If you are wanting to buy a home, purchase that scenic lot overlooking the lake to build your dream residence, invest in a rental property to earn some passive income, or finance office space for a business venture, the chances are you will need to borrow money to make that happen. Few people have the resources available to purchase a property outright by simply writing a check or slapping down piles of cash. If you are one of those fortunate few, congratulations! We salute you, envy you, and secretly want to be you. But for the rest of us, making purchases of that magnitude requires taking loans to turn that dream of owning property into a reality.
After finding that perfect property, the next step is to figure out how to pay for it. There are many factors involved in determining how much money you qualify for and what type of loan is best for your situation. Several factors are important when applying for a loan, including the size and percentage of the down payment, your credit score, the current interest rates, and the type and term of the loan.
In the end, the most important decision will be determining what type of loan will suit your individual needs and provide the greatest financial benefit. With so many financial implications involved, it is in your best interests to have a real estate transaction attorney on your side who can explain your options and prevent costly mistakes.
Here is a brief overview of some of the most common types of loan options you should consider or that a real estate transaction attorney can help you obtain!
1 – Conventional Fixed Rate Loans
Typically fixed rate loans have terms of 30-years, 20-years, or 15-years. For these types of loans, once the rate is set, it won’t change for the life of the loan. This is particularly helpful when rates are low and you “lock in” at that rate for the duration of the loan. Your rate is secure even when the interest rate goes up. If your loan carries a high interest rate, and rates begin to come way down, you still have the ability to refinance your loan at the lower rate.
A 30-year loan is spread out over a longer period of time, which means your monthly payments will be considerably less than a 15-year term, making it more affordable.. The interest rate is slightly higher for longer term loans, which over time can be significant.
For example, a home purchased for $600,000 with a 20% down payment would have a loan amount of $480,000. The principal and interest payment for a 30-year loan at 7% ($3,193/mo) compared to a 15-year loan at 6.25% ($4113/mo) is about $1000 less per month, but will cost nearly $400,000 more over the life of the loan ($1,149,480 over 30-year versus $740,880 over 15-years).
Since 30-year mortgages have lower monthly payments, most home buyers prefer them over 15-year mortgages. However, considering the tremendous upside of a 15-year mortgage, if you are willing to bite the bullet and make higher monthly payments you will 1) build equity faster in your home, 2) own your home outright sooner with no monthly mortgage payments, and 3) ultimately save hundreds of thousands of dollars.
2 – Adjustable Rate Mortgages (ARM) Loans –
The rate on an adjustable rate mortgage, or ARM, adjusts upward or downward depending on the market index, which fluctuates according to the ever-changing economy. There are lower interest rates at the outset of these loans, and they may decrease over time, but they may also increase over time, putting stress on your monthly budget. Fortunately most ARMs have a 2% periodic and/or 5% lifetime cap increase helping to minimize any substantial risk. If you don’t intend to stay in your home forever and are willing to accept the risk of potential rate hikes in exchange for a lower interest rate, this might be an option for you.
3- Interest-Only Loans
Interest-only loans differ from traditional loans in that the borrower only pays interest during a specified period of time, unlike a traditional loan that consists of both principal and interest. A loan that pays only interest does not pay down the principal balance during the initial period. However, payments will be much lower since only interest is being paid.
The downside is that the original loan amount remains unchanged until the principal starts being paid, and there is no equity built up (unless the value of the house increases). The borrower may also struggle to make regular monthly payments once the interest-only period ends if he or she is not prepared.
4 – FHA Loans
An FHA loan is a government funded loan backed by the Federal Housing Administration to help individuals and families with lower income or limited credit history become homeowners. The upsides of an FHA loan are that they require a lower down payment (a minimum of 3.5%) compared to conventional loans (a minimum of 20%), and are more lenient when it comes to credit criteria. Borrowers with lower credit scores have a higher chance of qualifying for an FHA loan than some other loans. The subsequent cost of a lower down payment, though, is that you will have to pay monthly private mortgage insurance (PMI) until the 20% equity threshold is met which could take several years.
5 – VA Loans
The Veterans Affair Loan is available to military personnel, veterans, and surviving spouses. VA loans are insured by the U.S. Department of Veterans Affairs and designed to help veterans and active-duty military personnel finance the purchase of a home with favorable terms and conditions including:
- No down payment
- Lower interest rates
- No private mortgage insurance (PMI)
- Flexible qualification requirements
- Closing cost assistance
The VA loan offers many advantages not available with other types of loans and far outweigh any disadvantages. If you have served or are currently serving in the military and looking to purchase a home, this is by far your best option!
