The implosion of the subprime lending industry threatens to bring foreclosure to over two million households, including many families with children. Barack Obama has been closely monitoring this situation for years, and introduced comprehensive legislation over a year ago to fight mortgage fraud and protect consumers against abusive lending practices. Obama’s STOP FRAUD Act provides the first federal definition of mortgage fraud, increases funding for federal and state law enforcement programs, creates new criminal penalties for mortgage professionals found guilty of fraud, and requires industry insiders to report suspicious activity. This bill also provides counseling to homeowners and tenants to avoid foreclosures. Finally, Obama’s bill requires the Government Accountability Office to evaluate and report to Congress on various state lending practices so that state regulations that undermine consumer’s rights can be identified and hopefully eliminated.
While it’s grouped under the heading of Subprime lending this initative is obviously pointed at the entire mortgage industry, which is fine, but unless we’re considering all of America subprime (which isn’t too far off) it’s a bit of a misnomer. Let’s take a look at some of the ideas in this plan.
Obama’s STOP FRAUD Mortgage Fraud Act
Obama’s STOP FRAUD Act provides the first federal definition of mortgage fraud, increases funding for federal and state law enforcement programs, creates new criminal penalties for mortgage professionals found guilty of fraud, and requires industry insiders to report suspicious activity.
I’m a little confused by the STOP FRAUD act because it seems to me that we all have a pretty decent understanding of mortgage fraud and what it means. On every loan application (known as the 1003) signed is a little statement at the end that says:
Each of the undersigned specifically represents to Lender and to Lender’s actual or potential agents, brokers, processors, attorneys, insurers, servicers, successors and assigns and agrees and acknowledges that: (1) the information provided in this application is true and correct as of the date set forth opposite my signature and that any intentional or negligent misrepresentation of this information contained in this application may result in civil liability, including monetary damages, to any person who may suffer any loss due to reliance upon any misrepresentation that I have made on this application, and/or in criminal penalties including, but not limited to, fine or imprisonment or both under the provisions of Title 18, United States Code, Sec. 1001, et seq.;
An entire chapter of the U.S. Code is devoted to fraud, and covers rather implicitly mortgage fraud throughout chapter 47 and in particular section 1014 which reads:
Whoever knowingly makes any false statement or report, or willfully overvalues any land, property or security, for the purpose of influencing in any way the action of the Farm Credit Administration, Federal Crop Insurance Corporation or a company the Corporation reinsures, the Secretary of Agriculture acting through the Farmers Home Administration or successor agency, the Rural Development Administration or successor agency, any Farm Credit Bank, production credit association, agricultural credit association, bank for cooperatives, or any division, officer, or employee thereof, or of any regional agricultural credit corporation established pursuant to law, or a Federal land bank, a Federal land bank association, a Federal Reserve bank, a small business investment company, as defined in section 103 of the Small Business Investment Act of 1958 (15 U.S.C. 662), or the Small Business Administration in connection with any provision of that Act, a Federal credit union, an insured State-chartered credit union, any institution the accounts of which are insured by the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, any Federal home loan bank, the Federal Housing Finance Board, the Federal Deposit Insurance Corporation, the Resolution Trust Corporation, the Farm Credit System Insurance Corporation, or the National Credit Union Administration Board, a branch or agency of a foreign bank (as such terms are defined in paragraphs (1) and (3) of section 1(b) of the International Banking Act of 1978), or an organization operating under section 25 or section 25(a) [1] of the Federal Reserve Act, upon any application, advance, discount, purchase, purchase agreement, repurchase agreement, commitment, or loan, or any change or extension of any of the same, by renewal, deferment of action or otherwise, or the acceptance, release, or substitution of security therefor, shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.
The bolding is mine to help sort through the legal gobblety gook. Now if we need to separate out mortgage fraud specifically from fraud as defined in Chapter 47 well let’s do it; but I don’t believe it’s a major policy issue to stand on. So no points to Mr. Obama for his STOP FRAUD act.
