What is Negative Amortization?
A negative amortization loan is an adjustable rate mortgage that allows the consumer to tap into home “equity” by offering several monthly payment options. Up to an additional 25% of the original loan amount is available to the borrower. This flexibility works well for consumers who have seasonal income or want more control over their cash flow.However, the borrower must have some degree of financial discipline. Each month, the borrower will choose to make a fully amortized payment, an interest-only payment, or a low introductory rate payment. A fully amortized payment is larger, and...
Read MorePros and Cons of a Bi-Weekly Mortgage Program
When borrowers enter into a contract to make bi-weekly payments on their mortgage, the amortization schedule is accelerated. For example, with a 30-year amortization schedule, the borrower makes 12 payments per year. In a bi-weekly arrangement, the borrower makes 26 ‘half’ payments, which allows the loan to be paid off in 22.8 years instead of 30 years. It’s the same as making 13 monthly payments. This ultimately saves the borrower thousands of dollars in interest rate fees. However, bear in mind that bi-weekly programs usually have some type of setup, transaction, and...
Read MoreWhat Is a Prepayment Penalty?
A prepayment penalty is a fee charged to borrowers that make full payment on their mortgage, or pay off a substantial portion (generally anything exceeding 20% of the total loan amount), ahead of schedule. This is a clause written into some contracts to protect the lender’s book of business in exchange for providing a lower interest rate, or for providing financing to a high-risk borrower. Prepayment penalties vary with different lenders, but generally apply to a one-, two-, three-, or five-year period oftime. This fee can be expressed as either a specific number of months’...
Read MoreVarious Ways to Hold Title to Real Property
Title is the legal documentation that bestows ownership of real property. This is to be indicated in Part II of the 1003 Uniform Residential Loan Application as “manner in which title will be held.” The decision of how the title will be held should not be put off until the last minute since it has a great impact on future tax planning, the financial future of the borrower(s) and their respective heirs, and the choice of the lender. It is most important for the mortgage consultant to work hand-in-hand with the borrower’s financial planner or taxconsultant to assist their...
Read MoreIntermediate Fixed Rate Loans
Intermediate Fixed Rate mortgages (sometimes referred to as Short-Term Fixed Rate mortgages, or Hybrids) come in numerous varieties; the 3, 5, 7 and 10-Year Fixed. These are all 30-year loans that carry a fixed rate for a set number of years, and then roll over to an Adjustable Rate Mortgage. For example, in a 7-Year Fixed Rate scenario, the rate would be fixed the first seven years, and the loan becomes an Adjustable for the remaining 23 years. The main advantage of these hybrid programs over a traditional 30-Year Fixed loan is typically a slightly lower interest rate. These types of loans...
Read More15-Year Fixed Rate Loans
A 15-Year Fixed Rate loan works well for borrowers who are nearing retirement and want to be debt-free when they get there. Because payments in a 15-year scenario are amortized over half the length of a 30-Year Fixed Rate loan, the monthly payments will be significantly higher in comparison. This is an important factor to consider before committing to a 15-year loan. However, the interest rate on a 15-Year Fixed Rate loan will be lower for the same reason – financing for 15 years costs much less than financing for 30 years. If a borrower is 50 years old and would like to be debt-free...
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