mortgage faq'S

What are low down payment options, for buyers who can't afford a 20% down payment?

Assuming you can afford (and qualify for) high monthly mortgage payments and have a high credit score, you should be able to find a low (5% to 15%) or even no down payment loan. However, you may have to pay a higher interest rate and loan fees (points) than someone making a larger down payment.

If you put down less than 20%, you may have to either pay for private mortgage insurance (PMI) or, to avoid PMI, take out two separate loans (a first mortgage and a second mortgage).

What is private mortgage insurance (PMI)?

Private mortgage insurance or "PMI" policies are designed to reimburse a mortgage lender up to a certain amount if you default on your loan and your house isn't worth enough to entirely repay the lender through a foreclosure sale. Most lenders require PMI on loans where the borrower makes a down payment of less than 20%.

Premiums are usually paid monthly and typically cost around one-half of one percent of the mortgage loan. You can normally cancel the PMI once your equity in the house reaches 20-25%, so long as you've made timely mortgage payments.

Can I tap into my IRA or 401(k) plan for down payment money?

Let's start with the IRAs. Under the 1997 Taxpayer Relief Act, certain homeowners can withdraw up to $10,000 penalty free from an individual retirement account (IRA) for a down payment to purchase a principal residence (though you might have to pay income tax on the amount withdrawn). If you've got a Roth IRA, however, you must have had the account for five years to make tax-free withdrawals.

This $10,000 is a lifetime limit -- and the money must be used within 120 days of the date you receive it. The law limits use of this benefit to so-called "first-time homeowners" -- but generously defines these as people who haven't owned a house for the past two years. If a couple is buying a home, both must be first-time homeowners. Ask your tax accountant for more information, or check IRS rules at www.irs.gov.

If you have a 401(k), you have two options. One is to do a so-called hardship withdrawal -- but, because this would subject you to taxes and a 10% penalty, we recommend you avoid this.

You can also take an ordinary loan from your 401(k) plan without penalty, as long as meet certain conditions and you promise to pay it back. Borrowing against your 401(k) offers several advantages:

• You, not a bank, receive the interest payments.
• The loan fees are usually less than what a bank would charge.
• The paperwork is less than would be required for a typical bank loan.

Keep in mind, however, that you'll need to repay the loan with after-tax dollars, and you'll forego the earnings on the 401(k) money you withdraw -- until it is paid back.

Ask your employer or plan administrator whether your plan allows loans. If it does, the maximum loan amount under the law is one-half of your vested balance in the plan, or $50,000, whichever is less. (If, however, you have less than $20,000 in your plan, your limit is the amount of your vested balance, but no more than $10,000.) Other conditions, including the maximum term, the minimum loan amount, the interest rate, and the applicable loan fees, are set by your employer. Any loan must be repaid in a "reasonable amount of time," although the Tax Code doesn't define what is reasonable.

Be sure to find out what happens if you leave your job before fully repaying a loan from your 401(k) plan. If a loan becomes due immediately on your departure, income tax penalties may apply to the outstanding balance -- but you may be able to avoid this hassle by repaying the loan before you leave the job.

What's the difference between a fixed and adjustable rate mortgage?

With a fixed rate mortgage, the interest rate and the amount you pay each month remain the same over the entire mortgage term, traditionally 15 or 30 years. A number of variations are available, including five- and seven-year fixed rate loans with balloon payments at the end.

With an adjustable rate mortgage (ARM), the interest rate fluctuates according to the interest rates in the economy. Initial interest rates of ARMs are typically offered at a discounted ("teaser") interest rate that is lower than the rate for fixed rate mortgages. Over time, when initial discounts are filtered out, ARM rates will fluctuate as general interest rates go up and down. Different ARMs are tied to different financial indexes, some of which fluctuate up or down more quickly than others. To avoid constant and drastic changes, ARMs typically regulate (cap) how much and how often the interest rate and/or payments can change in a year and over the life of the loan. A number of variations are available for adjustable rate mortgages, including hybrids that change from a fixed to an adjustable rate after a period of years, or "option ARMs" that allow you to choose, on a monthly basis, whether to pay a minimum amount, an interest-only amount, an ordinary principal plus interest amount, or an accelerated payment amount.