Use of nontraditional mortgages has increased among home buyers, according to a Wall Street Journal Online/Harris Interactive poll–could you benefit too?
There are four major types of non-traditional mortgages:
- Interest-only mortgages, which have received considerable media attention as home prices have skyrocketed, allow borrowers to pay interest but no principal during the early years of the loan.
- Piggyback mortgages combine a standard first mortgage with a home-equity loan or line of credit, thereby allowing the borrower to avoid paying private mortgage insurance or higher interest rates on jumbo loans.
- Miss-a-payment mortgages let borrowers skip up to two mortgage payments per year, and up to 10 payments over the life of the loan, without damaging their credit rating.
- Payment option mortgages give borrowers four-payment options–not when they take out the mortgage, but every single month.
These include
1) a payment based on a 30-year amortization table which, if made every month, will pay off the mortgage in 30 years;
2) a payment based on a 15-year amortization table, which, if made every month, will pay off the mortgage in 15 years;
3) an interest-only payment, in which the principal balance will remain unchanged; and
4) a partial-interest payment, in which part of the interest is deferred and added to the principal balance.
The chart below illustrates the reduced payment on an interest-only loan.
|
Factors |
Loan 1 |
Loan 2 |
Loan 3 |
|
Loan amount |
$350,000 |
$350,000 |
$350,000 |
|
Interest rate |
7% |
6% |
5% |
|
Length of loan |
30 |
30 |
30 |
|
Traditional monthly payment |
$2,329 |
$2,098 |
$1,879 |
|
Interest-only monthly payment |
$2,042 |
$1,750 |
$1,458 |
Source: Archer Pacific, as of October 2006 (www.archerpacific.com/compare%204%20mortgage%20loans%20calculator.html). This example is hypothetical. You may not be eligible for any of these loans, and if you are, interest rates on loans will vary based on your financial circumstances and prevailing interest rates.
If you want to buy more house than you can afford with a traditional mortgage, these options can be good tools, and more people are using them. The Wall Street Journal Online/Harris Interactive survey found increased usage of three of four types of nontraditional mortgages from 2005 to 2006.
But borrower beware: Non-traditional mortgages can be riskier than standard fixed-rate or adjustable-rate mortgages. For example, with payment option mortgages, borrowers who elect to make the minimum payment could see their loan balance rise, rather than fall. That’s because the deferred principal and interest payments get tacked onto the home owner’s total debt, a process known as negative amortization.
Specifically for seniors are reverse mortgages. If you have sufficient equity, these will allow you to pay off your traditional mortgage and even pay you.
Financial professionals who seek to assist retirees with retirement income, visit ProspectMatch
If they use interest only moratge thier mortgage could go up after next rate increase if it is adjustable. I know some of the problems happened to people doing this and they would owe more money and payments would go up.
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Great Post. I especially found it useful when you stated that these none traditional loans can be risky. So many people are in crisis modes right now and are easy prey to find some sort of relief.
I have a client of mine who is on an interest only loan. He is sixty five and the principle amount of his mortgage continues to go up. He is trying to put a couple of hundred dollars on the principle each month, but it is not helping his situation. He will never pay that mortgage off.
These are facts that people need to know.
Thank you for your post. I look forward to reading more.
This is great advice, thanks!
I recently came across a series of five videos put together by the AARP, the membership organization for those that are aged 50+.
I have grouped these videos together, they really are worth a look – each one is packed with useful information:
and so on.
Thanks again, keep up the good work!
Dom
Thanks for sharing, I only know a bit about reverse mortgages before reading your post 🙂
‘Reverse Mortgages’ or Equity Release Schemes as they are called in the UK are becoming more and more popular. When you look at the retirement income provision of most of the population (here in the UK he adverage fund is supposedly £40,000), it beggars belief how some people even survive given the rising energy costs we are all facing!
Reverse mortgages, i believe, really help certain people out by, as you say, clearing off existing mortgages and potentially paying you an excess over this amount. Surely that has to be a good thing for many who are struggling to survive. But then as this interest is rolled up into one giant loan paid off on death – I just hope the people doing it let their kids know! Great post by the way, really simple advice which I too give to my clients.
I got a nice short overview of the options that are available, I hadnt put interest into it before, but find some new ways, new possibilities, I have a 30-year mortage on me btw.
John
Reverse mortgages are becoming more and more popular as seniors evaluate options to maintain their lifestyle. In my opinion, if they want to use up their equity and leave nothing to their kids, that’s their perogative. I know that if my parents wanted a reverse mortgage, I wouldn’t be upset, it’s their home.
Regards,
Chad
with people wanting bigger more expensive properties people are risking going away from traditional mortgages and quite a few people have paid the price and lucked out. If you can’t get a traditional mortgage then these other options are there but as a consumer you have to make sure you can pay the monthly repayments and watch the interest rates as depending on what you got could change.
Interesting post. However on the topic of reverse mortgages retired people need to think long & hard. I know of several retired couples who took out reverse mortgages. Their circumstances changed and they needed to change their accommodation only to discover that the original principal plus interest accrued had grown so much over a number of years that they were stuck. Insufficient funds would have been left to purchase the newer accommodation by the time the reverse mortgage was paid out.
No doubt a reverse mortgage may suit some people. However once committed there is not much room to turn back.
Reverse mortgages are happening all the time. I think seniors are entitled to do what they want with their equity. They have after all worked all their lives to generate the savings.
It seems like these reverse mortgages are becoming more mainstream because I am beginning to hear a lot more about them, and even seeing commercials on TV for them. I was listening to a financial advice radio show the other day when someone called into ask advice on a reverse mortgage, the host said that it really depends on your individual situation, but for some people they could really provide some benefit. I’m not all that familiar with those other types though, except for the interest only mortgages, I know those were very popular during the real estate boom.
I agree that it is at the discretion of the owner whether or not they execute a reverse mortgage deal, my only concern would unscrupulous LOs/brokerages that may mis-lead or omit certain details when pitching the product that could potentially devastate the consumer later down the road. I’m sure eventually we will get to the point where companies are forced to operate transparently, but until then, buyer beware…
Nice Post. It is really true, you can save Money–or pay you like a Reverse Mortgage.
Reverse mortgages are becoming popular in America. HUD’s Federal Housing Administration (FHA) created one of the first. The Home Equity Conversion Mortgage (HECM) is FHA’s reverse mortgage program which enables you to withdraw some of the equity in your home. The HECM is a safe plan that can give older Americans greater financial security. Many seniors use it to supplement social security, meet unexpected medical expenses, make home improvements and more. You can receive additional free information about reverse mortgages in general by contacting the National Council on Aging at (800) 510-0301 or downloading a free booklet, “Use Your Home to Stay at Home,” a guide for older homeowners who need help now. Since your home is probably your largest single investment, it’s smart to know more about reverse mortgages, and decide if one is right for you!
A reverse mortgage really saved our bacon last year. If the numbers work and your in need then there is no better way to go.
Nice read here. A lot of people are not aware that there can be some better way on mortgages. This article will help them enlighten their views. Thanks for posting.