Are shared equity and shared appreciation mortgages the same?
No. With a shared appreciation mortgage, or SAM, a borrower receives a below-market interest rate in return for the lender receiving a share, usually 30 to 50 percent, in the future appreciation of the property upon its sale.
Introduced in the early 1980’s, when interest rates were high enough to make qualifying for a mortgage a real challenge, the SAM has never really caught on. Adjustable rate mortgages (ARMs) proved more attractive.
Can I split my mortgage in two and pay biweekly?
The biweekly mortgage has become increasingly popular as more people favor paying off their home loan early and reducing interest charges.
Monthly payments on these loans are split in half, payable every two weeks.
Because there are 52 weeks in a year, you actually have 26 half-payments, or the equivalent of 13 monthly payments per year instead of 12.
Under the biweekly payment plan, a homeowner can save tens of thousands of dollars in interest and pay off their loan balance in less than 30 years.
How do growing equity mortgages work?
Also called GEMs, these fixed-rate mortgages have monthly payments that increase in increments of 3 percent or more to reduce the principal loan amount. They are often written by the lender at a below market interest rate and have shorter terms.
A GEM lets you pay off the mortgage earlier, save tens of thousands of dollars in interest payments, and build equity quickly. A 30-year GEM, depending on the interest rate, can normally be paid off in 15 to 20 years.
Is a reverse mortgage good for elderly homeowners?
A reverse mortgage is an increasingly popular option for older Americans to convert home equity into cash. Money can then be used to cover home repairs, everyday living expenses, and medical bills.
Instead of making monthly payments to a lender, the lender makes payments to the homeowner, who continues to own the home and hold title to it.
According to the National Reverse Mortgage Lenders Association, the money given by the lender is tax-free and does not affect Social Security or Medicare benefits, although it may affect the homeowners’ eligibility for certain kinds of government assistance, including Medicaid.
Homeowners must be at least 62 and own their own homes to get a reverse mortgage. No income or medical requirements are necessary to qualify, and they may be eligible even if they still owe money on a first or second mortgage. In fact, many seniors get reverse mortgages to pay off the original loan.
A reverse mortgage is repaid when the property is sold or the owner moves. Should the owner die before the property is sold, the estate repays the loan, plus any interest that has accrued.
Is equity sharing a good idea?
A shared equity mortgage, or partnership mortgage, can be a good way to purchase a home with little or no money down. In such an arrangement, the borrower/homebuyer has an absentee partner who, as the investor, provides all or some of the down payment.
Equity sharing is not as popular in a slowly appreciating real estate market as in a rapidly appreciating one when equity investors are easy to find. A type of equity sharing called tenants-in-common partnerships is becoming increasingly popular, especially in high-priced markets.
First-time buyers are usually most interested in a TIC arrangement because it gives them a way to buy property collectively with an unrelated partner.
Loan underwriting standards are more complicated with these types of deals because lenders have more than one party’s financial situation to assess.
It is a good idea to hire an attorney to help draft a shared equity agreement.
Should I consider a “B,” “C,” or “D” paper loan if I have bad credit?
B, C, and D paper loans are types of sub-prime loans. There was a time when they were hard to find. Then when the housing market took off, so did the number of lenders offering them. Not so today. High default rates on sub-prime mortgages made to high-risk borrowers with bad credit or those who had filed for bankruptcy or had a property in foreclosure, now have many lenders either shunning these loans or tightening credit requirements on them.
As a rule, these loans have not met the borrower credit requirements of “A” or “A-” category conforming loans. Because mortgage lending is divided into various credit grades, several factors influence whether you receive, say, a “B” or “D” designation, including past credit history, documentation, and your debt-to-income ratio. The more serious a borrower’s problems, the lower the grade of the loan and the higher the rates and fees associated with the loan.
At one time, the outrageously high rates on these loans had dropped as more lenders began to offer them. Since the credit crunch spurred by the sub-prime mortgage crisis, rates on these paper loans have shot back up, reflecting in more stark terms their heightened risks.
What about a hybrid loan?
Also called a fixed-period ARM, these crossbreed loans combine features of fixed-rate and adjustable-rate mortgages.
They start out with a fixed interest rate for a number of years – usually 3, 5, 7 or 10 years – and then convert to an ARM.
Initially, the interest rate for the fixed period of the loan is much lower than the rate on a fixed-rate, 30-year mortgage by about 1.5 percentage points. As a result, the hybrid allows borrowers to buy a lot more home than they can afford – but at greater risk.
The terms and fees for these loans vary widely and when the fixed-rate period expires, homeowners could end up paying considerably more than the current rate of interest.
Before considering a hybrid, pay close attention to the terms, fees, and prepayment penalties.
What are jumbo loans?
If you borrow at or below the conventional loan limit for non-government mortgages, you have what is known as a “conforming” loan. If the amount surpasses the loan limit that is set by both Fannie Mae and Freddie Mac –now $333,700 for a single-family home – you would then have a “jumbo” loan and pay a somewhat higher rate because lenders believe these larger loans carry more risk.
There are also loan limits on FHA and VA loans. Veterans who live in high-cost areas or who wish to buy or refinance a home loan above $240,000 can now use their VA status to do so. In instances where the new loan amount exceeds that price, the VA will allow the new loan amount to go up to $333,700 – if the veteran either puts down 25 percent of any amount over the $240,000 or has sufficient equity in the property to cover that amount.
