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Home Financing Options

Home Financing Options

This article provides information about home financing options, which are very necessary if you are planning to buy a new home.
Madhurjya Bhattacharyya
Nowadays, people are improving their house related lifestyles. Moreover, an increasing section of homeowners feel, that the best way to improve their assets, is to either invest in refurnishing their existing homes, or in buying a new property. Additionally, if you are still in the process of paying off your first home loan, you can still think of investing in a property, as there are refinancing choices available. With the kind of rates prevalent in the real estate market, it's the best time to invest in a new home, as property rates are bound to increase in the next few years.

There are several financial institutions and banks competing with each other, and offering customers with special schemes coupled with low interest rates. However, these offers might be confusing for the first-time home buyers. Thus, you need to ensure that you've got the best deal while buying your home, and you have the knowledge to search for good financing choices. You can search for such schemes on the Internet, but this might get confusing as loads of information is available by this method. The best way is to call up a few lenders and find out about the existing offers. Moreover, you can ask for a quotation from some banks, and compare the rates and options available to you.

Nowadays, you don't have to make a huge down payment; and also the closing cost is absorbed by the banks. When you have applied for home loans, your credit score would be checked. There are some banks which offer financing plans even in the case of bad credit ratings.

Different Financing Options

They are available in several banks, credit unions, loan associations, and mortgage companies. Each institution has its own rates, fees, and rules. While comparing lenders, make sure that you go through the offers made, as it may help you save a lot of money.

Conventional Home Finance
This includes fixed rate mortgage, adjustable-rate mortgage, and jumbo loans. Their detailed information is given below.

Fixed Rate Mortgage
Their interest rate remains constant with equal monthly payments, and you have to repay the amount within a fixed duration of time. Usually, the repayment period is of 30 years. The advantage of such loans is that they are predictable and are suited for people with a fixed monthly income.

Adjustable Rate Mortgages
Their rate of interest keeps on changing throughout the loan term. This plan is mainly used when the difference between fixed-rate and adjustable-rate mortgage is more than 2%.

Jumbo Mortgage
When the amount applied by a borrower exceeds a certain limit, it's called jumbo mortgage. This limit (currently USD 417,700) is set by the Federal Home Loan Mortgage Corporation and Federal National Mortgage Association. Due to the higher amount and the risks associated, the rates of interest are higher.

Balloon Mortgages
The interest rates are fixed for these options. Even though they are long term loans, they must be paid off along with a balloon payment. Usually, their duration is from five to seven years. The main advantage is that the interest rates are usually below the current market rates.

Federal Government Home Finance Programs

The following options are a part of these programs.

Federal Housing Administration insured loans
These are available when the Federal Housing Administration insures the loan. The down payment is less and you don't need to pay much for the closing costs. It might be as low as 3.5% of the price at which you purchased your home.

Veterans Administration guaranteed loans
They are available for veterans and are guaranteed by The U.S. Department of Veterans Affairs. In case of foreclosure, the administration acts as a guarantee for the lenders. They can be used for repairing, construction, refinancing, or house buying.

Farmers Home Administration loans
They are available to people living in rural areas with low income, and are guaranteed by the Farmers Home Loan Administration. Their rate of interest is quite low compared to the other mortgage options available.

Alternative Financing

The following options are a part of this program.

Lease/Purchase agreements
The borrowers can pay a deposit to the seller, and this amount is applied towards purchasing the house. After the lump-sum is paid, the borrower pays a fixed amount for each month. This agreement is helpful for buyers who are not in a state to buy a property.

Installment Contract
Under this plan, buyers and sellers reach an agreement, wherein the amount of down payment, term, and interest rates are mentioned. These contracts may be long-term or short-term, and may consist of balloon payment.

Equity Financing
Under this plan, a new property can be purchased by borrowing against a part of the equity, for their current home. A six-month period is secured in which no monthly payments are required, and the money saved is used to purchase a new home. When the current house is bought by someone else, the previous loan is paid off. In case the property does not get sold-off within this period, the loan may be renewed, or the buyer may choose alternative options.

Disclaimer: This article is for reference purposes only and does not directly recommend any specific financial choices.