Section 7 _Other
Mortgage Options:
BUY-DOWN
OPTIONS - The most common buy-down is the 2-1 buy-down.
Historically, for a borrower to secure a 2-1 buy-down they would
pay approximately 3 points above current market points in order
to pay a below-market interest rate during the first two years
of the mortgage. At the end of the two years, they would then
pay the old market rate for the remaining term. As an example,
if the current market rate for a conforming fixed rate mortgage
is 8.5% at a cost of 1.5 points, the buy-down gives the borrower
a first-year rate of 6.50%, a second-year rate of 7.50% and a
third through 30th-year rate of 8.5% and the cost would be 4.5
points. In the past, relocation companies, because of the high
points associated with buy-downs, have usually absorbed the costs
for qualifying borrower/employee transfers.
In today's market, there are variations of the
old buy-downs rather than the charging of higher points to the
borrower at the inception of the mortgage. It is common in today's
market that the note rate is increased to cover their yields in
later years. As an example, if the current rate for a conforming
fixed rate loan is 8.50% at a cost 1.5 points, the buy-down would
give the borrower a first-year rate of 7.25%, a second-year rate
of 8.25% and a third-year rate of 9.25%. For a three-quarter point
higher rate than the current market, the cost would remain at
1.5 points.
Another common buy-down which has gained in
popularity is the 3-2-1 buy-down which works much in the same
manner as the 2-1 buy-down, with the exception that the starting
interest rate is 3% below the note rate.
Another variation is the flex-fixed buy-down
programs which increase at six month intervals rather than annual
intervals. As an example, for a flex-fixed jumbo buy-down at a
cost of 1.5 points, the rate for the first six months would be
7.50%; over the second six-month period, the rate would be 8.00%;
for the next six months, the rate would be 8.50%; with the next
six months having a 9.00% rate. Following these increments, the
next six months would be 9.50% and at the 37th month the rate
would reach the note rate of 9.875% and would remain there for
the remainder of the term. A comparable jumbo 30-year fixed at
1.5 points would be 8.875%
BALLOON MORTGAGE
- These programs are short-term mortgages that have some of the
features of a fixed rate mortgage. The mortgages provide a level
payment during the term of the mortgage; however, unlike the 30-year
fixed rate mortgage, balloon mortgages do not fully amortize over
the life of the loan.
When the balloon mortgage term expires, the remaining principal
balance must be paid in full, which can be accomplished by refinancing.
Other options, such as a conversion feature, are sometimes part
of the balloon mortgage program. For example, the mortgage may
convert to a 30-year fixed mortgage at the prevailing 30-year
market rate at the time of it being refinanced, 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
conversion option balloon mortgage program is often called 7/23
Convertible or 5/25 Convertible.
GPM GRADUATED
PAYMENT MORTGAGE - The GPM is an alternative to the conventional
ARM and is making a comeback as borrowers and mortgage professionals
seek alternatives in quality home financing. Unlike an ARM, GPMs
have a fixed note rate and payment schedule. With a GPM, the payments
are usually fixed for one year at a time. Each year for five years
(5 times) the payment gradually increases at 7.5% - 12.5% of the
previous years' payment.
GPMs are available in 30 and 15-year amortizations,
and are available for both conforming and jumbo mortgages. With
graduated payments and a fixed note rate, GPMs have scheduled
negative amortization of approximately 10% - 12% of the loan amount
depending on the note rate. The higher the note rate, the larger
the degree of negative amortization. This compares to the possible
negative amortization of a monthly adjusting ARM of 10% of the
loan amount. Both mortgages give the borrower the ability to pay
the additional principal and avoid the negative amortization.
In contrast, the GPM has a fixed payment schedule so the additional
principal payments reduce the term of the mortgage. The additional
payments made on ARMs avoid the negative amortization and the
payments decrease while the term of the mortgage remains constant.
