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Reverse Mortgage

Abstract:
In this paper we will discuss reverse mortgage. We will define reverse mortgage and provide details regarding the benefits and the eligibility requirements of reverse mortgages. Reverse mortgage is a type of loan that enables eligible homeo wners easily obtain a tax-free cash flow.
Millions of people, especially senior citizens, are applying for reverse mortgages to secure their post-retirement lives. Because the government sponsors and insures this loan program no payments are required during the loan’s tenure, as long as the borrower lives in the home. Reverse mortgages allow borrowers to access the money they spent building up their home equity.

There are three types of Reverse Mortgage: Federally Insured Mortgage, Uninsured Mortgage, and Lender Insured Mortgage. Different kinds of reverse mortgage products are available on the market, such as the Mae Home Keeper mortgages, home equity conversion mortgages, and cash accounts. The loan is classified according to the type of the residential property.

Eligibility:
1.The candidate must be a senior citizen, normally above 60 years of age.
2.The home, where the applicant is currently living, should be a “single family residence.”
3.The candidate should reside in his home for the entire period of the loan.

Benefits:
1. Borrowers can enjoy ownership of their residence throughout their lives.
2. Candidates do not need to repay the loan as long as they are living in their home.
3. No credit history is required for this loan.

Home Loans for Purchase or Refinance

Fixed mortgage: Simple interest, fully amortized home loans have payments that remain the same for the full term. 30 year and 15 year fixed rate mortgages are the most common. Short term home loans accelerate principal reduction and cut interest expense, while a 30 year mortgage can provide lower payments. Some lenders offer mor term options, such as 20 year or 10 year fixed rate loans. Other loan options can include low cost or zero points mortgage programs.

Adjustable mortgage: The most common adjustable rate loan is a fully amortized 30 year mortgage. Home loan rates are determined by adding an index to a margin. The index is a financial point of reference, such as the one year treasury, which can fluctuate. The margin is set by the lender, and remains the same for the life of the loan. Lenders offer ARMs with current mortgage rates fixed for the initial 3, 5, or 7 years, with the remaining term adjusting on a yearly basis. These programs typically have a low cost or zero point home loan option. 

FHA mortgage: Popular for buying a home because of the low down payment, plus the credit and income guidelines offer easy qualifying compared to conventional loans, FHA loans offer:

  • Down payment as low as 3.5% of purchase price when buying a home
  • FHA guidelines allow lower credit scores for more easy qualifying
  • Higher debt ratios allow home buyers to qualify with less income
  • A non-occupant co-borrower can help a first time home buyer qualify
  • Low cost fees with limitations set by FHA & zero points option
  • A previous bankruptcy only needs to be discharged for two years
  • Less cash reserves make it easier to qualify for a first time home buyer
  • FHA allows all or part of the down payment to be a gift from close relatives

When buying a home, remember to budget enough money for closing costs and setting up an impound account, which is money collected at closing held in reserve for taxes and insurance.

FHA Loans for Home Purchase & Refinance

FHA programs can work well for borrowers who need flexible qualifying guidelines. Mortgage lender rate quotes are available to buy a home or refinance with FHA. Zero point option, rate & term, cash out refinancing programs are available, as well as bad credit FHA programs.

If you have an existing mortgage through FHA, you have the opportunity to reduce the monthly loan payment using a streamline FHA refinance, which requires no income verification.

Benefits of the FHA Program:

  • Cash out FHA refinance up to 85% loan to value
  • Minimum down payment for buying a home is 3.5%
  • Higher loan limits are based on location of the property
  • FHA lenders allow for credit scores as low as 620
  • A higher debt ratio is allowed in comparison to conventional loans
  • FHA rate quotes are comparable to conventional home loans
  • Non-occupant co-borrower may be added to help qualify
  • Certain closing costs have limitations which are set by FHA
  • A previous bankruptcy only needs to be discharged for 2 years
  • Collection accounts may not have to paid to close a loan
  • FHA may not have a requirement for any cash reserves

Compare FHA refinance or home purchase quotes for 15 year or 30 year fixed rates, and 5 year ARM program. Every loan is required to have a mortgage insurance premium of 1.75%, which can be added to the financed loan amount. There is also a monthly premium added to the payment. Condominiums do not require the up-front premium, only the monthly amount. For information on non-approved condos, see spot loans.

FHA program guidelines allow a debt ratio of 43% of gross income for the PITI monthly payment, plus all other monthly debts. For an FHA refinance or home purchase, Good compensating factors may allow for a higher ratio, such as: Documented ability to pay more than the proposed loan payment; demonstrated ability to accumulate savings; minimal increase in housing expense; potential for increased earnings; substantial non-taxable income; good credit history.