Increasing Funding for Federal and State Enforcement Agencies
Here Mr. Obama is right on track. Instead of blaming a particular group of people as the primary culprits in this debacle and inventing a whole bunch of new legislation that gains a lot of public support but does little to change the firmament lets give the existing laws some teeth by ENFORCING them. This can only be done with dollars. As Jillayne Schlicke of the Ethical Lending Foundation in Washington says (paraphrasing) there will never be enough dollars or regulators to ensure every loan application is handled in a proper manner. I agree with this; but there needs to be some level of oversight that is in step with the size of the industry. Look at California, a staff of 33 in the enforcement office for more than 500,000 licensed real estate people. This can only change with funding.
Mr. Obama’s plan to increase enforcement funding will improve the environment that exists in the mortgage lending arena using existing laws. A much better approach than Mrs. Clinton’s of singling out the mortgage brokers.
New Criminal Penalties
Not much to say here. Fine, lets bump them up. They should be at least on par with securities fraud penalties since we’re dealing with assets that are usually far in excess of typical securities transactions.
Obama Gets Bank Culpability
One refreshing difference between Clinton and Mr. Obama is his understanding of bank culpability in the mess. He does not pin the problems on the mortgage broker community alone. In this article he wrote for the Financial Times Mr. Obama clearly points to the roles played by lending institutions in this mortgage mess.
This all started as a good idea - helping people buy homes who previously could not afford to. But over time, lenders began pushing low-income buyers into homes they could not possibly afford, abusing the system by lowering their lending standards, making loans that required no money down and offering low, teaser interest rates that explode after the initial grace period. Some borrowers were also lying to get mortgages or engaging in irresponsible speculation.
There is a reason why this has happened. Over the past several years, while predatory lenders were driving low-income families into financial ruin, 10 of the country’s largest mortgage lenders were spending more than $185m (£92m) lobbying Washington to let them get away with it. So if we really want to make sure this never happens again, we need to end the lobbyist-driven politics that made it possible.
Today, as we weigh our options on how best to resolve this crisis, many argue that bailing out the borrowers and investors will just encourage them to engage in more of the same irresponsible practices.
But I think we also have to recognise what will happen if we reward the mortgage industry’s lobbying: they will keep using the same kinds of deceptive practices to make a quick buck, no matter what the consequences to home buyers and their communities. Rather than correct what they are doing wrong, these companies will know that if things go badly, they can always lobby Washington to let them off the hook.
This is refreshing because the line out of Washington has typically been that the mortgage brokers (those gunslingers of the wild west who were unregulated by the states) are at the heart of the problem - not the federally chartered and regulated banking giants. The implication is that there was more security and less lawlessness in the big banks - which is clearly inaccurate.
Big banks who give the bucks should not be held out from scrutiny and regulation. They should not be protected while the brokers get thrown to the slaughter house. I applaud Mr. Obama on this initiative; and it truly shows his “outsider” mentality at work - and puts him in stark contrast to Mrs. Clinton.
The Ill-Advised Bail Out
While I applaud Mr. Obama for looking at all levels of the industry for improvement I have to strongly disagree with his stance on providing homeowner bail-out assistance. In particular I take issue with his position on providing federal assistance for those that bought homes that were too expensive for them to afford.
Obama will create a fund to help people refinance their mortgages and provide comprehensive supports to innocent homeowners. The fund will also assist individuals who purchased homes that are simply too expensive for their income levels by helping to sell their homes. The fund will help offset costs of selling a home, including helping low-income borrowers get additional time and support to pay back any losses from the sale of their home and waiving certain federal, state and local income taxes that result from an individual selling their home to avoid foreclosure.
This seems insane to me. Someone buys a home that is too expensive for them and therefore qualifies for financial assistance from the federal government? Let me ask. How did they get in to that overly expensive home? Was it inaccurate stated income? Was it falsified income? Did they sign an inaccurate 1003 that did not truly represent their earnings? If so, we’re bailing out people committing fraud? This doesn’t add up to me. Why do consumers who commit fraud to get loans they can’t afford get federal assistance while the loan officer who submits the application face prison time? This truly makes no sense.
Homeowners who bought more home than they can afford must lose their homes and there must not be a dollar of federal money spent on those people. What’s next? Are people who stretched on that new Lexus going to be entitled to a subsidy to unload their luxury car because they realized they couldn’t afford it? There needs to be some accountability here period.
