Types Of Christian Mortgage Loans
Smart homebuyers should consider all types of Christian mortgage loans before settling on financing terms. Buyers want to find the best package with the best interest rate, the lowest down payment, and more importantly, the most affordable monthly note. A mortgage is a short- or long term loan extended by a financial institution to an investor or home buyer, which is usually paid in monthly installments. There are two major kinds of loans: fixed rate or adjustable rate. A fixed rate mortgage is extended over 15, 20 or 30 years at one interest rate, which does not fluctuate. Payments remain the same over the life of the loan. Adjustable rate mortgages, also known as ARMs, include an interest rate which may be initially lower than a fixed rate, but varies according to a pre-determined index regulated by fluctuating returns on the U.S. Treasury Bill. ARMs allow borrowers to qualify for types of mortgage loans with interest rates which can increase after several years, usually mounting to a higher house payment or increased balloon payment at the end of the term. But high-interest balloon payments can prove fatal, causing foreclosures when buyers are unable to meet escalating rates. Buyers would be wise to heed Biblical admonishment: "He that handleth a matter wisely shall find good: and whoso trusteth in the Lord, happy is he" (Proverbs 16:20).
Both of these types of mortgage loans, fixed rate and adjustable rate, are offered through several different lenders. Homes are traditionally financed through conventional mortgage lenders offering two options, one based on the potential homeowner's qualifying income, and the other based on the property's value. Generally, the first income-based loan is extended to homeowners, and the latter applies to investors seeking portfolio loans based on potential rental income. The Veteran's Administration guarantees loans to military personnel sometimes at 100% financing. The amount of a VA loan depends upon the service person's rank and time served and is based on a sliding scale. Different from other types of mortgage loans, the Federal Housing Administration (FHA) offers financing to home buyers and investors to purchase or rehabilitate housing for owner-occupancy or rental. Homeowners may also opt for second mortgages on existing property, either to borrow money for home improvements or to pay off student loans, medical and dental bills, or as a flexible line of credit. The drawback to having a second mortgage is a high interest rate and shorter term, usually 15 years. Carrying a second can be risky if owners are unable to make additional monthly payments and interest due to extenuating circumstances.
Within these two broad types of mortgage loans, fixed and adjustable rate, lie a myriad of financing options tailored to suit buyers of all socioeconomic strata. Buying a home is not for the feeble minded nor the weak at heart; and negotiating the right terms is like maneuvering through a minefield. Most homebuyers rely on knowledgeable mortgage brokers, financial advisors, and real estate agents to guide them through the process of finding a suitable loan that fits their individual income and specific niche market. In the long run, it will pay to take time deciding on financing terms and interest rates buyers may have to live with for a lifetime. ARMs were designed to help first time buyers obtain financing for homes at lower interest rates with payments increasing, ideally, as the buyers' income earning potential increased over time. No one, not even sub-prime lenders who leapt at the opportunity to offer ARMs to buyers who could not qualify for prime loans, anticipated the economic woes which led to the current housing market crisis in the United States. For that reason alone, today's buyers should seek the counsel of reputable and reliable brokers, banks, and lawyers before plunging into types of mortgage loans which can backfire later.
A word of caution: Borrowers should beware of financing that sounds too good to be true. Adjustable rate mortgages offered through sub-prime lenders over the last decade caught homebuyers off guard when interest rates went through the roof. According to statistics, an alarming number of U.S. homeowners with ARMs are facing foreclosure; and the resulting housing market crisis has rocked the nation, causing a ripple effect in other industries, especially building trades and real estate. Types of mortgage loans with fluctuating payments may be too risky, especially for those buyers with limited earning potential. A fixed rate loan may include a higher interest rate, but there are no surprises. "Better is little with righteousness than great revenues without right" (Proverbs 16:8).
The key to avoiding types of mortgage loans that can wreak future havoc, such as adjustable rate mortgages, is to thoroughly investigate all options and terms. Wary buyers should compare the initial interest rate and ask how often the rate can change. Adjustable rate mortgages should also specify a cap, or a limit on how much the rate can go up or down during any adjustment period. Having a cap enables buyers to plan and budget on fluctuating payments. In comparing a fixed rate loan, buyers should take a realistic look at whether or not payments can be easily managed without becoming delinquent. People sometimes tend to buy more house than they have money. Wise money managers may advise buyers to purchase the size home that budgets can easily accommodate at a manageable interest rate, then either refinance when interest rates decrease or take out a home equity loan to make improvements to the property. Adding on a room to a three-bedroom, two-bath tract house may prove more economical than obtaining loans for larger properties that require heftier monthly payments. In the long run, deciding on a fixed or adjustable rate mortgage is a matter of personal preference and prudent consumerism.