Home Equity Loan Financing Programs

Home equity loan programs work essentially the same as a second mortgage. Equity cash out can be accessed without having to refinance the existing first mortgage, and the cash can be used for debt consolidation, auto loans, home improvement, or personal expenses.

The amount of a loan or a credit line is determined by the difference between the appraised value and the current first mortgage, subject to the maximum loan to value allowed by the lender. Closing costs and fees vary by lender, with some offering zero point home equity loans.

With a fixed rate equity loan, the borrower receives a one-time payment at the closing of the process. If you have an existing home equity loan, 2nd mortgage, or a home equity credit line, it has to be paid off with the proceeds of the new loan, so be sure to borrow a sufficient amount.

If a home equity loan is secured by a lien on your primary residence, the interest payments may be deductible from your taxes, within the allowed limitations, check with a tax advisor. After the loan documents are signed, you have a 3 day right to cancel if you change your mind.

Equity loans are typically available in 5 year, 10 year, 15 year or 20 year terms. Home equity loans with longer terms can provide a lower payment, but also means more interest is paid over the life of the loan.

For example, the monthly payment on $100,000 for 30 years may be about $200 less than a 15 year loan, however, the interest paid could be more than double for the full 30 year term.

Do Banks or Brokers Have the Best Rates?

If it is true that commission based brokers charge more, then it should also be true that banks have the lowest mortgage rates and costs if they are not commission based.  

In order to test this assumption, we surveyed the refinance rates offered by a selection of both mortgage banks and brokers. According to our survey, the difference in mortgage rates was at most, about 1/8 of a percent, with mortgage brokers often having the lowest refinance rates. Banks and credit unions may have an advantage for better home equity loan rates and fees. Our survey does not claim the final word, but it appears that banks are not giving away the store.

It turns out that banks and brokers use the same mortgage investment companies as their source of funds. Wholesale loan prices tend to be consistent among lenders, other than a potential volume discount. Some mortgage banks in effect also compete with themselves by having both a retail division, and a wholesale division that gives brokers the ability to sell the same loan programs. 

Free market competition can also prevent zealous overpricing of refinance rates. Regardless of how they are paid, if a mortgage broker cannot offer competitive rates to borrowers, they won’t be able to sustain their business. As long as borrowers continue to compare rates and loan fees, banks and brokers need to abide by market pricing, and also try to provide more efficient customer service.

Refinance Mortgage Loan Programs

How can you benefit from a refinance mortgage? There are a few different reasons to refinance, including several ways to save money, but one of the main things to consider is how long you may keep your home, because the amount of savings from refinancing a home loan can vary depending on the mortgage program and loan costs.

A good way to save money if you plan to stay in your home for a short time, is to use a zero point refinance loan, or a zero cost refinance, because if you move or refinance your mortgage later, you won’t waste money having to pay loan fees again.

Another potential money-saving refinancing option is a 3 year ARM or a 5 year ARM refinance, which provides a lower fixed rate for the first 3 years or 5 years of the home loan.

For refinancing with a higher debt ratio, or if you have lower credit scores, see FHA loans.

Short term refinance mortgage loans include a 6 month, or 1 year ARM. To attract borrowers, lenders provide adjustable loan rates that start lower than fixed refinance rates. Every 6 months or 1 year, the rate is adjusted based on the index plus the margin, subject to periodic and lifetime rate caps. The index can be based on the 1 year T-Bill, Cost of Funds, Treasury Average, or LIBOR. The margin is a fixed number set by the lender, which can range from 2.25 to 3.00.

If you want a cash out refinance mortgage, but you currently have a low interest rate, you may want to consider using a home equity loan or a second mortgage. If you are looking for lower payments, a 30 year fixed rate refinance is a good choice. If your goal is to keep your house until it is free and clear, you may want to consider a 15 year fixed refinance.

When you compare a 15 year term, the monthly payments will be higher, but the principal reduction is accelerated, so you can drastically reduce the amount of interest paid for a mortgage.

For example, the monthly payment for a $200,000 loan, for a 15 year term would be almost $500 per month more than a 30 year term, but it would also save about $128,000 in interest payments. Technically, you could achieve similar results on a 30 year refinance mortgage by sending an additional amount each month to be applied to the principal balance, if you have the discipline.

How to Compare Mortgage Quotes

Mortgage rates can change daily, sometimes even multiple times per day depending on economic factors. For accurate mortgage quotes, get all rate quotes on the same day.