Obama tries to minimize this by saying the fund will be financed by penalties collected from industry enforcement efforts; but then where will the industry enforcement efforts be funded from?
Better than Clinton but Not Quite There
I believe Mr. Obama’s mortgage reform policy to be a more sound one than that of Mrs. Clinton but still leaves some to be desired. His bail-out fund is terribly conceived and flawed; but his ability to look past the brokers as the scapegoats certainly has some merit.
It will be interesting to see if he refines his policy on mortgage reform throughout the course of his campaign to provide a clearer picture of his plans.
Tuesday, November 18, 2008
Tuesday, November 4, 2008
WHAT IS A MORTGAGE?
A mortgage is a lend on a property or house that secures a loan and is paid in installments over a set period of time. The mortgage secures your promise that you will repay the money you have borrowed to buy your home. Mortgages come in many different shapes and sizes, each with its own advantages and disadvantages. Make sure you select the mortgage that is right for you, your future plans and your financial situation.
MORTGAGE COMMITMENT
Purchasing a home is a big step and assuming a mortgage for that home is a big responsibility. Make sure you are ready for a financial commitment that could last several decades.Are you currently in a financial position to comfortably make the monthly mortgage payment? Do you have a financial cushion in case you have sudden financial difficulties (for example losing your job)? Are you prepared to take on a long-term financial debt? Owning a home has many advantages but it also has responsibilities. Be sure you are in a position to handle those responsibilities. If you don't think you are in the position to take on such a huge financial debt, this may not be the time to buy a home. Instead, focus on getting your affairs in order and building a financial cushion so you can buy a home in the future. Taking the time before buying a home to make sure you are set up for success can alleviate much stress and many problems later.
MAKING THE RIGHT MORTGAGE POLICY.
Once you decide on the mortgage you want, do your homework. Different lenders offer different rates, points, and fees. Ask around and compare. Understanding the benefits of different mortgage offerings can be a complex process.
How do you figure it all out?
1.Fixed-Rate MortgagesEvaluate the pros and cons of a fixed-rate mortgage:Fixed-rate mortgages are the most common mortgage for first-time homebuyers because they're stable. Typically the monthly mortgage payment remains the same for the entire term of the loan – whether it's a 15-year, 20-year, 30-year, or 40-year mortgage – allowing for predictability in your monthly housing costs.
What are the advantages of a fixed-rate mortgage?
Inflation protection.If interest rates increase, your mortgage and your mortgage payment won't be affected. This is especially helpful if you plan to own your home for 5 or more years.
Long-term planning.You know what your monthly mortgage expense will be for the entire term of your mortgage. This can help you plan for other expenses and long-term goals.
Low risk.You always know what your mortgage payment will be, regardless of the current interest rate. This is why fixed-rate mortgages are so popular with first-time buyers.
There are additional considerations to be aware of with fixed-rate mortgages:
Your mortgage interest rate won't go down, even if interest rates drop, unless you refinance your mortgage.
Because the interest rate may be higher than other types of loans such as adjustable-rate mortgages, you may not be able to qualify for as large a loan with a fixed-rate mortgage.
While your actual mortgage payment will not change, your total monthly payment can occasionally increase based on changes to your taxes and insurance. In many cases you can choose to pay these costs as part of your monthly payment through an escrow account that your lender keeps for you.
Interest-Only, Fixed-Rate MortgagesIf you choose an interest-only option for a fixed-rate mortgage, the term of the loan is divided into two periods. During the first period, your monthly payment is lower because you pay only interest and no principal. In the second period, you pay both. For example, on a 30-year fixed rate mortgage, you might make interest-only payments for the first 10 years, and then pay both principal and interest for the remaining 20 years. The actual principal of the loan (the amount you borrowed) will be paid off in the second period.
While interest-only loans can free up cash for other purposes during the initial period of the loan, you should remember that during the interest-only portion you will not be reducing the principal amount you owe. When you begin paying both principal and interest in the second period of the mortgage your monthly payments will be significantly larger.
As with all interest-only mortgages, interest-only, fixed-rate mortgages are not for all borrowers, and should be offered appropriately only to borrowers who:
Clearly understand that their payments will significantly increase when principal and interest payments begin.
