Denver Real Estate and Investment Loan Programs
An important aspect in buying a new Denver home is understanding and choosing the right type of mortgage that fits your needs. There are currently multiple loan options to chose from, each program having advantages and disadvantages, making the right choice is dependent on your goals for the home. This guide will help provide you with the basics to understand your options.
Meeting and consulting with a lender early in the home buying process puts you ahead of the game. They can explain the various types of home loan programs, the interest rate, and the monthly payment for each mortgage program. The lender can also let you know what type of mortgage and how much you can borrow based on your current financial situation. In many instances there will be a difference between what you think you can afford to borrow and what the bank is willing to lend you. Fully understanding and knowing how much the lender is willing to lend you and how much you are willing to borrow is important.
Below is a list of the most common mortgage programs you may want to consider. Communication between yourself, your Denver Realtor and the lender will help both yourself and your lender to understand your needs and guide you to making the right decision for you and your situation.
Standard Fixed Rate Mortgage (FRM)
The fixed rate mortgage sets the standards for current mortgage models. It is very easy to understand, very safe, and has been around the longest of any of the current mortgage programs. This program keeps the interest rate fixed ensuring your payments also stay fixed over the entire period of the loan. This program is perfect for home owners who plan to stay in their home for a long period of time, interest rates can be very affordable with this program.
Adjustable Rate Mortgage (ARM)
The interest rate with this program periodically rises and drops based on different market indexes. You will be assuming risk if the market justifies the rate increasing, but can also tremendously benefit if the market justifies the rate to fall. This loan program is popular with home owners who only plan on being in the home for for a short period of time.
There are two main factors that go into determining the rate you pay, the index and the margin. The index rate is set by market forces and made public by a neutral third party. Margin is the number of percentage points that is added to the index as agreed upon with the loan program, this is how your adjusted rate is determined. Multiple indexes exist and each has its own way of determining fluctuation. CMT, LIBOR, MTA, COFI are examples of the indexes that are used for these loan programs.
It is very important to ask if and what are the limits to what the rate can be raised for the ARM at each review and over the entire life of the mortgage. Limits on a rate increase are known as "caps", these caps are essential so you will have the ability to predict how your rate and monthly mortgage payment could change.
Convertible Option
This mortgage program begins as an adjustable rate mortgage, but also has an option to convert the loan over to a fixed rate mortgage at certain points in the loan. Good questions to ask the lender about this program would be: At what point are you allowed to convert? How many times during the life of the loan do you have the option to make the conversion? What type of fees are involved to make the conversion? What are the lenders current rate of conversion?
Graduated Payment Mortgage (GPM)
The GPM program allows the owner to start out out with smaller monthly payments and then slowly raise the monthly payment over a 5 to 10 year period. Once the payments are fully matured and are at the high end of the term, the rate and payment then becomes fixed for the remaining life of the loan. For some buyers who are expecting a steady increase in monthly salary, this program can be ideal for their situation.
Growing Equity Mortgage (GEM)
For home buyers who are looking to pay off their mortgage faster than average, but are concerned with committing to the shorter term fixed payment schedule, this program could be ideal. The main advantage to this program, the interest rate is fixed and the monthly principle payment is increased according to an agreed upon schedule. This option is meant to pay down the principle balance and the mortgage is paid down quicker.
Federal Housing and Veterans Administration Loans (FHA/VA)
Both the Veterans Administration and the federal housing Administration has a large selection of mortgage programs to chose from. Adjustable rate and fixed rate mortgages are amongst the most popular. A popular aspect to these loans are that they allow for low to no money down terms and can, in some cases be assumable by future home buyers. Only buyers who served in the military are qualified for the VA loan program, however all FHA programs are opened to the general public as long as they can qualify for the loan. Keep in mind that both these mortgage programs have limits relating to moderately priced homes through out the country. Consult with your mortgage professional for all the possibilities FHA/VA has to offer.
Reverse Annuity Mortgage (RAM)
As a newer loan program to hit the market, the Reverse Annuity Mortgage (RAM) is a good option for certain individuals. This program was designed for senior Americans, especially retirees living on fixed incomes, this option uses the equity in their free and clear residence which is used as a liquid asset. The RAM was developed to help supplement older american homeowners' income.
The financial institutions who offer the RAM program will get an appraisal on the property and makes the loan based on a certain percentage of its actual market value. The property then secures the loan allowing the homeowner to maintain ownership. The bank then pays the owner a monthly payment usually to equal the amount of equity they currently have in their home.
A huge advantage to this type of loan program is that the home owner will receive a tax free monthly income. This income will be available for life or until the home is sold and the home owner moves. The amount of and the schedule of the payments is based on the equity in the home and the age of the home owners. Like any loan program there are going to be risks involved. If and when the owner decides to sell the home and move, the equity in the home may not be there and put a damper on the home owners plans. The lender probably will only grant this option based on the current value of the home and will not take any future appreciation on the home into consideration.
As a borrower, you have many options available to try and meet your needs. Consulting with your real estate agent or lender can make understanding these options easier and more clear. As a good rule of thumb, you should always take the time to learn all the fine details about these programs before making your choice. The professionals at Urban Synergy Realty would be happy to sit down and explain in detail all of the options mentioned above.
