Introduction

General publications cannot provide specifics for every situation. However, here we'll outline 10 major financing options available in the vast majority of states. Be sure to check with your Abana Agent or Home Mortgage professional for details on each of these.

Use this guide as a handy primer for the major home financing terms you hear. With this knowledge, you can be more effective in the searching for, and in the negotiation of, the financing of your home.

Basic Terms

Principal

This is how much you are borrowing. It's usually the cost of the home, plus any costs you "roll into" the loan.

Interest

This is what you pay to the lending institution to use their money. It's given as a percentage rate. The lower the percentage rate, the lower the interest portion of the payment is, and therefore, the lower your payment.

P&I (Principle and Interest)

Principal and Interest Payment. This is your basic mortgage payment. This does not include taxes or insurance.

Term

This is how long the loan is in place, usually in years.

Down Payment

This is the amount of money you put into the loan up-front. This lowers your payment because you're actually borrowing less. You also tend to get a lower rate because the lender assumes less risk.

Personal Mortgage Insurance (PMI)

This is insurance for a lending institution against you defaulting on the mortgage. If you have it, it's applied to your payment with the lending institution being the beneficiary. It is typical on loans of 80% or more with low rates. Once the Loan to Value ratio is below 80% you can apply to have the PMI removed.

Loan to Value (LTV)

This is a ratio between the appraised value of a home versus the amount borrowed against it.

Financing Options

Adjustable-Rate Mortgage (ARM)

As the name implies, this is a loan where your interest rate can vary year to year depending on the market. Rates tend to start lower than the current market. Initial rates are usually set for a specified period (1,2,5, 7, etc..), so generally, you'll see these in terms of 2/28, 3/27, 10/20 loans, meaning (for 2/28) 2 years fixed, 28 years variable. These are usually subject to a cap where your interest can never be higher, and a yearly adjustment maximum.

Fixed-Rate 30-Year Conventional Mortgage

This is the most typical loan even today. With this loan, your P&I won't change over 30 years. This loan is favorable when rates are good and you plan to live in the home a long time. The initial rate will generally be higher than an ARM, but in the long term, there is stability and predictability.

Fixed-Rate 15-Year Conventional Mortgage

Just like the 30 year mortgage, but the term is 15 years instead of 30. The rates are usually a bit lower, but the payments are higher. The advantage here is, the loan is paid off sooner thus avoiding 15 years of interest payments. Overall, this has significant savings.

Two-Step Loan

This has features of both conventional and ARM loans. The rate is fixed for 5, 7 or 10 years and then adjusts to market interest rates for the rest of the loan. The initial rate is usually lower than a fix-rate conventional loan, but the second step is often subject to the lender's approval.

Federal Housing Authority (FHA) Loan

These loans are insured to the lender by the government. These usually help first-time homebuyers acquire a mortgage that they would not ordinarily be able to obtain. They usually require a smaller down-payment. There is a limit to the amount an FHA loan can have as principal. But generally, this is high enough to obtain a moderately priced home in many parts of the country.

VA Loan

Available to qualified Veterans, these loans are backed by the Department of Veterans Affairs. Usually these carry low or no down payment requirements. These are subject to the VA Mortgage funding fee of up to 1% of the loan amount, depending on the down payment.

Seller Financing

Sellers may take back a loan against their equity in the property in the form of a first or second mortgage. One approach to owner financing is to use a balloon mortgage calculated and repaid for 5 or 7 years as a 30-year mortgage, but then the balance of the loan is due in a lump sum.

Assumable Mortgage

The buyer assumes (takes over) an existing mortgage - usually FHA, VA or ARM - under its current terms. The lender must concur with the action. Sometimes, this means a lower rate to the buyer and some savings on the closing costs. The down payment makes up the difference between the sales price and the balance on the loan.

Wrap-Around Mortgage

This is where a new mortgage takes in an older assumable loan to help bridge the gap between a loan balance and a homes sales price. The interest rate is generally below market, but higher than the older loan. Payments are made to the new lender who then forwards part of that payment to the first lender. The term of this mortgage is the time remaining on the original loan.

Buy-Down Mortgage Plan

Seller, or a third party, provides additional funds to the lender in exchange for a lower rate for the buyer. Approaches vary amongst types which include: permanent buy-downs, multi-year plans, and graduated plans.