Qualify for this type of mortgage.
Are able to make payments at the fully amortized rate (the second period of the mortgage).
Other Fixed-Rate MortgagesBiweekly mortgages are mortgages that set up the payment differently. Instead of paying your mortgage once a month, you pay half the monthly mortgage payment every two weeks – which equates to 26 payments a year. A biweekly mortgage allows you to pay off your mortgage faster because you are making the equivalent of one extra monthly payment every year of the loan.
Biweekly mortgages are not offered by every lender and are not for every borrower; and they do require discipline since an additional payment is made every month.
Note that after you begin paying on your loan, some lenders will offer you, for a fee, the option of changing to a biweekly mortgage or some other payment schedule advertising that it will ultimately save you money in interest payments. Be aware that most mortgages allow you to make additional payments of principal at any time (and save the same amount over the life of the mortgage) without having to pay a fee for the service of paying on a different schedule.
2.Adjustable-Rate MortgagesAdjustable-rate mortgages (ARMs) are popular because they usually start with a lower interest rate and a lower monthly payment. However, the interest rate can change during the life of the loan.
It's important to understand the specifics of an adjustable-rate mortgage:
Adjustment periodsAll ARMs have adjustment periods that determine when and how often the interest rate can change. There is an initial period during which the interest rate doesn't change – this period can range from as little as 6 months to as long as 10 years. After the initial period, most ARMs adjust the interest rate periodically.
Indexes and marginsAt the end of the initial period and at every adjustment period, the interest rate can change based on two factors: the index and the margin. Interest rate adjustments are based on a published index. There are many indexes but some commonly used for ARMs are the London Interbank Offered Rate (LIBOR) and the U.S. Constant Maturity Treasury (CMT). Indexes reflect current financial market conditions, which is why your ARM interest rate can change at each adjustment period. The margin is the percentage that can be added to the index. Based on these two factors, the interest rate on your mortgage can increase or decrease. This will cause changes in your monthly payments. Remember, if the interest rate on your mortgage increases, your monthly payment will also increase.
Caps, ceilings, and floorsAll ARMs have rate caps, also known as ceilings and floors. Caps decide how much the interest rate can increase or decrease at each adjustment period and over the life of your loan. For instance, a 10/1 ARM with a 5/2/5 cap structure means that for the first 10-years the rate is unchanged, but on the eleventh year (the date of first adjustment), your rate can increase by a maximum of 5 percent (the first "5") above the initial interest rate. Every year thereafter, your rate can adjust a maximum of 2% (as noted by the second number "2"). But, your interest rate can never increase more than 5 percent (the last number, "5") throughout the life of the loan.
"Hybrid" ARMsThis type of ARM has a fixed interest rate for a certain period of time and then the interest rate adjusts for the remainder of the loan, like a conventional ARM. There are several types of hybrid ARMs, such as the 10/1, 7/1, 5/1, and 3/1. The first number (10 for example) is the length of the initial period, during which the interest rate doesn't change. The second number (1 for example) is how often the ARM is adjusted after the initial period. So, the interest rate on a 10/1 ARM won't change for the first 10 years, but can change in the eleventh year and be adjusted every year after that up to a maximum amount.
There are additional considerations to be aware of with adjustable-rate mortgages:
Because the initial interest rate is usually lower than a fixed-rate mortgage, you may qualify for a larger loan amount. If interest rates are high when you get your mortgage but drop during any adjustment period, your monthly payment may decrease. But a decrease is very unlikely, so don't base your choice of mortgage on this.
An ARM with a low initial interest rate and an initial adjustment period after 5 or 7 years can save you money.
ARMs can, and often do, have interest rate increases at adjustment periods. You may have an increase in your monthly mortgage expense after adjustment periods.
3.Balloon or Reset MortgagesBalloon/reset mortgages have monthly mortgage payments based on a 30-year amortization schedule, but the entire mortgage balance is due at the end of the 5- or 7-year term, unless you choose to reset your mortgage at the current rates. So you have the advantage of a low monthly payment, like someone with a 30-year loan, but you must pay off the loan at the end of the specified term or exercise your reset option at the end of the term. Many borrowers think of balloon/reset mortgages as "two-step" mortgages.