The scheduled negative amortization on a GPM
differs depending on the amortization schedule, the note rate
and the payment increases of the mortgage. GPM loans with 7.5%
annual payment increases offer the lowest qualifying rate but
the largest amount of negative amortization. On a loan of $150,000
with a 30-year amortization and a note rate of 10.50% with 12.5%
annual payment increases, the negative amortization continues
for 60 months. The qualifying rate is 5.7% and the negative amortization
is 11.34% or approximately $17,010.
The note rate of a GPM is traditionally .5%
to .75% higher than the note rate of a typical fixed rate mortgage.
The higher note rate and scheduled negative amortization of the
GPM makes the cost of the mortgage more expensive to the borrower
in the long run. In addition, the borrowers' monthly payments
can increase by as much as 50% by the final payment adjustment.
The advantage is that the lower qualifying rate of the GPM can
help borrowers maximize their purchasing power, and can be useful
in a market with rapid appreciation. In markets where appreciation
is moderate, and a borrower needs to move during the scheduled
negative amortization period, a GPM mortgage could create an unpleasant
situation.
REVERSE MORTGAGE
- A reverse mortgage is a special type of mortgage made to older
homeowners, which enables them to convert the equity in their
homes to cash to finance living expenses, home improvements, in-home
health care, or other needs. See more on this mortgage type in
"Thinking
About Retirement?"
HOME EQUITY MORTGAGE
- You can usually get approved for a home equity loan even if
you have bad credit. Home equity loans, which are second mortgages,
most often are used for home improvements, car purchases or to
consolidate credit card and other high-interest rate debt.
All interest paid on a home equity loan up to $100,000 is usually
tax deductible (check with your accountant to verify, as there
are legislative debates on this issue currently). In addition,
you can borrow more than your home's worth (up to 125%) depending
on your credit and what state the property is located in.
Beware of balloon payments. Most people avoid balloon payments,
so remember to ask if the mortgage you're interested in has a
large balloon payment and/or if there is a convertible feature.
SUBPRIME
MORTGAGES - (Sometimes called A - D Programs) Prior to
1990, it was almost impossible for borrowers with credit challenges
to obtain a mortgage if they did not qualify for either a conventional
or government loan. The Non-Conforming (SubPrime) lending market
was developed to assist borrowers who fell into a higher risk
category in obtaining a residential mortgage. Most borrowers intend
to pay their bills on time. A catastrophic event, loss of employment,
or a job transfer could all be good reasons for falling behind
on scheduled payments. Investors now have latitude to take into
consideration events outside the borrowers' control…but
not without a price.
Compensation for taking risks in lending is
in the form of interest rates. The lower
the risk, the lower the rate. The higher the risk, the higher
the rate. Therefore, there are several risk factors
taken into consideration for the SubPrime borrower. The first
concern is how the borrower has managed to pay their bills and
managed their credit over the past 2 to 5 years. Payments over
30 days late are generally considered minor; however, 60, 90 and
120-day payment delinquency can make you a "C" credit
risk or lower. Credit scores below 620 even with good credit repayment
history will also place you into a higher risk category as will
as bankruptcy and foreclosures. Mortgage defaults have occurred
in the greatest number with credit-challenged borrowers.
Other factors that are taken into consideration
are the borrower's Debt To Income levels (D.T.I. - usually anything
over 40% of the borrower's gross monthly income will place the
borrower into a SubPrime position); employment history if less
than 2 years; type of property, and lack of assets. In short,
when exceptions must be made outside of conventional or governmental
program guidelines, interest rates are higher and mortgage terms
are not optimum.
In a purchase transaction, a borrower
can get the into the home they want at what they qualify for "now";
clean up their credit, re-establish new credit, and ultimately
refinance into a lower rate at a later time. If the borrower already
has a mortgage, a refinance to cash out equity to eliminate higher
rate credit cards and debts is a good way to reconcile a troubled
credit history and save money at the same time.
No matter what your situation, we are
committed to helping you devise a plan with your long-term goals
in focus.
