Of course, the first question Soldiers should ask themselves is whether they should even be purchasing a home, rather than renting one or residing in on-post housing. Although home buying can be a wise investment, it may not be the best choice for military members who may be relocating within a year or two.
Prospective homebuyers should also consider the broader financial issues involved in home ownership--including the projected market value of the home, income-tax implications, utility costs, real-estate taxes, insurance premiums, homeowner association fees, maintenance expenses and resale costs. In addition, Soldiers approaching retirement should take into consideration their projected post-retirement income, the period they expect to occupy the new home, civilian employment opportunities, and the lifestyle they desire for themselves and their families.
Types of Loans
Once a Soldier has determined that owning a home is both practical and desirable, there remains the important question of how to finance the property's acquisition. Since paying cash is not usually an option for most people, loans are the most common alternative.
The various types of loans available include:
* Construction loans, which are used when buyers have a home built to their own specifications rather than buying one constructed by a developer. The amount of this type of loan is based upon the projected future market value of the home, not just on the estimated building cost. The lending company will review the construction plans, estimate the future market value of the home and then establish incremental loan advances as the construction proceeds, rather than making a lump-sum distribution of the entire loan to the builder. The lending company must ensure that there will be sufficient collateral to recover the loan should a default occur in construction or payments.
* Fixed-rate loans/mortgages are the most common home loans. They have a fixed interest rate over a set number of years. The interest is added to the principal of the loan and is paid off first during the lifetime of the loan out of each monthly payment. Home buyers should shop around to determine the lowest available interest rates and the lowest number of points to be paid up front, and then select the number of years for the loan that meets their projected ability I to make the payments.
* Adjustable-rate loans/mortgages normally provide the borrower with a lower initial interest rate than will a fixed-rate loan. However, the interest rate then fluctuates up or down, based upon an index such as the interest rate for federal treasury bills or the prime interest rates plus a set percentage margin (margin is the lender's profit). The new interest rate continues until the next specified adjustment period.
Since the interest rate for the life of the loan is uncertain, the loan agreement should include an interest cap or ceiling that either limits the percentage of increase during each ad justment period or sets a percentage ceiling as the maximum for the entire period of the loan. Borrowers should check the history of the index used to estimate the loan's future performance, and should fully understand the risks the loan rate presents.
* Convertible Adjustable-Rate loans/mortgages permit the borrower to convert the loan to a fixed-rate mortgage at specified times. The conversion normally requires the borrower to pay the lender a specific fee, and the loan then assumes the current interest rate of a fixed loan. There are no statutory time periods for this election and fees, so borrowers should understand their options under the contract.
* Balloon loans/mortgages provide a loan for a few years with monthly payments that only satisfy the interest debt for the loan. At the end of the loan period, the entire original loan principal amount comes due and must be paid immediately or a new loan must be obtained. Balloon loans provide the borrower with a lower monthly payment and the ability to obtain a lower interest rate for the principal amount before completion of the loan period.
* Wrap-Around mortgages are loans in which the lender assumes responsibility for a borrower's existing mortgage, while creating a new and additional loan for the borrower. The existing mortgage must be assumable to permit this transaction. FHA- and Department of Veterans Affairs-guaranteed loans are assumable; all others require the permission of the existing lender.
* Equity mortgages or loans are actually liens upon real property to secure the payment of a loan. Homeowners may borrow money and use their present homes as collateral, based upon the equity in the current home.
Other Things to Consider
FHA/HUD loan guarantees permit buyers with limited funds to put down as little as 3 percent of the purchase price. For further information visit www.fha.com and www.hud.gov/buying/index.
VA-guaranteed loans are made by lenders to eligible veterans for a portion of the purchase price of a home, which must be for the veteran's personal occupancy. VA buyer benefits include no down payment, the right to prepay the loan without penalty, and the ability for other qualified buyers to assume the mortgage. For more information visit www.homeloans.va.gov.
Ignorance is not bliss when buying a home. Home ownership is a long-term financial obligation that requires buyers to fully understand the terms and requirements of their mortgages.
Mr. Steven Chucala is chief of the Legal Assistance Division for the Staff Judge Advocate at Fort Belvoir, Va.
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|Title Annotation:||Legal Forum|
|Date:||Aug 1, 2007|
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