Purchasing a home is an enormous financial undertaking. Potential home buyers need to ascertain they are obtaining the best mortgage for their financial needs.
Many options exist when seeking a mortgage and determining which mortgage type is best boils down to research. Home buyers need to decide how long they will be staying in the house and choose a loan based on that information.
Fixed Rate Home Loan
Fixed rate mortgages offer set interest rates and payments for the life of the loan. Home buyers who should consider this loan are those who plan on staying within the home for at least five years.
Fixed rate loans appeal to buyers who desire a predictable payment and those who believe that interest rates will rise again. The typical span of this loan is 30 years. Buyers are able to obtain a 15 or 20 year fixed rate with a higher monthly payment.
Adjustable Rate Mortgage
Adjustable rate mortgages or ARM’s are a good option for many buyers. The initial interest rate begins low and will stay at the initial interest rate for a period of three to five years. ARM’s will be evaluated after the initial fixed period for fluctuations in interest.
If interest rates rise, the mortgage payment will increase. If interest rates decrease, the mortgage payments will be lowered. An ARM is a good choice for the person who is only planning to stay for a few years in the home or those who believe interest rates will fall.
Hybrid Home Loans
Hybrid mortgages are a combination of a fixed rate and an ARM. Initially, the hybrid loan has a set fixed payment which will adjust into an ARM in a specified time frame. Hybrids are given a value of 5/1 or a similar agreement. The five refers to the fixed mortgage length.
The one is the ARM length. An example of 5/1 is the home buyer pays the fixed rate for five years and then annually the mortgage rates will change. Hybrid loans are a good option for those who want a lower fixed rate but may not be planning on staying in the home long term. Home buyers are able to sell the home before the adjustment rate begins or refinance to a lower rate after the initial period.
Interest Only Financing
Interest-only mortgages have a set term of up to 10 years where only interest and no principal is paid. Once the initial period is complete, buyers are required to pay off the balance of the home loan. This mortgage works best for someone who plans on flipping the house for profit shortly or the buyer expecting the availability of a large some of the cash to pay off the mortgage.
Learn the Details about Residential Mortgage
In the world of real estate, there could be many differences between residential properties and commercial real estate. And the same thing applies to commercial loans and residential mortgages.
For common individuals, we always pay more attention to residential mortgages than commercial loans. Now we will learn some necessary details and features related to residential mortgages.
Actually, residential mortgages are something that everyone will come into contact with at some points in their lives. As the name suggests, a residential mortgage is a typical type of mortgage loan designed to offer financial support when we are buying or improving residential properties.
No matter we are planning to buy a new home, improve the existing one or build a new house on our own, we can always ask for economic assistance by applying for some quality residential loans.
What is the Loan Limit for Residential Mortgage?
It is true that each type of mortgage has its limitations on the total sum of the loan amount, and there is no exception to the residential mortgage. The loan amount for conventional residential mortgages is up to $417.000. That is, we can borrow as much as $417.000 to buy a new residential house.
There are still some companies offering jumbo loans for residential home buyers. Usually, the amount for jumbo residential mortgages is between $417.000 and $2.000.000.
But the jumbo residential loans often have much higher interest rates than conventional residential mortgages do. Besides, jumbo residential loans are usually carried out under some credible and valuable guarantees.
What are the Mortgage Interests for Residential Mortgages?
Unlike other kinds of mortgages, residential mortgages feature different requirements on mortgage interests. A lot of residential mortgage lenders will decide the final mortgage interest rates on the basis of the quality of the property being financed.
If our homes are in good conditions and look pretty nice and new, we will be able to enjoy a very competitive interest rate. On the other hand, when our houses are no longer in good conditions, the interest rates may be as much as 2.0 basis points higher than the original interest rates.
How Much Can Residential Mortgages Help on Down Payments?
The most favorable benefit of residential mortgage is probably its high down payment assistance. Borrowers are able to obtain huge financial assistance on the down payments of new residential houses.
Generally, we can enjoy as little as 3.5% of down payments when we are buying family residences with a residential loan. For jumbo residential mortgages, the down payment bonus could be as high as 25% of the appraised value of the new residence. With so high down payments, we will pay less for the later loans and save a lot of money.
