Today’s post concludes my mortgage series, which I hope has been educational and helpful for you. In my experience as a Realtor, the financial side of the transaction is often the most daunting for many people. It doesn’t have to be though. If you ever have questions or concerns that your agent cannot address, go to your loan officer. If you keep one piece of information from all of these posts, make sure it is this: your loan officer is there to help you. Ask questions, share worries, and stay involved so you are comfortable with all decisions regarding your finances. You will feel so much more empowered and confident buying or selling a home when you put your money matters first.
Now, as I step off my Realtor soapbox, let’s get to today’s topic. This post in the mortgage series outlines three types of financing that aren’t as common but might be a great option in certain situations.
The Jumbo Loan
If a borrower is requesting a loan amount that exceeds the mortgage industry’s conventional mortgage cap, the Jumbo Loan is a good option. Typically, this type of financing is secured to purchase a home above $500,000. The conventional mortgage is currently at $417,000 (it is reviewed and adjusted each year), so if a borrower needs to borrow more than that amount to purchase a home, he or she would need to look into a Jumbo Loan. At this level of lending, terms of the loan tend to be a bit more stringent because the lender is taking a higher risk in loaning a high amount of money, plus these loans are not secured by Fannie Mae or Freddie Mac. A Jumbo Loan usually requires at least a 5% higher down payment than a conventional loan, so borrowers should expect to have a down payment of 10%-25% depending on lender requirements. Additionally, a Jumbo Loan carries a higher interest rate, sometimes up to 1.5% higher than conventional rates. While that doesn’t seem like much, it can change the monthly mortgage payments on a $500,000 loan quite a lot, so be sure to work through your numbers carefully before committing.
The Bridge Loan
I have encountered many clients who have difficulty understanding the idea of a Bridge Loan. If you think about it as literally “bridging the gap” between financing options, that might help. The Bridge Loan is utilized while a person or company secures a permanent financing option or removes an existing financial obligation like an existing mortgage. For example, if a family finds a new home they want to purchase before they sell their current property, they can apply for a Bridge Loan to secure immediate cash flow. These loans are short term (typically one year) and have high interest rates compared to other types of loans. They also must be backed by some type of collateral such as a piece of real estate. Lenders require these additional guidelines because they are taking a risk in loaning to a borrower taking on two mortgages; they are just trying to protect their interests should the borrower lag in payments or default. If you’re very well-established financially, this is a fantastic short-term option in many situations. Just be sure you have excellent credit, and a low debt-to-income ratio. Another consideration? A Bridge Loan only covers up to 80% of the combined value of the two properties, so it is in your best interest to build up significant equity and a well-padded savings account before securing this type of loan. Talk at length with your loan officer about this lending option.
The Balloon Loan
At first glance, the Balloon Loan looks very similar to a 30-year fixed rate loan. Interest rates remain low, comparatively speaking, as well. The monthly mortgage payments are calculated the same way, but after a period of five to seven years, the outstanding balance of the loan must be paid in full. That means low initial payments, but at the end of the term of the loan, a borrower could owe tens or hundreds of thousands of dollars. Who would ever apply for that type of financing? Well, if a buyer is incredibly self-disciplined and ready to make that large payoff payment at the end of the loan period, their mortgage is paid off and they own the home. While that scenario happens on occasion, a more likely setting involves a borrower using this loan when he or she anticipates a major cash flow, like an inheritance, stock cash out, or another sale of some magnitude. Generally, if someone secures a Balloon Loan, he or she can validate that a large sum of money is imminent, but if that doesn’t happen, some Balloon Loans carry the option to refinance at the end of the term. Just remember that refinancing does require some investment and closing costs.
I sincerely hope that this post, along with the others in this series, have all been informative and helpful. The mortgage process does not have to be overwhelming or scary with a little self-educating and the right local loan officer. If you’re working through the preapproval process, best of luck and enjoy shopping for your new home sweet home!