How to decide the best financing plan for you:

Regarding how to find the best financing plan for you, there are two distinct ways to finance a home: getting a loan and paying in cash. Let’s start with acquiring a loan. There are 4 common types of loans and 2 typical durations: 30-year fixed interest rate, 30-year adjustable interest rate, 15-year fixed interest rate, 15-year adjustable interest rate, the Federal Housing Administration (FHA) loan, and the Jumbo loan. Other, more risky loan types also exist, but are uncommon and typically land the borrower in financial trouble. The following chart lists the advantages and disadvantages of each loan type:

Although getting a loan might be a good idea for first-time home buyers, the universally most competitive home offers come from what is generally known in the real estate community as “all-cash offers.” This means exactly what you’d think; the offer is completely financed by the available and ready liquid cash of the buyer. This type of financing plan may be ideal for avoiding interest payments, but also increases your risk. Another advantage of an all-cash offer is the prospect of an easy escrow process and the likelihood that the sellers of a home will accept your offer.

Loan types:

  • 30-year fixed interest rate
  • 30-year adjustable interest rate
    • Stays fixed for a period of time, then resets based on prevailing interest rates
  • 5/1 ARM = fixed for five years and adjusts annually after that
  • Appeal: initial rate lower than fixed, making monthly payments more affordable
    • Loan could reset and cause financial turmoil
    • Good for house flipping (not staying in the home for long)
  • 15-year fixed interest rate
    • Pay off sooner, but more expensive
    • Save money in interest
  • FHA loan
    • If you haven’t saved a 20% down payment, and not perfect credit
    • Allows as little as 3.5% down
    • Have to pay for insurance (a premium) to protect the bank
    • Once you have 20% equity in the house, you don’t have to pay the premiums
  • Jumbo loan
    • Historically exceed rates for “conforming” loans and require higher down payments
    • For those borrowing more than $417k, # is higher in pricey markets like San Francisco
  • Other, riskier loans
  • Cash offers:
    • All-cash = most competitive offer
    • Half-cash = pretty competitive, depends on market

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