Many balloon mortgages have a "reset" option. That means you can reset your mortgage interest rate at the market rate for the remainder of the amortization period. This option is typically only available if:
You are still the owner and occupant of the home. You have paid your mortgage on time for at least a year prior to the balloon note maturity date. You have no other liens against the property. You have satisfied any other conditions of the reset. You may also qualify to refinance your balloon/reset mortgage. There are additional considerations to be aware of with balloon/reset mortgages:
If you plan to sell your home before the maturity date of the balloon/reset mortgage, this type of mortgage may be a good option. But, keep in mind that if you end up staying in your house when the loan matures, you will need to reset or refinance the mortgage. Balloon/reset mortgages usually come with a slightly lower initial rate than most other mortgage types. You may qualify for a larger loan amount with a balloon/reset mortgage than you would with an ARM or fixed-rate mortgage. If interest rates increase during the term of the balloon loan, you may have a large increase in your monthly payments when you reset or refinance your mortgage.
4.Reverse MortgagesReverse mortgages are a new type of mortgage designed specifically to be appealing to older homeowners. In regular mortgages, the homeowner pays the lender. In reverse mortgages the opposite is true – homeowners receive money that does not need to be repaid until the home is sold, the homeowner dies, or does not use the home as the primary residence.
There are advantages to reverse mortgages, including:
There are tax advantages. Reverse mortgages can supplement retirement income.
They may be a good idea for a homeowner who has a great deal of equity in their home but not other assets or sufficient retirement savings, and wishes to stay in their home rather than downsize.
There are other factors to consider. If you dream of giving your home to your children after you die, a reverse mortgage may make that difficult since the equity in the home will have been depleted.
Reverse mortgages require research to make sure it is right for each homeowner, and there are usually requirements, such as:
The homeowners must be at least 62 years of age. The home must be the primary residence.
Beware of FraudReverse mortgages are a legitimate type of mortgage designed to help older Americans in their later years. However, because they are new and not always well understood, some unscrupulous individuals use reverse mortgages to rob seniors of the equity in their home.
Beware of the following:
Someone who is selling something like an annuity and suggests that a reverse mortgage is a good way to pay for it. A mortgage that you do not fully understand or are not sure you need. If you are unsure of what you are signing, don't sign anything. And remember, you have three days after signing to change your mind with no penalty.
A mortgage is a lend on a property or house that secures a loan and is paid in installments over a set period of time. The mortgage secures your promise that you will repay the money you have borrowed to buy your home. Mortgages come in many different shapes and sizes, each with its own advantages and disadvantages. Make sure you select the mortgage that is right for you, your future plans and your financial situation.
MORTGAGE COMMITMENT
Purchasing a home is a big step and assuming a mortgage for that home is a big responsibility. Make sure you are ready for a financial commitment that could last several decades.Are you currently in a financial position to comfortably make the monthly mortgage payment? Do you have a financial cushion in case you have sudden financial difficulties (for example losing your job)? Are you prepared to take on a long-term financial debt? Owning a home has many advantages but it also has responsibilities. Be sure you are in a position to handle those responsibilities. If you don't think you are in the position to take on such a huge financial debt, this may not be the time to buy a home. Instead, focus on getting your affairs in order and building a financial cushion so you can buy a home in the future. Taking the time before buying a home to make sure you are set up for success can alleviate much stress and many problems later.
MAKING THE RIGHT MORTGAGE POLICY.
Once you decide on the mortgage you want, do your homework. Different lenders offer different rates, points, and fees. Ask around and compare. Understanding the benefits of different mortgage offerings can be a complex process.
How do you figure it all out?
1.Fixed-Rate MortgagesEvaluate the pros and cons of a fixed-rate mortgage:Fixed-rate mortgages are the most common mortgage for first-time homebuyers because they're stable. Typically the monthly mortgage payment remains the same for the entire term of the loan – whether it's a 15-year, 20-year, 30-year, or 40-year mortgage – allowing for predictability in your monthly housing costs.
What are the advantages of a fixed-rate mortgage?
