Alternative Home Financing

    Lease/purchase agreements: Borrowers can lock in the price of a house today and postpone financing for 12 to 18 months with these agreements. The borrower gives the seller a deposit which is applied to the purchase and makes monthly rental payments. Lease/purchase agreements are used by sellers who want to keep a home occupied and receive rental money after they've moved out, and by buyers who are not in a position to commit to a property at a particular time.

    Installment contract: Buyers and sellers work out a contract which states a down payment, interest rate and term. Some contracts have long terms; others are short-term with balloon payments. Regulations about title transfer in a contract sale vary from state to state.

    First mortgages from relatives or others: Sometimes relatives or private investors will purchase a home outright then offer a borrower a first mortgage. The terms are worked out to the mutual satisfaction of both parties. Note: The Internal Revenue Service will impute higher rates on the lender for loans arranged below market rates.

    Second mortgages: These are used when a borrower needs additional financing to buy a home. This mortgage may be financed by the seller, another lender, relative or investor, and terms are negotiated between buyer and lender. Often, second mortgages are used when a borrower assumes a guaranteed first mortgage with a lower interest rate and needs to make up the difference between the loan and the sale price.

    Equity financing: An equity plan allows buyers to buy new homes by borrowing against a portion of the equity in their present home. A six-month "bridge" is secured on which no monthly payments are required and that money is used to purchase the new home. When the present home sells, the loan is paid off with the proceeds of the sale. If the home doesn't sell within six months, the owner may renew the loan or choose from other "back-up" options.

    Pre-approval Process

    • 1. You will know in advance what your payments will be.
    • 2. You won't waste time considering homes you cannot afford.
    • 3. You can select the best loan package without being under pressure. There are many options to choose from in today’s market.
    • 4. Sellers may find your offer to purchase move favorable if they know in advance of your ability to secure financing. This may make your offer more competitive if you are in competition with other offers.
    • 5. Peace of mind!

    Mortgages at a Glance

    Below is a brief synopsis of the types — and the pros and cons — of some of today's most popular mortgage loans.
    • 30-Year Fixed-Rate: A long-term loan in which principal and interest are amortized over 30 years; both interest rate and amount of monthly payment remain unchanged for life of the loan.
      • Advantages: Considerable tax benefits, especially in early years. Payments never rise, regardless of inflation.
      • Drawbacks: Slow equity build-up.
      • Comments: The most common mortgage in the U.S., a particularly good investment when rates are low.
    • 15-Year Fixed-Rate: A long-term loan in which principal and interest are amortized over 15 years; both interest rate and amount of monthly payment remain unchanged for life of the loan.
      • Advantages: Usually lower interest rate than 30-year. Faster equity build-up. Less interest paid out over life of loan.
      • Drawbacks: Higher monthly payments; less tax-deductible interest.
      • Comments: Good option for buyers whose income will rise and/or when rates are expected to drop.
    • ARM (Adjustable Rate Mortgage): A mortgage whose rate changes over time according to terms specified by the lender, usually according to short-term Treasury Bill rates.
      • Advantages: Low initial interest rate, sometimes below market. Payments may decrease over time.
      • Drawbacks: Payments may increase over time. Risky if rates rise significantly.
      • Comments: Good option for buyers whose income will rise and/or when rates are expected to drop.
    • FHA/VA Mortgage: Government-insured or guaranteed mortgages that can make purchase more affordable than conventional loans.
      • Advantages: Little or no down payment required. Marginally better rate than conventional 30-year mortgages.
      • Drawbacks: Lower limits on the maximum that can be borrowed. VA requires current or past military service record.
      • Comments: Good option for first-time buyers with little funds to invest in a down payment.
    • GMP (Graduated Payment Mortgage): A fixed-rate mortgage offering low initial monthly payments that increase by a predetermined amount, then level off after about five years.
      • Advantages: More affordable payments for first few years. Unlike ARMs, buyer knows up front how much payments will rise in the future.
      • Drawbacks: Slower equity build-up. Buyer's income may not rise in proportion to payments.
      • Comments: Another good choice for buyers who expect income to rise after home is purchased.
    • Balloon Mortgage: A short-term (3-5 year) loan, usually at a fixed rate. Paid back in equal, monthly payments and a final "balloon" payment for the remaining balance.
      • Advantages: Lower monthly payments. Full tax benefits. Little or no equity build-up.
      • Drawbacks: Monthly payments are often interest only. Balloon payment usually requires refinancing or selling the house.
      • Comments: Designed for buyers who plan on moving within a few years and/or are confident in the short-term appreciation of a property.

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