Do Residential Mortgages Ask for High Closing Fees?
Residential mortgages do have requirements on closing fees, but they vary from one type of property to another. For example, the appraisal costs for common residences run around $350. For an apartment building, the appraisal costs could range from $2500 to $5500. Besides, the lenders also require some additional report fees, which range from $50 to $5000.
5 Advantages of Mortgage Loans
Mortgage loans come in different types that are offered by banks and mortgage lenders. You may use a variable-rate mortgage or a fixed rate mortgage. These loans are also available in lengths of 15 years to 30 years. This is a financial product that may allow you to claim back PPI payments by following a reclaiming PPI process.
A fixed-rate mortgage has a rate that is locked-in for the length of the loan. This means all payments to the lender to be the same each month. A variable-rate mortgage loan has rates that vary each year. The use of a variable-rate mortgage means that your rate is not stable which can lead to higher interest you need to pay for the loan. A fixed-rate mortgage loan is typically less risky than a variable-rate mortgage loan for your home.
The use of a fixed-rate mortgage loan insulates you from a changing market if you plan to keep a home for the long term. This type of loan will provide you with the best results for the length of the loan. The cost of a variable-rate mortgage loan is typically only viable during a downturn in the economy; this is when rates are typically low but often increase as the economy improves. However, fixed-rate loans are set a rate that does not change.
Fees that are assessed for fixed-rate loans also remain the same and do not change. A variable-rate loan may have fees that go up when the interest rate increases. This can occur when there is an improvement in the economy and changes in the markets cause an increase in interest rates.
Borrowers that have a fixed-rate mortgage loan have flexibility with their monthly payments. This loan offers borrowers the opportunity to make additional monthly payments. Extra payments are on top of regular monthly payment and are applied to the principal. Making extra monthly payments trims one or more payments that reduce the length of the loan. One extra monthly payment per year drops a 30-year loan to 26 years.
Applying for a fixed-rate mortgage allows you to plan for future payments. Rates that change for a loan with a variable-rate mean that you a standard payment plan is not available. You will need to make sure that you have funds available to make an increased payment should the interest rate increase.
Who Makes Money on Your Mortgage Loan?
With everything that has become of the housing market, consumers and potential home buyers are wary as to where their money is going and if the banks are up to their old scamming ways.
When they get their Good Faith Estimate, they’ll notice dozens of fees and costs that are applied to their loan which ends up being paid out of their end.
Sure, they know that those involved in making the loan work have to get paid for their efforts, but what exactly do those fees mean and who is pocketing the profit? Here are some answers most homeowners never get when they asked – who is making money from my loan?
What Happens When a Mortgage Is Sold?
Most lenders that originate loans in order to sell them off quickly are referred to as direct lenders. When a lender keeps and services the loan, the lender is referred to as a portfolio lender. When a loan is sold, the lender has two commodities: the loan itself and the servicing rights of the loan.
A banker who sells a loan will make a certain amount of points on a package of loans. Let’s say, for example, he has a package of loans worth a million dollars. If he makes 1 point (1% of $1 million), he would make $10,000. Not only does he make an immediate profit, but he has just freed up $1 million that he can turn around and use to fund more loans. If he sells $1 million a month, the banker or lender would be making $10,000 x12 = $120,000 annually.
The service is paid a monthly fee for collecting and processing the monthly payments from the consumer. The fee is typically 3/8 of a percent (0.375%), or 37.5 basis points. (A basis point is 1/100 of 1%.) This does not sound like much, but servicers usually service billions of dollars in home loans. Let’s look at an example with an average of 37.5 basis points:
$100,000 x 0.00375 (0.375% or 37.5 basis points) = $375 annually.
Certainly, $375 annually may not seem like a lot of money for all the functions a service performs. However, servicers typically service billions of dollars annually. Suppose then, that a servicer services $5 billion a year. Do the math and you get:
$5,000,000,000 x 0.00375 (0.375% or 37.5 basis points) = $18,750,000 annually.
It is easy to see why large mortgage lenders tend to make their money servicing loans. The origination fees of a large retail mortgage lender are usually consumed by the high overhead expenditure.
How Do Mortgage Companies Make Their Money?