Inflation protection.If interest rates increase, your mortgage and your mortgage payment won't be affected. This is especially helpful if you plan to own your home for 5 or more years.
Long-term planning.You know what your monthly mortgage expense will be for the entire term of your mortgage. This can help you plan for other expenses and long-term goals.
Low risk.You always know what your mortgage payment will be, regardless of the current interest rate. This is why fixed-rate mortgages are so popular with first-time buyers.
There are additional considerations to be aware of with fixed-rate mortgages:
Your mortgage interest rate won't go down, even if interest rates drop, unless you refinance your mortgage.
Because the interest rate may be higher than other types of loans such as adjustable-rate mortgages, you may not be able to qualify for as large a loan with a fixed-rate mortgage.
While your actual mortgage payment will not change, your total monthly payment can occasionally increase based on changes to your taxes and insurance. In many cases you can choose to pay these costs as part of your monthly payment through an escrow account that your lender keeps for you.
Interest-Only, Fixed-Rate MortgagesIf you choose an interest-only option for a fixed-rate mortgage, the term of the loan is divided into two periods. During the first period, your monthly payment is lower because you pay only interest and no principal. In the second period, you pay both. For example, on a 30-year fixed rate mortgage, you might make interest-only payments for the first 10 years, and then pay both principal and interest for the remaining 20 years. The actual principal of the loan (the amount you borrowed) will be paid off in the second period.
While interest-only loans can free up cash for other purposes during the initial period of the loan, you should remember that during the interest-only portion you will not be reducing the principal amount you owe. When you begin paying both principal and interest in the second period of the mortgage your monthly payments will be significantly larger.
As with all interest-only mortgages, interest-only, fixed-rate mortgages are not for all borrowers, and should be offered appropriately only to borrowers who:
Clearly understand that their payments will significantly increase when principal and interest payments begin.
Qualify for this type of mortgage.
Are able to make payments at the fully amortized rate (the second period of the mortgage).
Other Fixed-Rate MortgagesBiweekly mortgages are mortgages that set up the payment differently. Instead of paying your mortgage once a month, you pay half the monthly mortgage payment every two weeks – which equates to 26 payments a year. A biweekly mortgage allows you to pay off your mortgage faster because you are making the equivalent of one extra monthly payment every year of the loan.
Biweekly mortgages are not offered by every lender and are not for every borrower; and they do require discipline since an additional payment is made every month.
Note that after you begin paying on your loan, some lenders will offer you, for a fee, the option of changing to a biweekly mortgage or some other payment schedule advertising that it will ultimately save you money in interest payments. Be aware that most mortgages allow you to make additional payments of principal at any time (and save the same amount over the life of the mortgage) without having to pay a fee for the service of paying on a different schedule.
2.Adjustable-Rate MortgagesAdjustable-rate mortgages (ARMs) are popular because they usually start with a lower interest rate and a lower monthly payment. However, the interest rate can change during the life of the loan.
It's important to understand the specifics of an adjustable-rate mortgage:
Adjustment periodsAll ARMs have adjustment periods that determine when and how often the interest rate can change. There is an initial period during which the interest rate doesn't change – this period can range from as little as 6 months to as long as 10 years. After the initial period, most ARMs adjust the interest rate periodically.
Indexes and marginsAt the end of the initial period and at every adjustment period, the interest rate can change based on two factors: the index and the margin. Interest rate adjustments are based on a published index. There are many indexes but some commonly used for ARMs are the London Interbank Offered Rate (LIBOR) and the U.S. Constant Maturity Treasury (CMT). Indexes reflect current financial market conditions, which is why your ARM interest rate can change at each adjustment period. The margin is the percentage that can be added to the index. Based on these two factors, the interest rate on your mortgage can increase or decrease. This will cause changes in your monthly payments. Remember, if the interest rate on your mortgage increases, your monthly payment will also increase.
Caps, ceilings, and floorsAll ARMs have rate caps, also known as ceilings and floors. Caps decide how much the interest rate can increase or decrease at each adjustment period and over the life of your loan. For instance, a 10/1 ARM with a 5/2/5 cap structure means that for the first 10-years the rate is unchanged, but on the eleventh year (the date of first adjustment), your rate can increase by a maximum of 5 percent (the first "5") above the initial interest rate. Every year thereafter, your rate can adjust a maximum of 2% (as noted by the second number "2"). But, your interest rate can never increase more than 5 percent (the last number, "5") throughout the life of the loan.
