Several adjustable rate mortgages, ARMs, are available to homeowners and they include 6-Month Certificate of Deposit ARM, 1-Year Treasury Spot ARM, 6-Month Treasury Average ARM, and the 12-Month Treasury Average ARM. An ARM that reacts quickly to the market will allow the borrower to benefit from falling interest rates. An ARM that lags behind the market will allow the borrower to take advantage of lower rates when rates being to increase. As a borrower it is important to watch the market and speak with your mortgage broker to decide which type of ARM will best fit your home loan needs.
One of the many types of home loans offered to borrowers is called a fixed rate mortgage. Unlike an adjustable rate mortgage, the monthly payments for a fixed rate mortgage stay stable through out the life of the loan. This type of home loan is most commonly available in 15 and 30 year mortgages and can provide the stability many home buyers require during unstable economic times.
A reverse mortgage is a unique type of loan used by older Americans to convert the equity in their homes into cash. The money from a reverse mortgage may provide seniors with the financial security they need to fully enjoy their retirement years.
The reverse mortgage has earned its name because the payment stream is “reversed.” Instead of making monthly payments to a lender, as with a regular first mortgage or home equity loan, a lender makes payments to you. The money from a reverse mortgage can be used for anything from daily living expenses to home repairs and home modifications.
Disclaimer: This information is not intended to be a substitute for legal, tax or financial advice. Consult with a qualified attorney, accountant or financial advisor for additional legal or tax advice. This material is not from HUD or FHA and has not been approved by HUD or a government agency.
Reverse Mortgage Qualifications
To qualify for a reverse mortgage you must be at least 62 and own your own home. There are no income or medical requirements to qualify in light of April 2015 financial assessment requirements. You may be eligible for a reverse mortgage even if you still owe money on a first or second mortgage. In fact, many seniors get a reverse mortgage to pay off a first mortgage.
How does it work?
A reverse mortgage loan allows you to turn some of the equity in your home into cash to improve your financial situation. With a reverse mortgage loan, you will remain on title and can stay in your home without making monthly mortgage payments during the loan period.¹ The borrower will be required to pay for property taxes, home insurance and home maintenance. The loan balance becomes due upon the occurrence of other events including non-compliance with the loan terms.
This federally-insured loan offers multiple ways to receive the proceeds and gives you the ability to spend the cash as needed.
Common uses of Reverse Mortgage loans include:
- Paying off debt
- Cover costly medical bills and prescriptions
- Home repairs and modifications
- Delay Social Security benefits²
- and much more!
Important features of a reverse mortgage loan include:
1. Proceeds from a Reverse Mortgage loan are tax-free³.
2. There are multiple ways to receive the loan proceeds, either as a line of credit, a term payment, a tenure payment or lump sum.
3. Live in your home with no monthly mortgage payments¹.
If you qualify and your loan is approved, a HECM Reverse Mortgage must pay off your existing mortgage(s). With a HECM Reverse Mortgage, no monthly mortgage payment is required. Borrowers are responsible for paying property taxes and homeowner’s insurance (which may be substantial). We do not establish an escrow account for disbursements of these payments. A set-aside account can be set up to pay taxes and insurance and may be required in some cases. Borrowers must also occupy home as primary residence and pay for ongoing maintenance; otherwise the loan becomes due and payable. The loan becomes due and payable when the last borrower, or eligible non-borrowing surviving spouse, dies, sells the home, permanently moves out, or defaults on taxes and insurance payments, or does not comply with loan terms. A Reverse Mortgage increases the principal mortgage loan amount and decreases home equity (it is a negative amortization loan). These materials are not from HUD or FHA and were not approved by HUD or a government agency.
²Social Security benefits estimator available at www.ssa.gov/estimator.
³Loan proceeds are paid tax-free; consult your tax advisor.
Adjustable rate mortgages allow the interest rate on your home loan to fluctuate during its life.
When financial markets are unstable, adjustable rate mortgages can be risky for home owners because the rate can increase with little notice. On the other hand, this type of mortgage may allow you to purchase a more expensive home.
Several adjustable rate mortgages are available to homeowners and they include 6-Month Certificate of Deposit ARM, 1-Year Treasury Spot ARM, 6-Month Treasury Average ARM, and the 12-Month Treasury Average ARM. An ARM that reacts quickly to the market will allow the borrower to benefit from falling interest rates. An ARM that lags the market will allow the borrower to take advantage of lower rates when rates being to increase.
There are several aspects of ARMs that impact interest rates including the index, margin, interim caps, and payment caps. The index of an ARM is the financial instrument that the loan is linked to and indexes move up and down with the market. The margin is added to the index to determine the interest that the borrower will pay. Caps, such as the interim cap, protect borrowers against rising interest rates. Payment caps, on the other hand, place a maximum on the amount a borrower must pay. This type of cap also protects against payment shock associated with rising interest rates.
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.
The margin is one of the most important aspects of ARMs because it is added to the index to determine the interest rate that you pay. The margin added to the index is known as the fully indexed rate. As an example if the current index value is 5.50% and your loan has a margin of 2.5%, your fully indexed rate is 8.00%. Margins on loans range from 1.75% to 3.5% depending on the index and the amount financed in relation to the property value.
All adjustable rate loans carry interim caps. Many ARMs have interest rate caps of six-months or a year. There are loans that have interest rate caps of three years. Interest rate caps are beneficial in rising interest rate markets, but can also keep your interest rate higher than the fully indexed rate if rates are falling rapidly.
Some loans have payment caps instead of interest rate caps. These loans reduce payment shock in a rising interest rate market, but can also lead to deferred interest or “negative amortization”. These loans generally cap your annual payment increases to 7.5% of the previous payment.
Almost all ARMs have a maximum interest rate or lifetime interest rate cap. The lifetime cap varies from company to company and loan to loan. Loans with low lifetime caps usually have higher margins, and the reverse is also true. Those loans that carry low margins often have higher lifetime caps.
We offer Full Doc Loans as well as State Income Loans, but most people are not familiar with the specifics. Here are the details!
Full Doc Loan
A full doc loan is one that requires that the borrower present all necessary documents, including inc me verification to be considered for the home loan. This type of loan usually offers lower rates because it is less risky for the lender. On the other hand, if you are self employed you may not have all of the required documents and should look into a stated income loan.
State Income Loans
Stated income home loans allow those who are self employed or do not have documentation of earned wages to state a wage on the mortgage application and qualify for a mortgage based on that stated income.
The advantages of a stated income home loans allow those who are self employed or do not have documentation of earned wages to state a wage and qualify for a mortgage based on that stated income. The borrower does not need to verify income and approval is generally faster than with traditional home loans.
However, the disadvantages of this type of loan are that interest rates and the required down payments are often higher than with traditional home loans.