Financing Options & Definitions

Adjustable Rate Mortgage (ARM)
The initial interest rate on an ARM is lower than a fixed rate loan, so it requires lower monthly payments. The rate rises or falls at intervals, but within limits.

Ask about different term options like 3 year and 5 year options; these offer no rate adjustment until the third or fifth year, then annual adjustments after that. Desirable ARM's have low rate caps (ideal: 0-3% adjustable cap; 0-6% life-of-loan cap) and below-market rates for the first period. Expect to shop among several lenders for the best terms.

Fixed Rates
If you're more comfortable with the security of a fixed rate loan, opting for a term loan (typically between 15-30 years) may put monthly payments within reach. Many fixed rate mortgage plans are available and have different qualification and down payment requirements. Some examples of fixed rate loans include FHA, VA, Insured Conventional, Conventional, and USDA loans.

FHA Loan
Insured by the Federal Housing Administration, your loan (obtained through an established lender) requires lower downpayment than most other mortgages.

VA Guaranteed Loan
If you're an eligible veteran, the Department of Veterans Affairs requires no downpayment (up to a specific sale price) for a VA mortgage. Ask your lender for the current limits.

Private Mortgage Insurance
You insure your mortgage privately, to allow you to take out a mortgage with less than 20% downpayment. Your PMI covers your lender's risk (should you fail to make mortgage payments.)

Buydowns
At settlement, a third party (builder, seller or investor) agrees to put additional cash "up front" with a lender, in exchange for a lower interest rate to the buyer. Approaches vary among permanent buydowns, multi-year, and graduated plans. These rate subsidies can help you afford the home you want.

Graduated Payment Mortgage
The initial interest rate of a GPM is lower than a fixed rate loan and it has scheduled increases in following years - as your income presumably is on the rise.

Seller Take Backs
Some sellers are willing to consider seller financing (in several formats) designed to reduce buyers' payments. One format is a short-term second mortgage, secured by the house and accepted by the seller to help trim the buyer's downpayment requirements. Another is a long-term first mortgage but without the usual qualification standards.

Mortgage Assumption
When you assume an existing loan, your "downpayment" is the difference between the sale price and the loan balance. By finding an assumption with a high unpaid balance, you may reduce your downpayment. If the loan has a lower-than-market interest rate, you'll also reduce your monthly payments.

Co-Signed Loan
A loan co-signer can help you qualify for a larger loan.

Shared Equity
You buy your home with parent, relative, friend or other qualified investor who makes the downpayment. You share the purchase costs, the maintenance, the monthly payments -- and equity profits on sale.

SETTLEMENT STRATEGIES:
Still another solution to reduce your monthly payments is to find additional funds for a downpayment. Here are some suggestions to consider:

Seller Paid Closing Costs:
You ask the seller to in your purchase agreement to contribute funds toward your financing, down payment and/or closing costs. Check with your lender for limitations.
Gift:
Receive a gift from a family member documented by a "gift letter" stating no repayment is required (thus your debt burden is not increased.) Some lenders may require you to use some of your own money in addition to the gift.
Finance Closing Costs
Ask your lender if you can pay closing costs from your mortgage loan proceeds. This will free some additional cash for a downpayment.
Sale of Assets
If you own other property (real estate, jewelry, collectibles, automobile, etc.), securities (stocks, bonds) or other assets, they can be sold to make your downpayment.
Tax Refund
Buyers anticipating an income tax refund can use it to increase their downpayment funds, especially in the spring.
Life Insurance
If your life insurance has cash value, you may be able to borrow against it at a low interest rate, possibly without having to repay the loan -- and without jeopardizing your mortgage loan qualifications.
Securities
If you own bonds, an IRA, vested pension or profit sharing, some banks will lend you cash against these as collateral. The portfolio must be negotiable, although not immediately available.

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INFORMATION DEEMED RELIABLE, BUT NOT GUARANTEED.