For most home loans, the lender’s mortgage rate sheets have pricing based on a lock period, which are offered in increments like, 15, 30, or 60 days. 

A rate lock guarantees the mortgage rate for a specific time. Longer lock periods usually have higher mortgage rates. Compare mortgage quotes for similar lock periods.

Increasing the mortgage rate will decrease the points, while reducing the rate will increases the points. Home mortgage rates have tiered pricing that allows you to buy the rate, or the points up or down. Compare mortgage quotes with the same loan points, such as, zero points, or one point.   

Have lenders quote the mortgage loan points separate from other fees. In addition to title insurance, escrow, or appraisal, lenders have other fees like, processing, document, or underwriting, which may be negotiable. Property taxes, home insurance, and pre-paid interest are not lender fees. 

Approximate credit scores can be used for comparing mortgage quotes, but to get actual home mortgage rates, lenders need to run a credit report, but the rate is subject to change until locked. Lenders normally use the middle of 3 credit scores of the person who is the primary wage earner. 

More information to compare mortgage quotes on a refinance mortgage or FHA mortgage.

Mortgage Credit Scores

Your credit report contains a set of credit scores that have a direct impact on the availability and the terms of a home mortgage. The higher your credit scores are, the better the rates will be. For a higher loan to value, credit scores can have an even greater effect.

Credit score information is provided by 3 national credit reporting bureaus: Transunion, Equifax, and Experian. Their computer risk models track how typical borrowers will pay their bills, and identify specific payment patterns, forecasting the risk.

Credit scores are based on five main categories of information:

1. Late Payments, Delinquencies, Bankruptcy, Tax Liens, Foreclosure
2. Outstanding Debt – Ratio of balances to available credit
3. Length Of Payment History
4. New Applications For Credit (Inquiries)
5. Types of Credit in Use – Credit Card, Installment, Mortgage, etc.

Credit scores are based on a person’s whole credit picture. No one factor determines a score. Your credit report is a composite of both positive and negative information such as missed loan payments, as well as loan accounts paid satisfactorily. Issues that can carry the most weight are:

Payment Performance: The fewer late payments, the better the scores. Payments that were 60 or 90 days late have more of a negative effect than a 30 day late. The age of late payments can effect your credit scores, more recent late payments are considered worse.

Credit Use: A large number of accounts can reduce your credit scores, especially if the balances are high. Using 75% of your credit limit is a greater risk than using 25%.

Payment History: A longer payment history is better for accounts on your credit report. Having recently opened a new loan or credit card could reduce your scores, as well as new inquiries.

Inaccurate information can reduce your credit score. Read about disputing credit reporterrors.

Compare Loan Rates

Reasons for a Home Refinance

Everyone has their own reason for refinancing, but usually to save money or take cash out.

Reduce the Monthly Payment

Instead of looking at the difference in the refinance rate, compare the savings between your existing monthly payment and the home refinance payment. Use only the principle and interest payments on a loan amount that includes the closing costs, but does not include taxes, insurance, or cash out. Then decide if the monthly savings will make it worth your while.

 Consolidate Credit Card Balances

If you are carrying a substantial balance on credit cards, you may have a good chance of saving money with a home refinance. Consolidating high rate, compound interest debts with a low rate mortgage may reduce your total monthly payments, and convert your debt into a tax deductable, simple interest loan.

Pay for Personal Expenses

A home refinance with cash out can provide money for personal expenses. As long as you have sufficient equity in your home, refinancing could be one of the cheapest ways to access funds at a low rate. You may have medical expenses, a college bound teenager, or maybe a need for home improvements, or perhaps you would just like to take your family on nice vacation.

Change from Adjustable to Fixed Rate

Adjustable rate loans can serve their purpose, which is usually for the short term, but eventually interest rates go up, and your monthly payments inrease accordingly. If you plan to keep your home for a long period of time, refinancing to a fixed rate can provide stable, long term savings.

Reduce the Term of the Loan

A home refinance with a shorter term can reduce the amount of interest you pay over the life of the loan. There is about $120,000 difference in interest charges between a 15 year mortgage and a 30 year mortgage, on a $200,000 loan. You can build equity in your home much sooner with a shorter term, and plan ahead for retirement by setting a goal to eventually pay off your mortgage.

Eliminate Mortgage Insurance

Provided you have enough equity, a home refinance can save money by eliminating unnecessary insurance. If you paid less than 20% down payment when you bought your home, you may still be paying mortgage insurance. The insurance is only for the benefit of the lender, and is included in the monthly payment until you sell your home, or refinance at 80% loan to value, or less.