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Home Financing Options

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Finding a home financing option to meet your needs was once a simple matter of going to the bank and accepting the cookie cutter package offered. Today’s borrowers are able to change virtually any feature of the standard mortgage loan to create their ideal lending and payment structure. While all these additional choices are a gift to individuals with unusual circumstances, they can leave even the most knowledgeable borrower wondering which option is right for them.

Interest Only Home Financing

With standard home financing options, you repay a portion of your principle in addition to your accrued interest each month. Although it is a small portion of the payment that goes to principle in the note’s early years, you still make progress paying off the balance over time. An interest only mortgage option has the potential to lower your monthly payments by taking the principle balance out of the equation. Unless your interest rate is variable, your monthly payments remain the same because each reflects the amount of accrued interest and nothing else.

In declining housing markets, this equates to additional risk for the lender, so you may not have this option unless your mortgage is for far less than the home’s appraised value.

Adjustable Rate Home Financing

An adjustable rate mortgage (ARM) is a home financing option that allows many borrowers to purchase a home when they otherwise may be unable to afford the monthly payments. The lender locks in an interest rate for a set period, typically five or seven years. During the lock period, you’ll enjoy a lower rate than those who took the fixed rate options. After the lock expires, your rate fluctuates with the prevailing mortgage rates. If things are down, you can see a drop in payments; however, when rates experience a sharp increase, your rate can jump several percentage points.

Unless you can afford the payments at the highest rate, prepare to refinance the note before the lock expires or seek alternative home financing options.

Multiple Note Home Financing

Mortgage lenders often require you to purchase private mortgage insurance (PMI) when you put down less than 20 percent. To avoid PMI costs without spending additional time saving for the down payment, you can use multiple notes for your home financing needs. Your first mortgage is for 80 percent of the purchase price and the lender finds someone else to offer a secondary note for the part of the down payment you do not have.

While the second note is a higher rate than the first mortgage, this home financing structure may offer lower combined payments than you would pay with a single mortgage and PMI.

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