Mortgage brokers make their money from origination fees, rebates or yield spread premiums, and miscellaneous fees (such as processing and application fees). Mortgage bankers and lenders make their money from the following principal sources:
Origination Fees – typically 1% of the mortgage amount. For example, if the mortgage loan amount is $100,000, the loan origination fee (1%) IS $1,000. The origination fee is a fee to compensate for the costs of originating the loan.
These costs include commissions paid to the loan originator; salaries for the operations staff (receptionists, processors, underwriters, funders, managers), and office overhead (rent, utilities, phones, equipment, etc.)
Miscellaneous Fees – Lenders may also charge third-party fees (fees that are paid directly to a third party and that include document preparation fees, underwriting fees, and tax service fees). These fees can make the mortgages more profitable to service in the long run and supplement the income from the origination fee.
Overage – The difference between the lowest available price and any higher price that the borrower agrees to pay is an overage. The overage is part of the commission paid to the loan officer. Not all lenders allow overages.
Servicing Income – As we discussed earlier, servicing income can be quite lucrative for the lender. Another benefit is the fact that servicing is a year-round source of income.
Sale of Servicing Rights – The ale made in the sale of the servicing rights can be quite significant. On most mortgage loans, the servicing rights can be sold for anywhere from 1% to 2% of the mortgage amount.
If a mortgage lender loses one point on the origination fee (one point is the commission fee and overhead), the lender will still be able to profit if it receives 2 points for the servicing rights.
Is Reverse Mortgage a Wise Option?
Well, all of us go through this phase in life when we retire or lose our job or are unable to live within the pension. You have a son to be educated and daughters to be married off. With age your reflexes are slow and you have medical issues also.
You have minor debts that you need to take care of. That is a phase in life when we think about a reverse mortgage. Of course, it is understandable. Under these circumstances, a reverse mortgage is indeed a wise option.
With the global meltdown and retrenchment, several people are losing jobs every day. The fear of survival has spread in our society. Our political bosses are trying their best to improve the situation but it’ll take time. The real estate market is in the doldrums.
So you cannot sell your home and move into a smaller one. There are umpteen houses in the market. So, who is going to buy yours? Under these circumstances, a reverse mortgage comes to your rescue.
Many homeowners have benefited from reverse mortgage opportunities, with many homeowners over the age of 62 pulling out the equity on their house for retirement, vacation, home improvements, and other large expenditures.
Reverse mortgages allow homeowners to take out equity accrued on the home, provided they continue to pay insurance and property taxes. The house then is transferred to the lender at the time of death or should the homeowner vacate early.
Cause Of The Restructure
With the recent housing market growth, reverse mortgages are one of the only sectors to take a hit. Unfortunately, this means a temporary restriction on the availability and opportunities of reverse mortgages.
FHA Forced To Borrow
The FHA recently admitted that they were requesting 1.7 billion dollars in bailouts to cover losses it accrued from reverse mortgages. The bailout was requested after the department suffered nearly 5 billion dollars in losses from the remortgaging market.
The FHA insures approximately 40 million home mortgages and many homeowners in the recent past have taken out large amounts of equity on their homes – up to 100% of the accrued equity.
FHA: ‘Borrowing, Not Broke’
Despite the FHA borrowing 1.7 billion dollars from the Federal Treasury, spokesmen say that they are far from broke. Instead, they are using the bailout to create a buffer and adhere to federal laws requiring that it maintains a minimum of 2% in funds available compared against its total loans.
The bailout is designed to allow the FHA to afford reverse mortgages on a large scale.
Equity Available For Withdrawal Capped
One of the major provisions of the restructuring is placing a limit on the amount of money a reverse mortgage can be for in regards to equity. Prior to the restructure, homeowners were able to take out – through either a lump sum or monthly payments – amounts equally to 100% of the total equity of the house. Current revisions are reducing the total equity that can be withdrawn in the first year based on a percentage of the whole amount. This will help slow the amount of money being paid out by the FHA while still giving homeowners access to a significant amount of equity on the home.
Private Lenders Follow FHA
Many private banks and lenders have had to adjust their reverse mortgage policies as well. Much like the FHA, private banks are placing caps on the total equity that can be taken out in a reverse mortgage, as well as creating programs that will allow the homeowner to access the entire equity of the home over a longer period of time.
