|
||||||||
|
How a reverse mortgage loan works and how to apply.
Whether seeking money to pay for medical treatment, finance a home improvement, buy long-term care insurance, or supplement income, many older Americans are turning to a "reverse mortgage." A reverse mortgage allows older consumers to convert the equity in their homes to cash while retaining home ownership.
Internet mortgage loan quotesWith a "regular" mortgage, you make monthly payments to the lender. But with a reverse mortgage, you receive money from the lender and generally do not have to repay it for as long as you live in your home. In return, the lender holds some — if not most or all — of your home's equity.
Introduced in the late 1980s, reverse mortgages can help homeowners who are "house-rich-but-cash-poor" remain in their homes and still meet their financial obligations. The proceeds of the loan are tax-free, there are no minimum income requirements, and for most reverse mortgages, the money can be used for any purpose.
If you're considering a reverse mortgage, it's important to understand how the loans work and what your rights and responsibilities are.
Types of reverse mortgage loans:
To qualify for a reverse mortgage, you must be at least 62 and have paid off all or most of your home mortgage. Income is generally not a factor, and no medical tests or medical histories are required. If you seek an HECM, you also must undergo free mortgage counseling from an independent government-approved "housing agency." Financial institutions offering proprietary reverse mortgages may require similar counseling or homeowner education.
The amount you can borrow depends on your age, the equity in your home, the value of your home, and the interest rate. If it's an HECM, federal law limits the maximum amount that can be paid out.
You can be paid in a lump sum, in monthly advances, through a line of credit, or a combination of all three.
Get mortgage news to stay up to date on lenders. Second Mortgage Loans
A second mortgage means whatever amount borrowed is secured by your property, in second preference, to your first mortgage and it is a secured loan. A second mortgage loan is made in addition to the first mortgage and normally based on the amount of equity that the borrower has in his home.
There are many loans available and it can be easy to get a second mortgage on your home. The amount that can be borrowed depends on the difference between the value of the property and the amount of the first mortgage. This is known as the equity on the property. There are two types of second mortgages and they are the home equity loan and the home equity line of credit.
A Home equity loan is a loan when the borrower uses the equity in his home as assurance. Home equity loans are a lump sum loan with a fixed interest rate payment. The amount of loan is determined by credit history, income, and the value of the collateral. Consumers with bad or poor credit can get a personal loan or home equity loan but it can have high interest rates.
A home equity line of credit is used by homeowners who want to borrow against the equity in their home and there are several different types of home equity lines of credit. The differences are based on the interest rate charged. The home equity line of credit is like a credit card, you get a line of credit to use when you need it. A line of credit will have a variable interest rate and the homeowner will not know what the interest payment will be. The interest rate on the loan will vary to the same interest rate as set by the Federal Reserve Board.
As for second mortgage interest rates, there is the fixed rate mortgage and adjustable rate mortgage (ARM). In a fixed rate mortgage, the interest rate remains fixed for the life of the loan. The borrower does not have to worry about the monthly payments changing or getting higher. This is a good loan to have when interest rates are low. In a adjustable rate mortgage(ARM), the interest rate may change during the life of the loan.
If you are going to live in your home more than just few years, having a fixed payment can be good. If you plan to stay a short time in your home and are not worried the monthly payment may change or increase in the future an adjustable rate mortgage (ARM) may be a good loan option for you too.
Second mortgage interest rates can be higher than a 1st mortgage rate, and the interest paid on the second mortgage may be tax deductible ( ask your tax person). The interest may be 100% deductible if the combined loan value of the first and second mortgage does not exceed the price of the home.
When more than 80% of the home’s value is borrowed, it can subject the borrower to private mortgage insurance. If ever you refinance, you will have to pay off the 2nd mortgage. Taking out a second mortgage loan requires the lender to place a lien on the borrower's home. The lien will be recorded in second position after the first mortgage lender’s lien. Usually loans are for 5, 10 or 15 years which gives the borrower a choice of repayment options depending on their financial circumstances.