Christian Subprime Mortgage LoanA subprime mortgage loan is a product that charges a higher interest rate and higher fees than a prime mortgage. People with low FICO scores have a difficult time qualifying for traditional mortgages so the subprime market developed to provide a means for these people to purchase homes. FICO stands for Fair, Isaac Corporation, the company that calculates a numerical value for an individual's creditworthiness. Though the actual formula is a trade secret, it is based on such factors as employment and residential stability, record of meeting financial obligations, and amount of available credit. The three major reporting agencies, namely, Equifax, Experian, and TransUnion, also have their own formulas for determining creditworthiness, but the FICO is considered the industry standard. A low FICO score almost always represents someone who hasn't done a good job paying bills. (People who pay cash for everything are the rare exception. They may not have a FICO score at all.) A prime lender is unwilling to take the risk that the potential borrower will make monthly house payments. But the person may qualify for a subprime mortgage loan.
The subprime or non-prime market offers loans to people with poor credit histories at interest rates that are higher than a prime loan. The higher interest rate reflects the additional risk that the subprime lender is taking by lending money to someone with poor credit. Additionally, the fees on a subprime mortgage loan are higher because of the higher risk and because of increased marketing costs. At least, that is how the industry justifies the increased costs of its loans. Anyone with a mailbox knows that the industry markets aggressively in their search for potential borrowers. Promotional materials often encourage property holders to refinance for a higher amount than is owed on the first mortgage. By taking cash out of the home's equity, the marketing campaign announces, the homeowner can consolidate other debts or take a dream vacation. At one time, such advertisements even encouraged people to borrow up to 125% of a home's appraised value. The tide has turned, though, and after the falling housing market, legislation has been passed that has tightened the underwriting and disclosure requirements. With the new legislation, consumers will be better informed about the details of a subprime mortgage loan before they sign their name to the dotted line.
People with low credit scores aren't the only ones who have been caught up in the subprime market fiasco. A potential mortgage applicant who knows she has an excellent FICO rating is confident in applying for a loan through a prime lender. But someone with a middle score may not have this same confidence. Instead of shopping around, he may apply for a subprime mortgage loan and get caught with high interest rates and poor terms. But he may have been eligible for a prime mortgage since the prime lender looks at other factors in addition to the FICO rating. These include the size of the down payment, the ratios of house payment to gross income and total monthly debt to gross income, and the willingness and ability to provide additional documentation. Though it may take longer for someone with a FICO score in the middle range to be approved by a prime lender, the cost savings will be enormous. Even a one percent difference in an interest rate can increase a monthly payment by hundreds of dollars and practically all of that, at the beginning of the term, is going to pay the interest, not the principal. Over the life of the loan, the additional amount paid may be well over $100,000. Knowledge and good sense are financial protections. "When wisdom entereth into thine heart, and knowledge is pleasant unto thy soul; Discretion shall preserve thee, understanding shall keep thee" (Proverbs 2:10-11).
A popular subprime mortgage loan was a product called the 2/28 ARM (adjustable rate mortgage). The product started out with a fixed rate (which was still higher than the prime market) for the first two years of the mortgage. Typically, the interest rate adjusted upwards after the first two years and every six months after that with a cap of about 6%. This means that, given time, a mortgage that started out with an 8% interest rate could increase to a whopping 14%. As the rates went up, people found they couldn't continue making the monthly payments. They might attempt to refinance to a lower rate with better terms only to find out that there was a prepayment penalty for paying off the loan early. Meanwhile, the housing market began declining and the house was no longer appraising as high as it once did. Selling at a profit was no longer an option. As more and more people found themselves in these types of situations, the housing market continued its downward spiral. Banks began foreclosing and the property values continued to drop. Because of this recent crisis, the legislation was passed to give consumers more upfront information about the subprime mortgage loan documents they are asked to sign at closing.
Financial Christian experts suggest that potential borrowers begin shopping for loans with prime lenders. Even someone with a middle FICO rating may have the opportunity to explain the legitimate reasons for late payments found in her credit report (illness, temporary job loss, etc.). Different lenders have different underwriting requirements. Just because the applicant is turned down by one prime lender doesn't mean that another lender won't approve the application. An applicant who qualifies for a prime rate, but applies for a subprime mortgage loan will probably be given the subprime rate. The lender may not tell the applicant he is eligible for a lower interest rate because of the commission that will be lost. Consumers should be aware that a little time spent shopping and comparing now can save a them a great deal of money and stress in the future.