Loan Options
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage (ARM) is a home loan with an interest rate that can change periodically, meaning your monthly payments may fluctuate. Typically, the initial interest rate is lower than that of a comparable fixed-rate mortgage. Once the initial period ends, the interest rate—and your monthly payments—can either decrease or increase.
How Does an Adjustable-Rate Mortgage Work?
The initial rate and payments in the first few years of an adjustable-rate mortgage (ARM) can differ significantly from those later in the loan’s term. Before committing to an ARM, ask your lender for the annual percentage rate (APR), which reflects the overall cost of the loan, including interest and fees. Comparing the APR to the initial interest rate can help you understand how much higher your costs might be after the initial period ends, even if interest rates remain stable.
ARMs typically have specific adjustment periods during which the interest rate and monthly payment can change. These adjustments usually occur on a predetermined schedule—monthly, quarterly, or annually. For example, a loan with a one-year adjustment period is called a one-year ARM, meaning the interest rate and payment can change once every year. Similarly, a loan with a five-year adjustment period is referred to as a five-year ARM.
The interest rate for an ARM is based on two main components: the index and the margin. The index reflects prevailing interest rates and is variable, while the margin is an additional fixed amount your lender adds. After the initial fixed-rate period ends, your monthly payments are calculated by adding the index to the margin.
It’s also important to note that caps—limits on how much the interest rate or payment can increase during adjustment periods or over the life of the loan—can influence these changes.
What is the Difference Between a Fixed-Rate and an Adjustable-Rate Mortgage (ARM)?
The key difference between a fixed-rate mortgage and an adjustable-rate mortgage (ARM) is that the interest rate on a fixed-rate mortgage remains the same for the entire life of the loan, while the interest rate on an ARM changes periodically based on the index and margin.
People are often attracted to ARMs because they typically start with a lower interest rate than fixed-rate mortgages. This initial rate period can last a few years or longer, depending on the loan. Once this period ends, the interest rate on the ARM will adjust periodically.
While ARMs can offer advantages, they also come with some uncertainties due to factors beyond your control, such as changes in the index. If you have any further questions about adjustable-rate mortgages, don’t hesitate to reach out.
FHA Streamline Refinance
An FHA loan is a government-backed mortgage insured by the Federal Housing Administration. These loans require lower minimum credit scores and down payments than many conventional loans, making them especially popular with first-time homebuyers. According to the FHA’s 2020 Annual Report, more than 83 percent of all FHA loan originations were for borrowers purchasing their first homes.
How Does the FHA Streamline Work?
According to the U.S. Department of Housing and Urban Development (HUD), the basic requirements for a streamlined refinance are as follows:
- The mortgage loan to be refinanced must be an FHA loan.
- The FHA mortgage loan being refinanced must be current.
- The refinance must provide a net tangible benefit to the borrower. The definition of net tangible benefit varies depending on the type of loan being refinanced and the interest rate and/or term of the new loan.
- If borrowers use a streamlined refinance, they cannot take out more than $500 in cash on the refinanced mortgage.
Streamline refinances can be offered in several ways. For example, lenders may offer “no-cost” refinances, where borrowers pay no out-of-pocket expenses. Instead, the lender might charge a higher interest rate on the new loan if the borrower opts not to pay the closing costs in cash.
In such cases, the lender covers any closing costs incurred during the transaction. According to FHA guidelines, lenders are not allowed to include closing costs in the new mortgage amount of a streamlined refinance. Simply put, an FHA streamlined refinance allows current FHA loan borrowers to lower the interest rate on their mortgage without having to meet an extensive list of criteria.
What Are the FHA Streamline Programs?
The FHA Streamline program is a refinancing option for current homeowners who have an FHA loan. If existing FHA borrowers decide to refinance their mortgage, they can choose between a five-year adjustable-rate mortgage (ARM) or a fixed-rate loan with a term of 15, 20, 25, or 30 years. This program can be utilized under certain conditions, such as:
- Today’s mortgage rates are lower than your current mortgage rate.
- Homeowners owe more on their mortgage than the home is currently worth.
The best refinancing option for you will depend on factors such as how much you owe, your financial situation, and how long you plan to stay in the home.
What Are FHA Streamline Refinancing Costs?
When refinancing through the FHA Streamline program, borrowers are typically required to pay closing costs. The key difference with streamline refinancing is that it does not require homeowners to pay for an appraisal. Homeowners can expect to pay between $1,000 and $5,000 in closing costs for an FHA streamline refinance.
However, this amount could be higher or lower depending on factors such as your new loan amount, down payment, and other variables. If borrowers make a down payment of less than 20 percent of the home’s value, their lender may require them to purchase private mortgage insurance (PMI). Lenders can charge this premium upfront and include it in the new loan estimate. It’s important to note that PMI only protects the lender in case the borrower stops making payments.
VA Loans Overview
A VA loan is guaranteed by the U.S. Department of Veterans Affairs. The loan itself isn’t actually made by the government, but the fact that it’s backed by a government agency makes lenders more comfortable offering these loans as they take on less risk than with a conventional mortgage. As a result, it’s possible to get a VA loan without a down payment and, sometimes, with looser credit standards.