The borrower is free to use the second mortgage loan as they wish. It could be used to pay debts, make home improvements, pay for college expenses, or anything. The important thing is make sure payments are paid on time and the loan is paid off as soon as possible as it is a secured loan. If it is not paid and you default on the loan, you risk losing your home. Bad Credit Mortgage
Having bad credit doesn't always mean getting a mortgage is impossible. Do the research yourself for a loan with good terms. Lenders grade borrowers on their "underwriting guidelines" which are rules lenders use for those who apply for a mortgage. The rules change for different loan types like the requirements for a 30 or 2 year fixed loan and a variable loan for 28 years. Yet different lenders can have different guidelines for the same loan, with the same person applying for the loan. For example, if a person is seeking a 30 year fixed loan with several different lenders, each lender can have different guidelines.
Before applying for a mortgage loan, check your credit reports and fix any errors. Review information about the last seven years involving credit cards, loans, payment habits, and collections. Credit reports that show many late mortgage payments may not be viewed well in the eyes of a prospective mortgage lender. However, a few late payments that were only a couple of days late may be taken as an honest mistake. Items on credit reports like collections for small debts, for example like $10, could indicate finances are not managed well and it may be best if you can pay off the debt in full.
Consider providing the mortgage lender with a letter of explanation as to why any debts were late. If there were any short term medical problems, lack of employment, or other circumstances to explain any late payments or credit problems, a letter of explanation can give added details. Lenders may require information about savings accounts or retirement accounts and it can be great if these types of assets have been around for months. It can look good to mortgage lenders if applicants have a reserve of cash to be able to pay bills for about three or more months in a savings account. If you have bad credit and you get prepared in advance, even people with bad credit may be able to get approved for a mortgage loan. Mortgage Tip
Mortgage foreclosures still fell in October even though the filings are higher than in 2008. According to RealtyTrac, who is an online seller of foreclosed
homes, filings were down 3% in October. It appears that the mortgage industry
may be turning around.
Millions of consumers owe more than their home is worth and that is about 20% of borrowers. Most people try to pay off their mortgages but when problems arise, the loan resets to a higher interest rate, then there is a risk the home will be lost. If homeowners have a positive home equity and financial problems, they could get a home equity loan or cash-out refinance to keep them afloat. Equity 2ndmortgage
A home equity 2nd mortgage loan has a fixed interest rate and disburses at closing. A 2nd mortgage loan lets you to take home equity out of a property and an interest home equity 2nd mortgage loan could lower a mortgage payment. There is a stated second mortgage loan for income that is difficult to verify and one with no closing costs that is available. One advantage of the home equity 2nd mortgage loan is that the interest costs are generally tax deductible, you would need to ask your accountant. Some common uses for getting a 2nd mortgage loan is to pay for college, a new auto or boat, to make home improvements, take a vacation, or pay off debts. Equity 2nd Mortgage Benefits
Some features of a second mortgage are having a pre-payment privilege, to be expandable, and have portability. With the pre-payment privilege, payments can be made toward the principal portion of the mortgage over and above the monthly payments. Portability means you could transfer the balance of a current mortgage, at the existing rates and with the existing terms and conditions, to a new home. Expandable could allow for additional funds needed in the future by increasing the principal amount.
A Second Mortgage loan taken after the first mortgage is secured against the same assets as the first. It is based on the amount of equity or interest in that property which is the difference between the current value of the property and the amount owed. Second mortgages are used for different reasons such as financing home improvements, college fees, debt consolidation, starting a business, taking a vacation, or for emergency expenses. Reasons vary among consumers seeking a second mortgage.
If there is enough equity, another option is to refinance a home and borrow funds in excess of the current loan balance. Usually, a second mortgage has a higher rate of interest than a first mortgage. So if interest rates are low, refinancing can be a good option. It can take less time to get a second mortgage than to refinance a loan, and a second mortgage may have low transaction costs. Regardless of the higher interest rates on second mortgages, they may turn out to be less expensive than refinancing. Equity 2nd Mortgage
When looking to refinance a mortgage, consider a cash-in refinance. Rather than borrowing against a home's equity, it is bringing more money to pay down the loan principal. During the time when real estate values were high, cash-out refinancing was a good deal for borrowing against a home's equity. When housing prices declined, cash-in refinancing is now popular. Cash-in transactions accounted for about a third of mortgage refinances the last part of 2009.