What is a balloon mortgage?
It is a mortgage in which the entire unpaid principal becomes due and payable on a given date, five, ten, or any number of years in the future. The borrower must pay up, refinance, or lose the property.
Interest rates on balloon mortgages are lower than for fixed-rate mortgages. So their monthly mortgage payments will be lower than the monthly payments for conventional mortgages.
Balloon mortgages are a good way to keep monthly housing costs to a minimum if you plan to move or sale well within the period of the balloon.
What is a bridge loan?
It is a short-term bank loan of the equity in the home you are selling. You may take out a bridge loan, or interim financing, to help with a knotty situation: closing on the home you are buying before you close on the property you are selling. This loan basically enables you to have a place to live after the closing on the old home.
The key to a bridge loan is having a qualified buyer and a signed contract. Usually, the lender issuing the mortgage loan on the new home will write the interim financing as a personal note due at settlement on the property being sold.
If, however, there is no buyer for the property you have up for sale, most lenders will place a lien on the property, thereby making that bridge loan a kind of second mortgage.
Things to consider: interest rates are high, points are high, and there are costs and fees involved on bridge loans. It may be cheaper to borrow from your 401(K). Actually, any secured loan is acceptable to lenders for the down payment. So if you have stocks or bonds or an insurance policy, you can borrow against them as well.
What is a lease option?
It is an agreement between a renter and a landlord in which the renter signs a lease with an option to purchase the property. The option only binds the seller; the tenant has a choice to make a purchase or not.
Lease options are common among buyers who would like to own a home but do not have enough money for the down payment and closing costs. A lease option may also be attractive to tenants who are working to improve bad credit before approaching a lender for a home loan.
Under this arrangement, the landlord agrees to give a renter an exclusive option to purchase the property. The option price is usually determined at the outset, but not always, and the agreement states when the purchase should take place.
A portion of the rent is used to make the future down payment. Most lenders will accept the down payment if the rental payments exceed the market rent and a valid lease-purchase agreement is in effect.
Before you opt to do a lease option, find out as much as possible about how they work. Have an attorney review any paperwork before you and the tenant sign on the dotted line.
What is a two-step mortgage?
Not to be confused with a biweekly mortgage, this type of home loan is also known as 5/25s and 7/23s. It has one interest rate for part of the life of the mortgage and a different rate for the remainder of the loan.
Two steps are 30-year mortgages. They can either be convertible or nonconvertible. The 5/25s have a fixed interest rate for the first five years and either convert to a one-year adjustable rate or a 25-year fixed loan. The 7/23 has a fixed interest rate for the first seven years and then converts to a one-year adjustable rate or a 23-year fixed loan.
The initial rate on the two step is lower than on a 30-year fixed mortgage, but higher than a one-year adjustable. Also, because the adjustment interval is longer, there is less risk initially than with an adjustable rate mortgage, or ARM.
What is a wraparound loan?
Also called an all-inclusive mortgage, it is where a new home loan is placed in a subordinate or secondary position to the original mortgage and the new loan includes the unpaid balance of the first.
The wraparound allows the buyer to purchase a home without having to qualify for a loan or pay closing costs. The contract is made between the buyer and seller with the seller remaining on the original mortgage and title. The buyer pays the seller a fixed monthly amount and the seller uses part of this money towards the existing loan.
The seller benefits by offering the buyer a loan at a higher interest rate than the existing mortgage, and the lender profits from the difference in interest in the two loans.
Wraparounds are not for novices and cannot be used when there is a legally enforceable “due on sale” clause in the first mortgage.
Consult an attorney if you are considering this type of financing.
What is an assumable mortgage?
It is a mortgage held by the seller that can be taken over by the buyer when a home is sold. Such loans are hard to find because most lenders stopped voluntarily writing them many years ago. Most new assumable loans today are adjustable rate mortgages.
An assumable mortgage may be attractive if the interest rate on the existing loan is lower than the rate the buyer could otherwise get on a new mortgage, either because of current market conditions or the buyer’s poor credit history.
To determine whether to assume an old loan or apply for a new one, pay close attention to the possible assumption fee, usually one point, and other terms of assumption set forth in the existing loan. One plus: there are generally few closing costs with an assumable loan.
While an assumable mortgage can speed up the property sale, sellers should be careful about letting a buyer assume their mortgage. Depending on the state and terms of the mortgage, a seller may remain liable for the loan until it is paid off in full. Or the lender may go after both the seller and the buyer if the loan is not paid.
What is seller financing?
Also known as a purchase money mortgage, it is when the seller agrees to “lend” money to the buyer to purchase and close on the seller’s home. Usually sellers do this when money is tight, interest rates are high or when a buyer has difficulty qualifying for a conventional loan or meeting the purchase price.
Seller financing differs from a traditional loan because the seller does not actually give the buyer cash to complete the purchase, as does the lender. Instead, it involves issuing a credit against the purchase price of the home. The buyer executes a promissory note or trust deed in the seller’s favor.
The seller may take back a second note or finance the entire purchase if he owns the home free and clear.
The buyer makes a sizeable down payment and agrees to pay the seller directly every month.
The interest rate on a purchase money note is negotiable, as are the other terms in a seller-financed transaction, and is generally influenced by current Treasury bill and certificate of deposit rates. The rate may be higher than those on conventional loans, and the length of the loan shorter, anywhere from five to 15 years.