"Hybrid" ARMsThis type of ARM has a fixed interest rate for a certain period of time and then the interest rate adjusts for the remainder of the loan, like a conventional ARM. There are several types of hybrid ARMs, such as the 10/1, 7/1, 5/1, and 3/1. The first number (10 for example) is the length of the initial period, during which the interest rate doesn't change. The second number (1 for example) is how often the ARM is adjusted after the initial period. So, the interest rate on a 10/1 ARM won't change for the first 10 years, but can change in the eleventh year and be adjusted every year after that up to a maximum amount.
There are additional considerations to be aware of with adjustable-rate mortgages:
Because the initial interest rate is usually lower than a fixed-rate mortgage, you may qualify for a larger loan amount. If interest rates are high when you get your mortgage but drop during any adjustment period, your monthly payment may decrease. But a decrease is very unlikely, so don't base your choice of mortgage on this.
An ARM with a low initial interest rate and an initial adjustment period after 5 or 7 years can save you money.
ARMs can, and often do, have interest rate increases at adjustment periods. You may have an increase in your monthly mortgage expense after adjustment periods.
3.Balloon or Reset MortgagesBalloon/reset mortgages have monthly mortgage payments based on a 30-year amortization schedule, but the entire mortgage balance is due at the end of the 5- or 7-year term, unless you choose to reset your mortgage at the current rates. So you have the advantage of a low monthly payment, like someone with a 30-year loan, but you must pay off the loan at the end of the specified term or exercise your reset option at the end of the term. Many borrowers think of balloon/reset mortgages as "two-step" mortgages.
Many balloon mortgages have a "reset" option. That means you can reset your mortgage interest rate at the market rate for the remainder of the amortization period. This option is typically only available if:
You are still the owner and occupant of the home. You have paid your mortgage on time for at least a year prior to the balloon note maturity date. You have no other liens against the property. You have satisfied any other conditions of the reset. You may also qualify to refinance your balloon/reset mortgage. There are additional considerations to be aware of with balloon/reset mortgages:
If you plan to sell your home before the maturity date of the balloon/reset mortgage, this type of mortgage may be a good option. But, keep in mind that if you end up staying in your house when the loan matures, you will need to reset or refinance the mortgage. Balloon/reset mortgages usually come with a slightly lower initial rate than most other mortgage types. You may qualify for a larger loan amount with a balloon/reset mortgage than you would with an ARM or fixed-rate mortgage. If interest rates increase during the term of the balloon loan, you may have a large increase in your monthly payments when you reset or refinance your mortgage.
4.Reverse MortgagesReverse mortgages are a new type of mortgage designed specifically to be appealing to older homeowners. In regular mortgages, the homeowner pays the lender. In reverse mortgages the opposite is true – homeowners receive money that does not need to be repaid until the home is sold, the homeowner dies, or does not use the home as the primary residence.
There are advantages to reverse mortgages, including:
There are tax advantages. Reverse mortgages can supplement retirement income.
They may be a good idea for a homeowner who has a great deal of equity in their home but not other assets or sufficient retirement savings, and wishes to stay in their home rather than downsize.
There are other factors to consider. If you dream of giving your home to your children after you die, a reverse mortgage may make that difficult since the equity in the home will have been depleted.
Reverse mortgages require research to make sure it is right for each homeowner, and there are usually requirements, such as:
The homeowners must be at least 62 years of age. The home must be the primary residence.
Beware of FraudReverse mortgages are a legitimate type of mortgage designed to help older Americans in their later years. However, because they are new and not always well understood, some unscrupulous individuals use reverse mortgages to rob seniors of the equity in their home.
Beware of the following:
Someone who is selling something like an annuity and suggests that a reverse mortgage is a good way to pay for it. A mortgage that you do not fully understand or are not sure you need. If you are unsure of what you are signing, don't sign anything. And remember, you have three days after signing to change your mind with no penalty.
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