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 on the home he or she is borrowing 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 home mortgage a real challenge, the SAM has never really caught on. Adjustable rate mortgages (ARMs) proved more attractive for buying a home.
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 home loans are split in half, payable every two weeks.
Because there are 52 weeks in a year, you actually have 26 home mortgage half-payments, or the equivalent of 13 monthly mortgage payments per year instead of 12.
Under the biweekly mortgage payment plan, a homeowner can save tens of thousands of dollars in interest and pay off his or her home 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 on your home loan. They are often written by the mortgage lender at a below market interest rate and have shorter terms.
A GEM lets you pay off the home mortgage earlier, save tens of thousands of dollars in interest payments, and build home 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 from your home equity loan can then be used to cover home repairs, everyday living expenses, and medical bills.
Instead of making monthly payments to a mortgage 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 home loan.
A reverse mortgage is repaid when the property is sold or the homeowner moves. Should the homeowner die before the property is sold, the estate repays the home 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 to buy the home.
Equity sharing is not as popular in a slowly appreciating real estate market as in a rapidly appreciating one when home equity investors are easy to find. A type of home equity sharing called tenants-in-common partnerships is becoming increasingly popular with homeowners, especially in high-priced real estate markets.
First-time homebuyers 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 mortgage 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 if you are considering these equity sharing ideas when buying a home.
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 mortgage loans for homeowners or homebuyers. There was a time when these home mortgages were hard to find. Then when the housing market and real estate took off, so did the number of mortgage lenders offering them. Not so today. High default rates on sub-prime mortgages have created high-risk borrowers with bad credit, those who had filed for bankruptcy, or those who had a property in foreclosure. Because of these default rates, now many home lenders either shun these mortgage loans or tighten credit requirements on them.
As a rule, these home 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 home borrower’s problems, the lower the grade of the mortgage loan and the higher the rates and fees associated with the home loan.
At one time, the outrageously high rates on these mortgage loans had dropped as more home 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 for the financial lending institution who has to carry these home borrowers’ mortgage loans.
What about a hybrid loan?
Also called a fixed-period ARM, these crossbreed mortgage loans combine features of fixed-rate and adjustable-rate mortgages.
These mortgages 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 home 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 home loan allows borrowers to buy a lot more home than they can afford – but at greater risk for mortgage default.
The terms and fees for these home 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 home loan, pay close attention to the terms, fees, and prepayment penalties.
What are jumbo loans?
If you borrow at or below the conventional mortgage loan limit for non-government mortgages, you have what is known as a “conforming” mortgage loan. If the amount surpasses the mortgage 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” mortgage loan and pay a somewhat higher rate because mortgage lenders believe these larger home loans carry more risk.
There are also loan limits on FHA and VA loans when buying a home. Veterans who live in high-cost areas or who wish to buy a home or refinance a home loan above $240,000 can now use their VA status to do so. In instances where the new home loan amount exceeds that price, the VA will allow the new home 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 home equity in the property to cover that amount.
What is a balloon mortgage?
A balloon mortgage 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 home borrower must pay the mortgage, refinance the home, or lose the property.
Interest rates on balloon mortgages are lower than for fixed-rate mortgages. So homeowners’ 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 sell your home well within the period of the balloon mortgage.
What is a bridge loan?
A bridge loan 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 home buyer and a signed contract between the home buyer and the home seller. 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 mortgage 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 mortgage lenders for the down payment. So if you have stocks, bonds, or an insurance policy, you can borrow against these instruments as well to finance your home purchase.
What is a lease option?
A lease option is an agreement between a renter of a home and a landlord or homeowner in which the renter signs a lease with the homeowner with an option to purchase the property. The option only binds the seller of the home; the tenant has a choice to make a home purchase or not.
Lease options are common among home 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 mortgage lender for a home loan.
Under this arrangement, the landlord (or homeowner) agrees to give a renter (or home seller) 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 of the home should take place.
A portion of the rent is used to make the future down payment on the home. Most mortgage 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. Buying a home is complicated and you want to ensure you’re starting off on the right foot.
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. This mortgage has one interest rate for part of the life of the mortgage and a different rate for the remainder of the home loan.
Two steps are 30-year mortgages. They can either be convertible or nonconvertible mortgages. 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 home 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 home loan.
The initial rate on the two step mortgage is lower than on a 30-year fixed mortgage, but higher than a one-year adjustable mortgage. 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, a wraparound home loan 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 mortgage.
The wraparound allows the buyer of the home to purchase a home without having to qualify for a loan or pay closing costs. The contract is made between the buyer of the home and the seller of the home 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 home loan.
The seller of the home benefits by offering the buyer a home loan at a higher interest rate than the existing mortgage, and the mortgage lender profits from the difference in interest in the two home 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 home loan financing.
What is an assumable mortgage?
An assumable mortgage is a mortgage held by the seller that can be taken over by the buyer when a home is sold. Such mortgage 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 home 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 home loan or apply for a new one to buy a home, pay close attention to the possible assumption fee, usually one point, and other terms of assumption set forth in the existing home loan. One plus: there are generally few closing costs with an assumable loan.
While an assumable mortgage can speed up the property sale, home sellers should be careful about letting a home 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 mortgage lender may go after both the seller of the home and the buyer of the home if the loan is not paid.
What is seller financing?
Also known as a purchase money mortgage, seller financing is when the seller of the home agrees to “lend” money to the home buyer to purchase and close on the seller’s home. Usually home sellers do this when money is tight, interest rates are high or when a home buyer has difficulty qualifying for a conventional loan or meeting the purchase price of the home.
Seller financing differs from a traditional mortgage loan because the seller of the home does not actually give the buyer of the home cash to complete the home purchase, as does the mortgage lender. Instead, it involves issuing a credit against the purchase price of the home. The home buyer executes a promissory note or trust deed in the home seller’s favor.
The homeseller may take back a second note or finance the entire purchase if he owns the home free and clear.
The buyer of the home makes a sizeable down payment and agrees to pay the seller of the home 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 mortgage loans, and the length of the loan shorter, anywhere from five to 15 years..