Mortgage & Title - Choosing The Type Of Mortgage You Want

There isn't a simple answer to choosing a type of mortgage. The most important factor in choosing a mortgage is finding a payment plan you can afford. Keep in mind, aside from the monthly mortgage payment, you also have home maintenance costs, property taxes, and home owners insurance. The best way to decide on a mortgage is to consult with a mortgage broker or financial professional.

The most common type of mortgage program is a fixed rate mortgage. Your monthly payments never change. Property taxes and homeowners insurance may increase, but generally your monthly payments will be very stable.

Fixed-rate mortgages are available for 30-years, 20-years, 15-years and even 10-years. The most common fixed rate loans are 15-year and 30-year mortgages. You can also choose a bi-weekly mortgage. This type of mortgage shortens the loan period by having you pay half the monthly payment every two weeks. Instead of 12 monthly payments each year you will make 26, 1/2-month payments or 13 annual monthly payments.

Fixed rate loans have two distinct features. First, the interest rate remains fixed for the life of the loan. Secondly, the payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term.

During the beginning of the loan, a large percentage of the monthly payment is used for paying the interest . As the loan is paid down, more of the monthly payment is applied to principal . A typical 30-year fixed rate mortgage takes 22.5 years of level payments to pay half of the original loan amount.

Adjustable rate mortgages (ARMs) generally begin with an interest rate that is 2-3 percent below a comparable fixed rate mortgage, and could allow you to buy a more expensive home.

However, the interest rate changes at specified intervals (for example, every year) depending on changing market conditions; if interest rates go up, your monthly mortgage payment will go up, too. However, if rates go down, your mortgage payment will drop also.

There are also mortgages that combine aspects of fixed and adjustable rate mortgages - starting at a low fixed-rate for seven to ten years, for example, then adjusting to market conditions.

The index of an ARM is the financial instrument that the loan is "tied" to, or adjusted to. The most common indices, or, indexes are the 1-Year Treasury Security, LIBOR (London Interbank Offered Rate), Prime, 6-Month Certificate of Deposit (CD) and the 11th District Cost of Funds (COFI). Each of these indices move up or down based on conditions of the financial markets.

ARMs with different indexes are available for both purchases and refinances. Choosing an ARM with an index that reacts quickly lets you take full advantage of falling interest rates. An index that lags behind the market lets you take advantage of lower rates after market rates have started to adjust upward.

The interest rate and monthly payment can change based on adjustments to the index rate.

6-Month Certificate of Deposit (CD) ARM Has a maximum interest rate adjustment of 1% every six months. The 6-month Certificate of Deposit (CD) index is generally considered to react quickly to changes in the market.

1-Year Treasury Spot ARM Has a maximum interest rate adjustment of 2% every 12 months. The 1-Year Treasury Spot index generally reacts more slowly than the CD index, but more quickly than the Treasury Average index.

6-Month Treasury Average ARM Has a maximum interest rate adjustment of 1% every six months. The Treasury Average index generally reacts more slowly in fluctuating markets so adjustments in the ARM interest rate will lag behind some other market indicators.

12-Month Treasury Average ARM Has a maximum interest rate adjustment of 2% every 12 months. The treasury Average index generally reacts more slowly in fluctuating markets so adjustments in the ARM interest rate will lag behind some other market indicators.

Balloon loans are short term mortgages that have some features of a fixed rate mortgage. The loans provide a level payment feature during the term of the loan, but as opposed to a fixed rate mortgage balloon loans have a term of 5 to 7 years.

At the end of the loan term there is still a remaining principal loan balance and the mortgage company generally requires that the loan be paid in full, which can be accomplished by refinancing. Many companies have other options such as a conversion feature at the end of the term. For example, the loan may convert to a 30-year fixed loan at the thirty year market rate plus 3/8 of a percentage point. Your conversion can be guaranteed based on certain criteria such as having made your last 24 payments on time. The balloon mortgage program with the conversion option is often called a 7/23 Convertible or 5/25 Convertible.

Unlike an ARM, GPMs have a fixed rate and payment schedule. With a GPM the payments are usually fixed for one year at a time. Each year for five years the payments graduate at 7.5% - 12.5% of the previous years payment. After several increases the payment usually levels off at a fixed value. GPMs are available in 30-year and 15-year terms.

The total amount of the loan paid of a GPM is traditionally .5% to .75% higher than the a fixed rate mortgage and makes the cost of the mortgage more expensive to the borrower in the long run. In addition, the borrowers monthly payment can increase by as much as 50% by the final payment adjustment.

GPMs usually require a lower qualification and can help borrowers maximize their purchasing power. Another draw-back to the GPM is if the borrower needs to move during the loan it could be costly.

Reverse Mortgage

A reverse mortgage is a special type of loan made to older homeowners to finance living expenses, home improvements, in-home health care, or other needs. A Reverse mortgage enables them to convert the equity in their home to cash.

With a reverse mortgage, the payments are "reversed." Payments are made by the lender to the borrower rather than by the borrower to the lender.

A reverse mortgage is a sophisticated financial planning tool that enables seniors to stay in their home -- or "age in place" -- and maintain or improve their standard of living without taking on a monthly mortgage payment. The process of obtaining a reverse mortgage involves a number of different steps.

The first, most widely available reverse mortgage in the United States was the federally-insured Home Equity Conversion Mortgage (HECM), which was authorized in 1987.

A reverse mortgage is different from a home equity loan or line of credit, which many banks and thrifts offer. With a home equity loan or line of credit, an applicant must meet certain income and credit requirements, begin monthly repayments immediately, and the home can have an existing first mortgage on it. In addition, there is no restriction on the age of borrowers.

In general, reverse mortgages are limited to borrowers 62 years or older who own their home free and clear of debt or nearly so, and the home is free of tax liens.

Borrowers usually have a choice of receiving the proceeds from a reverse mortgage in the form of a lump-sum payment, fixed monthly payments for life, or line of credit. Some types of reverse mortgages also allow fixed monthly payments for a finite time period, or a combination of monthly payments and line of credit. The interest rate charged on a reverse mortgage is usually an adjustable rate that changes monthly or yearly. However, the size of monthly payments received by the senior doesn't change.

Some reverse mortgage products also involve the purchase of an annuity that can assure continued monthly income to the senior homeowner even after they sell the home.

The size of reverse mortgage that a senior homeowner can receive depends on the type of reverse mortgage, the borrower's age and current interest rates, and the home's property value. The older the applicant is, the larger the monthly payments or line of credit. This is because of the use of projected life expectancies in determining the size of reverse mortgages.

Seniors do not have to meet income or credit requirements to qualify for a reverse mortgage and the loan can occur if the sole remaining borrower dies, the borrower sells the home, or the borrower moves out of the home, say, to a nursing home.

The repayment obligation for a reverse mortgage is equal to the principal balance of the loan, plus accrued interest, plus any finance charges paid for through the mortgage. This repayment obligation, however, can't exceed the value of the home.

The loan may be repaid by the borrower or by the borrower's family or estate, with or without a sale of the home. If the home is sold and the sale proceeds exceed the repayment obligation, the excess funds go to the borrower or borrower's estate. If the sales proceeds are less than the amount owed, the shortfall is usually covered by insurance or some other party and is not the responsibility of the borrower or borrower's estate. In general, the repayment obligation of the borrower or borrower's estate can't exceed the value of the property.

In general, a borrower can't be forced to sell their home to repay a reverse mortgage as long as they occupy the home, even if the total of the monthly payments to the borrower exceeds the value of the home.