6 – Jumbo Loans
There is a reason they call them “jumbo” loans! Jumbo loans are used to finance the purchase of high-priced homes and properties in areas where the cost of housing is higher. In comparison to standard loan limits, these loans are typically higher than those offered by government-sponsored companies such as Fannie Mae and Fannie Mac.
Due to the greater amount of risk the lender assumes, these loans typically have higher interest rates. As these loans have higher limits, borrowers need to provide more documentation to demonstrate their creditworthiness. In cases involving property values of this magnitude, it is recommended to seek the assistance of an experienced real estate transaction lawyer.
7 – Construction Loans
A construction loan is a type of loan that is specifically designed for financing the construction of a new building or home. It provides the money to cover the costs of purchasing the land, constructing the building(s), and making any necessary improvements. Construction loans are usually short-term loans and tend to have higher interest rates compared to traditional home loans. A construction loan is typically disbursed in stages or “draws” as work is completed. Borrowers usually refinance their short-term loans into long-term loans once construction is completed.
A construction loan can benefit various individuals involved in the construction process. Here are some examples:
- Homeowners who want to build a new home or renovate an existing one
- Real estate developers who want to fund large-scale construction projects such as residential or commercial developments.
- Contractors who take on large construction projects
- House flippers who buy properties with the intention of renovating and reselling
- Commercial property owners looking to construct or expand commercial properties, such as office buildings, retail spaces, or warehouses,
8 – USDA Loans
Also known as a USDA Rural Development Loan, this type of loan offered by the United States Department of Agriculture (USDA) is designed to promote homeownership in rural areas. These loans are designed to assist low to moderate-income borrowers who may not qualify for conventional financing.
There are two main types of USDA loans:
- USDA Direct Loan: This program provides loans directly from the USDA to eligible low- and very-low-income borrowers. The interest rates on these loans are typically lower, and no down payment is required.
- USDA Guaranteed Loan: This program involves working with approved lenders who offer USDA loans to eligible individuals. The guarantee by USDA makes it easier for borrowers to secure affordable financing with competitive interest rates and low or no down payment.
To be eligible for a USDA loan borrowers must meet certain criteria, such as income limits based on the location of the property, as well as demonstrate the ability to repay the loan. Additionally, the property being financed must be located in a designated rural area as defined by the USDA. For individuals looking to purchase or refinance property in rural areas USDA loans can be an attractive option as they offer favorable terms and reduced upfront costs.
Why Do You Need A Real Estate Transaction Attorney To Help You Decide?
Real estate isn’t easy, especially if you’ve never purchased property before. Or maybe it’s not your first time, but you had a negative experience or felt taken advantage of by the seller, agent, or lender. With so many variables and options, it’s easy to understand why real estate transactions can be so confusing. Your loan options should be fully understood and you should select the best loan for your circumstances.
Real estate transaction attorneys can provide a range of valuable services during the loan process. Here are four ways they can assist you:
- Loan Document Review: Attorneys can carefully review loan documents to ensure they are accurate, complete, and in your best interest. They can identify any problematic clauses or terms that may be disadvantageous to you.
- Negotiating Terms: Attorneys can negotiate better loan terms with lenders on your behalf. They can advocate for lower interest rates, reduced fees, or flexible repayment options.
- Due Diligence: Attorneys can perform thorough due diligence on the property and the loan, including reviewing property titles and surveys and identifying any potential legal or financial issues that could affect the loan or property.
- Closing Assistance: By ensuring all necessary documents are prepared and executed properly, attorneys help to ensure the closing process runs smoothly. In addition to reviewing the settlement statement, they can also address any legal concerns or questions that may arise during the closing.
Making a decision about which loan to choose isn’t something to be taken lightly. In fact, choosing the best loan type for your circumstances could save you tens of thousands or even hundreds of thousands of dollars, whereas choosing the wrong loan could be equally costly. Whether you need help deciding which option best suits your needs or just want to make sure the process goes smoothly without incident, a proven real estate transaction attorney can be a valuable resource. Call The Law Office of Patel & Cardenas today to see how we can assist you.