Bills), Certificates of Deposit (CDs), and Libor (London inter- bank offering rate). Most metropolitan newspapers publish current ARM index rates.

How do you choose between fixed and adjustable rates?

There is risk involved in selecting an adjustable rate mortgage, or ARMs, because rates may go up. On the other hand, a fixed-rate loan offers good protection against rising interest rates but the borrower is stuck with the initial rate if interest rates drop.

Statistics show that home buyers who have chosen ARMs since 1981 have saved thousands of dollars. For a period, the percentage of home buyers applying for ARMs rose substantially, then buyers and homeowners began flocking to fixed-rate loans.

Whether to opt for a fixed or adjustable rate mortgage is a matter of personal choice. The first route offers stable payments; the second offers lower initial payments.

Another consideration is the length of time a buyer plans to own the home. If you're planning on moving within three or four years, an ARM makes sense even if rates do nothing but rise during that period of time.

How do I monitor my ARM loan?

Consumer Loan Advocates publishes a book with form letters and worksheets to help people who want to check mortgage payments or adjustments on their own. It costs $19.95 plus $4 shipping and handling. For a copy, write or call Consumer Loan Advocates, 655 Rockland Road, Lake Bluff, IL 60044; (847) 615-0024.

What is an FHA loan?

FHA: The Federal Housing Administration (FHA) administers various mortgage loan programs. FHA loans have lower down payment requirements and are easier to qualify than conventional loans. FHA-insured loans are available in urban and rural areas for single family homes, for 2-unit, 3-unit, and 4-unit properties, and for condominiums. Interest rates on FHA loans are generally market rates, while down payment requirements are lower than for conventional loans. Down payments can be as low as 3 percent, and closing costs can be wrapped into the mortgage. For more information on FHA loans visit http://www.hud.gov/offices/hsg/.

What is an VA loan?

VA loans are guaranteed by U.S. Dept. of Veterans Affairs. The guaranty allows veterans and service persons to obtain home loans with favorable loan terms, usually without a down payment. In addition, it is easier to qualify for a VA loan than a conventional loan. Lenders generally limit the maximum VA loan to $203,000. The U.S. Department of Veterans Affairs does not make loans, it guarantees loans made by lenders. VA determines your eligibility and, if you are qualified, VA will issue you a certificate of eligibility to be used in applying for a VA loan. VA-guaranteed loans are obtained by making application to private lending institutions. If you are interesting in obtaining a VA-guaranteed loan visit http://www.va.gov/.

What is a Balloon mortgage?

One way of shortening the length of your mortgage is to purchase a balloon mortgage. It works like an ARM or a fixed-rate mortgage for the first several years. After that period of time has expired, you owe a large payment -- sometimes the remaining balance on the loan. The advantage of this type of loan is that it keeps monthly payments low. Experts recommend this type of loan for people who are planning to sell their homes within a few years, and can pay off the balloon payment from the proceeds of the sale of the house.

What is a convertible loan?

A convertible loan is an ARM that can be converted to a fixed-rate mortgage after a specified number of years. There may be a cost associated with this.

What is an impound account?

An impound account is a trust account established by the lender to hold money to pay for real estate taxes, and mortgage and homeowners insurance premiums as they are received each month.

Do all loans require impound accounts?

If you are taking out a FHA or VA loan, the lender can require an impound account to pay real estate taxes and hazard insurance premiums, as with a standard loan. Most conventional loans do not require an impound account.

What is amortization?

Repayment of loan by installment payments. As the payments are made, the debt is reduced so that at the end of fixed period or term, no money will be owed.