What is a reverse mortgage?
To put it in simple words – your home can be hypothecated with a lender who will give you money in lieu of the same. Moreover, you can also stay in the house and enjoy it. In a conventional mortgage, you make amortized payment to the lender for the house you’ve purchased that is loaned by him. Whereas in reverse mortgage the lender pays you for the home that is owned by you.
Criteria for a reverse mortgage
- In the U.S. the criteria for a reverse mortgage is you need to be a senior citizen and 62 years of age.
- You must own property and should be living in it.
- Your property/ residence should be free of debt.
- The value of the property should be substantial so that the lender can easily make payments to you.
- It can be a condominium, family dwelling or large homes.
Advantages of reverse mortgage
The advantages of a reverse mortgage are many.
1) Like a pension, the lender will make payment to you monthly depending upon the value of your property. You have the option to take it a lump sum or on monthly payments. You need not pay it back.
2) Even if you decide to pay it back at a later date there is no penalty levied on it.
3) Your credit score doesn’t matter.
4) HUD has set a loan limit of $625,000 for a reverse mortgage. You cannot exceed this amount. The lender takes into consideration your age before fixing in the limit. You can use this money for any other expenses also.
5) For example, my dad took a reverse mortgage to pay for my brother’s college and my wedding. My brother and I felt very bad about this but had no option at that time. Later we saved from our earnings and gave dad back what he had spent on us. That not only made dad happy and tearful (with emotion) he could also release the home from the lender. There was no prepayment penalty here.
6) Older the senior is more money you’ll receive. This money is not taxable and it doesn’t impact your Social Security or Medicare benefits.
So you see there is no need to panic in old age as a reverse mortgage can always give a helping hand to seniors to lead a stress-free life. After all, you deserve it.
The Pros and Cons of a Reverse Mortgage
It is difficult financial times for many older Americans. Many people understand the concept of a reverse mortgage. Less is known about the possible pitfalls of this valuable financial tool. There is a real benefit is to the homeowner with equity in their home.
They are able to borrow or “cash out” of their home’s value. The reverse mortgage is to be repaid when the home sells. As more of the U.S. population approaches the age of 62, there will be a huge jump in the number of reverse mortgages. The U.S. Government has increased the maximum eligible home value. A home can be worth up $625,000 for reverse mortgages.
A reverse mortgage comes from the equity in the home. It is made by making mortgage payments for many years. A homeowner gets equity from owning a home and paying down the mortgage principal and interest. Over time the owner makes payments to reduce the mortgage principal every month. The home’s value also increases over time.
The reason to use a reverse mortgage is that the homeowner can get an infusion of much-needed cash. These payments can be made in a lump sum or in periodic payments. This money can be used for living expenses, medical bills, or a vacation. People often wonder about the downside to the reverse mortgage. Here are some advantages and disadvantages of using a reverse mortgage.
- The homeowner can get money in a lump sum payment. They can also choose monthly installments.
- Reverse mortgages do not require a lengthy credit approval process such as regular mortgages. Typically, the credit score is not an issue if there is sufficient equity in the home.
- The homeowner will have security to stay in their homes for the rest of their lives. The reverse mortgage note becomes due upon sale of the property or death of the owner.
- The fees and charges to issue a reverse mortgage are usually very high. Shop around!
- The homeowner is still responsible for payment of property taxes, homeowner’s insurance, and repairs.
- The home could be sold if a homeowner goes into state care or nursing home.
Retirement financial options usually include IRAs, 401Ks, savings accounts. Some people also have retirement income from investments and annuities. The reverse mortgage was once considered to be risky or exotic. The reverse mortgage is an increasingly popular financial tool.
It is ideal for most baby boomers looking to make up the gap in potential retirement income. Most reverse mortgages are executed under the strictest lending standards. Having a qualified and licensed professional working on your side is essential.
The first step is to speak with a certified or licensed professional. They will help to determine whether a reverse mortgage is right for you. For some homeowners, a refinance may make more sense if household income remains good.
More Americans are considering a reverse mortgage when formulating a long term financial plan. The home has traditionally been a place of security for most people. A reverse mortgage may allow many older people to remain in their homes longer.