KNOW YOUR NUMBERS 4.1 Know Your Loan Options. In some cases the loan option may be clear. In others, you may need to weigh a few different loan types based on the security and flexibility the loans provide you. The lender will have the ability to supply you with an analysis of the different options quantifying the total cost of the loans over the period of time you may own the home. The choice of the loan program is always yours. However, it is the job of the lender to provide you with options. 4.2 Understanding Loans. Here is a brief summary of some loans: Fixed Rate Loan: The Fixed Rate Loan is fixed for the life of the loan which generally is 15 or 30 years. Some lenders are now offering 40 year fixed-rate loans. Conventional Loan: Conventional Loan: A Conventional Loan is not guaranteed or insured by the federal government and can be 'conforming' or 'jumbo'. A conforming loan is at or below the conforming loan limit, set annually by Fannie Mae and Freddie Mac. The current conforming limit is $417,000 in most areas of the country. A jumbo loan is one that is over the conforming loan limit. Jumbo loans generally carry higher interest rates and have more restrictive underwriting standards. FHA Loan: FHA Loans are available for primary residences only. FHA loans currently require a 3% down payment. The funds can come from a variety of different sources. The maximum loan amount is specific for the county in which the property is located. An FHA loan is insured by the federal government thus allowing more lenient underwriting. These loans are popular for first-time homebuyers, people wishing to make a low down payment and others who can benefit from the flexible underwriting guidelines. VA Loan: A VA loan is guaranteed by the U. S. Department of Veteran Affairs. VA loans require no down payment and are offered exclusively to the United States military personnel who are active, discharged or retired. Because the loan is guaranteed, there is no private mortgage insurance on a VA loan. Down Payment Assistance Programs: Some down payment assistance programs currently enlist the participation of nonprofit organizations to help buyers cover the costs of a down payment along with, in some cases, closing costs and other upfront cash requirements. Cash-to-close assistance provided by these programs generally falls in the range of three to six percent of the selling price of the home. AmeriDream and Nehemiah are among the more well known nonprofit organizations. Adjustable Rate Mortgage (ARM): In an Adjustable Rate Mortgage (ARM) the interest rate will likely be lower than a fixed rate loan initially. Once it begins adjusting, the rate can exceed the fixed rate loan. The initial fixed period of the loan can range from one month to 10 years making it attractive to people who plan to sell or refinance over that period of time. Once a loan begins adjusting, the new rate will be calculated based on an index and a margin. It is important for you to understand your index and margin and how these will impact your rate in the future should you still have the ARM when it starts adjusting. Interest-Only Loan: An Interest-Only Loan can be a feature of either a fixed-rate loan or an ARM. An interest-only loan allows you the option of making interest-only payments. Usually the loan allows interest-only payments during the beginning of the loan and up to the first 10 years or so. Then the loan will require a monthly payment resulting in paying off the remaining term of the loan. 4.3 Pre-Payment Penalty. A Pre-Payment Penalty will require the borrower to pay the lender a penalty if the loan is paid off or a large principal payment is made in a certain period of time after it was originated. These penalties can be 'hard' (will be owed if the home is sold or refinanced) or 'soft' (only owed if refinanced, but the property can be sold penalty-free). If the loan you are considering has any kind of pre-payment penalty, be sure you understand why it is necessary and the terms of the penalty.