Loans and Loan Programs

Conventional Loans

These are residential loans less than $417,000. In some counties, the conventional loan limit is higher but $417,000 is the limit throughout New Mexico. Conventional loans can be used to purchase or refinance primary residences, second homes and investment (rental) homes. A conventional loan for a primary residence can be secured with as little as 5% down. Conventional loans have fixed rate and adjustable rate options.

USDA Loans

These loans are available only in rural counties which include Taos and much of the rest of New Mexico. USDA loans offer 100% financing requiring no money down. It’s also possible to have all closing costs included in the loan. USDA charges a funding fee which is rolled into the loan and the borrower also pays mortgage insurance, an additional monthly payment for loans over 80% of the home’s value. USDA loans have a household income cap of $73,600 per year.

FHA Loans

This type of loan requires 3.5% down payment but has no income cap. The maximum FHA loan amount is $286,350 for a single family home in Taos County. FHA loans offer more lenient qualifying criteria sometimes enabling a borrower who can’t qualify for a conventional or USDA loan to qualify. FHA also offers some renovation loans enabling a buyer to both purchase a home and secure money simultaneously for renovations. FHA also charges a funding fee and requires mortgage insurance.

Adjustable Rate Mortgages

The rate on an Adjustable Rate Mortgage (ARM) is fixed for a pre-determined set of time and then adjusts, usually on an annual basis after that. ARMs can be fixed for different periods, the most common being 3/1, 5/1 and 7/1 ARMs. In each case, the first number indicates the number of years a rate is fixed and the second number refers to how often the rate adjusts. For example, a 3/1 ARM is fixed for 3 years and subsequently adjusts yearly after the initial 3 year period. In most cases, ARMs are amortized over 30 years. The amount an ARM can adjust annually and through it’s lifetime is typically as follows; On a 3/1 ARM, the most a rate can change each year once adjusting is 2% and typically the lifetime cap is 5 or 6%. A 5/1 and 7/1 ARM can typically adjust as much as 5% up or down on the first adjustment date and then no more that 2% each year thereafter with the same 5 or 6% lifetime cap. ARMs adjust according to an index and a margin. In most cases, ARMs are attached to the LIBOR index (London Interbank Overnight Rate) and generally adjust to 2.25 above that index.

Construction/Renovation Loans

Construction loans are short term interim loans used to build or renovate a home. These loans typically act as a line of credit enabling the borrower to disburse money to a builder as the building project proceeds. Generally, the borrower pays interest only on the money as the money is drawn. In most cases, the borrower will secure a permanent loan at the same time which will be used to pay off the final balance of the construction loan once the home is complete and a CO (Certificate of Occupancy) is issued.

VA Loans

Available to those with veteran’s benefits, these loans offer 100% financing up to $417,000 and have no mortgage insurance requirement. Closing costs are often less than other loans and can be rolled into the loan.

Jumbo Loans

These are residential loans over $417,000. These loans also offer both fixed rate and adjustable rate options and typically require at least 20% down.

Refinancing

Homeowners may want to refinance their existing mortgage for various reasons. One may refinance if rates are lower than their current note in order to save money and/or if the homeowner wants to borrow additional money against the equity in their home. If a borrower has an Adjustable Rate Mortgage (ARM) that is ready to adjust or a second mortgage they want to consolidate a refinance can be the right option. Sometimes a refinance is needed if the ownership of the house is being transferred or if someone on the note needs to be taken off.

If one is just lowering the rate and/or amortization period of their existing loan it is categorized a rate and term refinance. If instead the homeowner is pulling additional money from their home for renovations or other investments, it is categorized a cash out refinance. A cash out refinance can be a bit more expensive than a rate and term depending upon the LTV (loan to value- ie the % of the value of the home the loan represents) though the difference in terms is small.

For the most part, rate and term refinances are similar for a purchase and in both cases if one borrows more than 80% of the value of the home they will pay PMI (mortgage insurance).

OCCUPANCY INFORMATION

Residential mortgage loan terms vary depending upon the stated ‘occupancy’ of the home. When applying for a loan and when closing a loan the borrower states their intention as to how the home will be used.

Primary Residence

Loan terms are most favorable for primary residences. Once can borrow up to 95% on a conventional loan and up to 100% with government loans. Rates and costs are lowest for primary residences.

Investment/No Owner Occupied (NOO)

Investment (NOO – non owner occupied) – NOO homes are more expensive to finance and generally require a larger down payment. Depending upon down payment there is an additional fee for NOO homes than can be paid as part of closing costs or absorbed into the rate. For example, if one puts 20% down on an NOO home they will either be charged 3 points( 3% of loan amount) or take an interest rate about .75% higher than for a primary or vacation home. If one puts 25% or more down, the fee drops to 1.75% or about .375% higher than standard rate.

Second/Vacation Residence

Loan terms are identical to primary homes but typically require at least 10% down. For example, one can put as little as 10% down.