Loan Options
When it comes to home loan options, one size simply does not fit all. Your home purchase is a major investment into one of the most valuable assets you'll ever own.
At Paragon Mortgage Services, our team is on a mission to truly serve our clients with the best financing options available. We provide and explain all of the loan options and scenarios to our clients so that they can feel comfortable and confident in the home buying process.
The same is true for refinance options. There are a variety of refinance loan products available ranging from cash out, HELOC, to HECM. Presenting all the options and tailoring the right refinance to fit our clients' financial goal is our expertise and is always our highest priority.
Read more below to learn more about some of the common types of home loans, benefits, and requirements.
A conventional loan is any mortgage loan that is not insured or guaranteed by the government (such as under Federal Housing Administration, Department of Veterans Affairs, or Department of Agriculture loan programs).
Credit: https://www.consumerfinance.gov
An FHA loan is insured by the Federal Housing Administration, a federal agency within the U.S. Department of Housing and Urban Development (HUD). The FHA does not loan money to borrowers, rather, it provides lenders protection through mortgage insurance (MIP) in case the borrower defaults on his or her loan obligations. Available to all buyers, FHA loan programs are designed to help creditworthy low-income and moderate-income families who do not meet requirements for conventional loans.
FHA loan programs are particularly beneficial to those buyers with less available cash. The rates on FHA loans are generally market rates, while down payment requirements are lower than for conventional loans.
Some of the other benefits of FHA financing:
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Only a 3.5 percent down payment is required (with FICO© score of 580 or higher)
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Closing costs can be financed
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Lower monthly mortgage insurance premiums and, under certain conditions, automatic cancellation of the premium
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More flexible underwriting criteria than conventional loans
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FHA limits the amount lenders can charge for some closing cost fees (e.g. the origination fee can be no more than 1% of mortgage)
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Loans are assumable to qualified buyers
VA guaranteed loans are made by lenders and guaranteed by the U.S. Department of Veteran Affairs (VA) to eligible veterans for the purchase of a home. The guaranty means the lender is protected against loss if you fail to repay the loan. In most cases, no down payment is required on a VA guaranteed loan and the borrower usually receives a lower interest rate than is ordinarily available with other loans.
Other benefits of a VA loan include:
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Negotiable interest rates
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Closing costs are comparable and sometimes lower - than other financing types
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No private mortgage insurance requirement
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Right to prepay loan without penalties
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The Mortgage can be taken over (or assumed) by the buyer when a home is sold
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Counseling and assistance available to veteran borrowers having financial difficulty or facing default on their loan
​Although mortgage insurance is not required, the VA charges a funding fee to issue a guarantee to a lender against borrower default on a mortgage. The fee may be paid in cash by the buyer or seller, or it may be financed in the loan amount.
The Rural Housing Service, part of the U.S. Department of Agriculture (USDA) offers mortgage programs with no down payment and generally favorable interest rates to rural homebuyers who meet the USDA’s income eligibility requirements.
Credit: https://www.consumerfinance.gov
What does it cost to refinance? What are the benefits of refinancing?
Ever heard the old rule of thumb, you should only refinance if your new interest rate is at least two points lower? That may have been true years ago, but with refinancing dropping in cost over the last few years, it's never the wrong time to think about a new loan! Refinancing has a number of benefits that often make it worth the up-front expenditure many times over.
When you refinance, you might be able to lower your interest rate and monthly payment -- sometimes significantly. You might also be able to "cash out" some of the built-up equity in your home, which you can use to consolidate debt, improve your home, take a vacation -- whatever!
With lower rates and balances, you might also be able to build up home equity faster with a shorter-term new mortgage.
All these benefits do cost something, though. When you refinance, you're paying for most of the same things you paid for when you obtained your original mortgage. These might include settlement costs and other fees, an appraisal, lender's title insurance, underwriting fees, and so on.
You might have to pay a penalty if you refinance your previous mortgage too quickly. That depends on the terms of your existing mortgage. These penalties are illegal in some places, and more often than not when you have one of these penalties on your current mortgage it applies only for the first year or two. We'll help you figure it out.
You might pay points to get a more favorable interest rate. If you pay (on average) three percent of the loan amount up front, your savings for the life of the new mortgage can be significant. You should be aware that the IRS has recently said that points paid for the purpose of refinancing your mortgage cannot be deducted in their entirety in the year you pay them, unless the refinanced loan is primarily for home improvements. Consult your tax professional before deducting points you pay on your new mortgage from your federal income taxes.
Speaking of taxes, if you lower your interest rate, naturally you will be lowering the amount of mortgage interest payments you can deduct from your federal income taxes. This is another cost that some borrowers consider. We can help you do the math!
Ultimately, for most people the amount of up-front costs to refinance are made up very quickly in monthly savings. We'll work with you to determine what program is best for you, considering your cash on hand, how likely you are to sell your home in the near future, and what effect refinancing might have on your taxes.
A home equity line of credit (HELOC) is a line of credit that allows you to borrow against your home equity. Equity is the amount your property is currently worth, minus the amount of any mortgage on your property.
Unlike a home equity loan, HELOCs usually have adjustable interest rates.
For most HELOCs, you will receive special checks or a credit card, and you can borrow money for a specified time from when you open your account. This time period is known as the “draw period.” During the “draw period,” you can borrow money, and you must make minimum payments.
When the “draw period” ends, you will no longer be able to borrow money from your line of credit.
After the “draw period” ends you may be required to pay off your balance all at once or you may be allowed to repay over a certain period of time. If you cannot pay back the HELOC, the lender could foreclose on your home.
Credit: https://www.consumerfinance.gov
A second mortgage or junior lien is a loan you take out using your house as collateral while you still have another loan secured by your house.
Credit: https://www.consumerfinance.gov
Home Equity Conversion Mortgage
Also known as a reverse annuity mortgage. It allows home owners (usually older) to convert equity in the home into cash. Normally paid by the lender in monthly payments. HECM's typically do not have to be repaid until the borrower is no longer occupying the home.
Reverse mortgages (also called home equity conversion loans) enable elderly homeowners to tap into their equity without selling their home. The lender pays you money based on the equity you've accrued in your home; you receive a lump sum, a monthly payment or a line of credit. Repayment is not necessary until the borrower sells the property, moves into a retirement community or passes away. When you sell your home or no longer use it as your primary residence, you or your estate must repay the cash you received from the reverse mortgage plus interest and other finance charges to the lender.
Most reverse mortgages require you to be at least 62 years of age, have a low or zero balance owed against your home, and keep the property as your principal residence. Additionally, the homeowner is required to maintain the property, and continue to pay homeowners insurance and property taxes, on-time and as-agreed.
Reverse mortgages are ideal for homeowners who are retired or no longer working and need to supplement their income. Interest rates can be fixed or adjustable and the money is nontaxable and does not interfere with Social Security or Medicare benefits. Your lender cannot take property away if you outlive your loan nor can you be forced to sell your home to pay off your loan even if the loan balance grows to exceed property value.