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Recommended Conventional Loans For First-Time Buyers

Here Is A List Of Safe Mortgages:

40 and 50 year fixed loans. - These are fairly new on the market. Their long payment period stretches the payment out and makes the monthly payment smaller.

30 year fixed - This is the classic loan and has no risk of interest rate change. The interest-only version of this loan often has an interest-only period lasting ten years.

20 year and 15 year fixed - These loans are selected by individuals who want to pay off their mortgage quickly and can afford the higher payments these loans have. Normally there are no interest-only versions of these loans. The 15-year fixed loan will normally have the highest payments of all loan categories. The upside is that the loan can paid off quickly and the total interest paid out over the lifetime of the loan will often be hundreds of thousands of dollars less than loans lasting 30 years. The longer the amortization period, the more interest is paid out over the loan's lifetime. A 50-year fixed loan will have the most interest paid out over its lifetime of all loans.

10 year, 7 year, and 5 year fixed loans. - These loans last a total of 30 years with the interest rate being fixed for the first 5, 7, or 10 years. These loans can either have principal and interest payments right from the start or have an interest-only payment period during the first 5 years.

Fixed Rate 2nd Mortgages - 2nd mortgage can have a fixed rate or a variable rate. 2nd mortgages with variable rates usually use the Prime Rate as the base right. In a period of about two years, the Prime Rate jumped from 4.00% to over 8.00%. Borrowers with variable-rate 2nd mortgages experienced large, steady increases in the monthly mortgage payments. Rates are still historically low. The Prime Rate could rise further. Borrowers who take out variable rate 2nd mortgages should take into consideration that the payment on their 2nd mortgage will increase every time the Fed raises rates.
 

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1st Mortgage Overview

Any person borrowing money from a bank to purchase a home will have at least a 1st mortgage attached to their home. Some homeowners will also have a 2nd mortgage attached to their home in addition to the 1st mortgage. Each mortgage is recorded at the county recording house at the time that the mortgage was taken out. The only difference between a 1st mortgage and a 2nd mortgage is that the 1st mortgage was recorded before the 2nd mortgage. Homeowners take out 2nd mortgages for one main reason: to avoid paying mortgage insurance on their 1st mortgage. Anytime a mortgage loan amount exceeds 80% of the value of the property, the lender will require additional insurance to be paid along with the payment on that mortgage. This insurance is known as MI (Mortgage Insurance) or PMI (Private Mortgage Insurance). This payment can sometimes amount to several hundred dollars per month. Mortgage insurance does not benefit the borrower at all. It only provides insurance to the lender. To avoid having this mortgage insurance tacked on to a mortgage payment, the borrower must make sure not to borrower more than 80% of the total value of the property on any one loan. This is the reason that people often borrow up to 80% of the property value on the 1st mortgage and borrow any additional money that they need on a 2nd mortgage. Most home purchasers who do not have at least a 20% down payment of their own money will have to borrower an 80% 1st mortgage and then borrow what ever else they need for the purchase on a 2nd mortgage.

Safe 1st mortgages are those that have a rate and payment that is fixed for at least five years. Most 1st mortgages take 30 years to pay off. In the beginning of that 30 year period, the loan payment are rate will be fixed for some period of time. The longer this fixed period is, the safer the loan is. On average, a first-time buyers stay in their first home for a little more than 4 years. For this reason, most first-time homebuyers should not choose a loan that has a fixed period of less than five years. At the end of the fixed period, the loan's interest rate will move to the current market rate. In a worst case scenario, This could result in a very large jump in monthly payment.

A further risk factor is added by selecting a loan that has interest-only payments in the beginning. Normally this interest-only period last for five years. Many loans now have interest-only period of ten years as well. Five years is considered a safe period for interest-only payments. Even in this case, the homebuyer should consider whether or not they could afford the payment if they remain in the home more than five years and the payments become principal and interest. Interest-only periods of at least five years are not that bad for homebuyers. They give the home buyer a lot more flexibility in payments. The borrower can make additional payments toward principal if they want to, but they don't have to. The interest-only option allows homebuyers to qualify for more home that a fully-amortized payment (principal and interest) because the payment is lower.

 

2nd Mortgage Overview

2nd mortgages can have a fixed or a variable interest rate. Their total payment period are normally 20, 25, or 30 years. A fixed rate 2nd mortgage will have the interest rate fixed for the entire lifetime of the loan. The loan amount will be fixed as well. These are true fixed rate loans. These fixed 2nd mortgages are sometimes called HELOANs (Home Equity Loans).

A variable rate 2nd mortgage is usually a line of credit, just like a credit card. They are sometimes called HELOCs (Home Equity Line of Credit). They normally last for 20, 25, or 30 years. The interest rate will normally be the Prime Rate (8.25% at the time of this writing) plus some fixed margin. The interest rate on one of these types of loans will often be described in terms such as this, "Prime + 2%." The current interest rate on such a loan would be 10.25% (Prime rate, Which is currently 8.25%, + 2.00%). The trouble with these type of loans is the the Prime rate goes up every time the Fed raises raises. The Fed raises a rate that is called the Federal Funding Rate. The Prime Rate increases lockstep with increases to the Federal Funding Rate. Ina two year period, the Fed has raised the Prime Rate from 4.00% (Those were the days!) to over 8.00%. A homeowner with a $100,000 2nd mortgage tied to the Prime Rate saw their monthly mortgage payment increase by $354 during that time. That is only the increase on the 2nd mortgage payment. If the first mortgage had begun to adjust, that payment would have risen as well. It is recommended to get a 2nd mortgage with a fixed rate if possible.

 

 

 

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Brought To You By
Mark Harmon, Realtor

CalHFA Preferred Loan Officer
USA Realty and Loans

Brokerage Main Office
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San Diego, CA 92117