How Does a VA Loan Work?
The VA loan process works similarly to any other conventional mortgage loan. Before lenders can approve applicants, they will need to verify the following:
- Current and past employment history
- Credit score
- Desired loan amount
- Gross monthly income
- Assets (bank accounts, retirement savings, etc.)
- Debts (credit cards, delinquencies, etc.)
- Previous homeownership
Since lenders will review your credit report, which includes your payment history and debts, they will calculate your debt-to-income ratio (DTI). DTI ratios give lenders a clearer picture of a potential borrower’s monthly income relative to their recurring debts. Typically, lenders prefer to see a DTI ratio of 41 percent or lower. However, many lenders have different standards for VA loan eligibility, and they will determine your eligibility based on your financial status and history.
Since the VA loan is guaranteed by the federal government, it provides eligible applicants with the following benefits:
- Requires no down payment (unless your lender deems otherwise or the purchase price of the home exceeds the allowed VA limit).
- Lenders offer competitive interest rates.
- Allows borrowers to pay off all or part of their loan in advance without penalty.
- The VA orders an appraisal on your behalf to ensure the home’s value is reasonable and aligns with current market conditions.
- If defects are found, the VA may assist you in hiring a contractor to resolve those issues.
However, it’s important to note that the VA does not guarantee the condition of the home you are purchasing; it only guarantees the loan. This is a common misconception, so do not assume that the VA will handle any damages or defects that need to be repaired. This responsibility will fall to the potential homeowner.
The Loan Must Be for an Eligible Purpose
There are many benefits when veterans finance a home with a VA loan. This mortgage loan has helped over 25 million veterans achieve the dream of homeownership. Not only does the VA provide financial mortgage aid to veterans, but it also offers the following benefits:
- For most applicants, no down payment is required. In comparison, an FHA loan requires a down payment of as little as 3.5%. However, FHA borrowers are required to purchase mortgage insurance, whereas VA loan borrowers do not have to pay this premium.
- Borrowers with a VA loan are not required to pay for monthly mortgage insurance.
- Lenders can offer competitive interest rates compared to other loans.
- No prepayment penalties.
- VA loans are classified as assumable mortgages (subject to lender approval).
- The VA loan program avoids placing veterans in foreclosed homes.
- There is a limitation on the buyer’s closing costs. With a VA loan, sellers can pay all the buyer’s closing costs and up to 4 percent in concessions.
What Are the Requirements to Obtain a VA Loan?
To obtain a VA loan, applicants are required by law to meet the following criteria:
- The applicant must be an eligible veteran who can prove their service.
- The loan must be for an eligible purpose.
- The veteran and their family must occupy the home as their primary residence.
- The applicant’s credit risk must be satisfactory.
- The veteran’s and spouse’s income must be verified as stable and sufficient to handle mortgage payments and other home-related costs.
Lenders will calculate your debt-to-income (DTI) ratio by reviewing your gross monthly income and monthly debts. Most lenders prefer a DTI ratio of 41 percent or lower to ensure that your income exceeds your existing debt obligations.
An appraisal is also required during a VA loan transaction. A VA appraisal is ordered to provide an accurate estimate of the home’s value compared to other homes in the area.
Lastly, there are specific service requirements that must be met to become eligible for a VA loan. Most military members, veterans, reservists, and National Guard members are eligible to apply for a VA loan. Even spouses of service members who died while on active duty may be eligible to apply.
Jumbo Loans Overview
A jumbo loan is a mortgage for an amount that exceeds the limits set by Fannie Mae and Freddie Mac, the government-sponsored enterprises that buy most U.S. home loans and package them for investors. If you’re buying a mansion — or just a regular home in a high-priced area like Silicon Valley — you might need a jumbo loan.
What Are the Benefits of a Jumbo Loan?
The main benefit for borrowers is that a jumbo mortgage allows you to borrow more than the limits imposed by Fannie Mae and Freddie Mac. For instance, if you want to borrow $1 million against a $1.5 million home, a jumbo loan makes it possible. Some borrowers prefer to finance more of the home’s cost rather than tying up cash, making the jumbo mortgage a useful financial tool and part of an overall investment strategy. You can still get a competitive interest rate and finance the home of your choice without being restricted by the dollar limit on conforming mortgages.
What Are the Jumbo Loan Requirements?
Just like a conforming loan, jumbo loans have a similar application and evaluation process. Mortgage lenders will consider your credit score, down payment amount, current debt, debt-to-income ratio, employment history, money left over after closing, and more.
Jumbo loans require borrowers to have an above-average credit score. This credit score gives borrowers access to the best loan options available. Remember, with a higher credit score, you will be offered better rates and terms. Money left over after closing, also known as reserves or post-closing liquidity, is closely examined by your mortgage lender.
If you are applying for a jumbo loan, lenders typically like to see 12 months of reserves after closing, with half in liquid assets (in a checking or savings account) and half calculated from retirement assets. Lenders can make exceptions if you have a low debt-to-income ratio and a high down payment.