Cash-in refinancing can be worth while since banks have tightened lending standards. When more is owed than what property is worth, additional cash can improve the equity position, which may help homeowners qualify for better mortgage rates. Some lenders boost rates as the equity declines. Giving additional cash can make it easier to qualify to refinance. Putting up some cash, may get you within the range of 125 percent refinance available.
A cash-in refinance is like an investment that may get you get a better return by putting money toward the mortgage. If a mortgage can be refinanced at a fixed rate of 5.25 percent, any additional money may be earning a 5.25 percent interest, as interest not paid is like interest earned. The earnings may be more if the mortgage interest is a tax deduction. If the home values decline, putting more money in a mortgage may not be best. If a home’s value is the same or higher, and it must be sold, the seller may come out ahead. Equity 2ndmortgage
When homeowners have equity built up in their home, they may need to decide if a HELOC (home equity line of credit) or a true second mortgage will be best when money is needed for other things. A second mortgage pays out a fixed sum of money to be repaid on a set schedule, like an initial mortgage. The second mortgage does not supersede the first mortgage. Second mortgages are usually 15- to 30-year loans with a fixed rate of interest. The rate of interest an any points will be based on your credit history, the cost of the home, and the current interest rate. The interest rate on a second mortgage may be higher and fees are generally lower.
A HELOC is like a credit card and it may include a credit card or checks to make purchases. Like credit cards, interest is charged, and the amount you can borrow is based on your creditworthiness. To determine the limit of a HELOC, lenders will look at the appraised value of your home and start their calculations at 75 percent of that value. They subtract the outstanding balance owed on the mortgage. For example, if a home was appraised at $200,000, the lender would typically look at a maximum of $150,000 or 75 percent. If you had paid off $100,000 of your $180,000 loan, the lender would then deduct the remaining $80,000, which would mean you would have a maximum of $70,000 available on a HELOC if you had good credit history. Your current needs will help determine which type of loan is right for you. If money is needed for a one-time expense, a fixed-rate second mortgage might be the best way to go.
When or if more money will be needed at some time in the future, a HELOC or line of credit lets you borrow when money is needed. If the money is paid back quickly, this could save you money. For consumers who have a problem spending too much money, a line of credit could be like having a credit card and it may be too easy to get in debt by spending too much money. It is important to figure out which type of loan might be right for you and discuss both options with your lender. Second mortgages are usually like initial mortgages while lines of credit have monthly payments. Be sure to shop around for the best one for your needs. Equity 2ndMortgage Loans
Some banks may extend mortgage relief to homeowners with second mortgages, in cases where borrowers have already qualified for relief under the U.S. Treasury's mortgage-modification program. One weakness of the government's foreclosure prevention program is that mortgage modifications don't change the second loans. Those borrowers qualifying for lower mortgage payments still may have problems paying large payments on a second mortgage. There has been some attention given to this problem by trying to get big banks to modify those loans, too.
Hopefully, many lenders will try to help consumers who need some relief from high 2nd mortgage payments. There is some concern that the modification program will help reduce foreclosures for 2010 or just cause them to be postponed. In February, there were more people who lost their homes than last year. The Home Affordable Modification Program, or HAMP, was to slow the surge in foreclosures and to lower the payment on a first mortgage to about 31 percent of a borrower's gross income.
Another problem is that borrowers have complained of lost paperwork and slow service by the banks. According to the Treasury Department, 168,708 mortgages have been permanently modified with lower payments or longer payoff periods. By giving relief to second mortgages, it may help prevent more borrowers from defaulting later. Wells Fargo, one of the largest home lenders, has modified many loans under this program. Get a quote to refinance a mortgage.
|
|
