How To Pick The Perfect Loan in Today’s Market

A lot has been written about interest rates and credit scores but few people focus on how to pick the perfect loan. While it might not sound like the most exciting part of purchasing a short sale property, it is one of the most important decisions you are ever likely to make.  As millions of Americans have already learned, obtaining the wrong loan can be a very costly decision. Fortunately, it’s relatively simple to secure a great loan that works well for your individual situation once you are aware of all your options. Follow these quick steps to help find your perfect loan:

1. Determine your down payment. The larger your down payment the more options you will have available but always leave a little additional cash for emergencies and other needs.

•    0-5 Percent Down Payment: VA loans for veterans or Vendee loans for foreclosures.

•    3.5 – 5 Percent Down: FHA or HUD loan for purchase of primary residence only.

•    5 to 10 Percent Down: Conventional Loan with strong credit score.

•    20 Percent Down: Conventional Loan without PMI or inferior credit score.

•    20 to 30 Percent Down: Investment loans, vacation or second homes.

2. Determine the best term.  Right now fixed rate loans are at or near historic lows so if you intend to hold the property for any length of time, it’s a good idea to take a serious look at 15 to 30 year terms. Interest only and ARM (Adjustable Rate Mortgages) remain a solid investment for those who understand the pros and cons.

•    30 Year Term:  Select a 30 year term if you intend to remain in the property for many years, plan to turn it into a rental property at a later date, are on a limited fixed income or are expecting to be on a fixed income in the future and want minimum payments with maximum flexibility. Remember, you can always pay more on the loan should you desire.

•    15 Year Term:  Select a 15 year term if you want to obtain the lowest possible interest rate with steady fixed payments, become debt-free as soon as possible, save tens of thousands of dollars over the life of the loan and you have ample yet steady income.

•    Interest Only:  Select an interest only loan if you want to lock in a great price on a property, want to get started in real estate investments with a modest amount out of pocket, expect to have dramatically higher income within a few years (for example, you are in college, paying off significant debt or will have a spouse/other return to work) or are buying in an area experiencing rapid appreciation.

•    ARM/Option ARM’s:  Select an adjustable rate mortgage if you plan to use the property for cash flow then sell, need the minimum payment for a  short period of time then expect to have significantly more cash in the future and/or wish to use an alternative to a Jumbo Loan.