Non-traditional Mortgages Could Save You Money–or pay you like a Reverse Mortgage
Use of nontraditional mortgages has increased among home buyers, according to a Wall Street Journal Online/Harris Interactive poll–could you benefit too?
There are four major types of non-traditional mortgages:
- Interest-only mortgages, which have received considerable media attention as home prices have skyrocketed, allow borrowers to pay interest but no principal during the early years of the loan.
- Piggyback mortgages combine a standard first mortgage with a home-equity loan or line of credit, thereby allowing the borrower to avoid paying private mortgage insurance or higher interest rates on jumbo loans.
- Miss-a-payment mortgages let borrowers skip up to two mortgage payments per year, and up to 10 payments over the life of the loan, without damaging their credit rating.
- Payment option mortgages give borrowers four-payment options–not when they take out the mortgage, but every single month.
These include
1) a payment based on a 30-year amortization table which, if made every month, will pay off the mortgage in 30 years;
2) a payment based on a 15-year amortization table, which, if made every month, will pay off the mortgage in 15 years;
3) an interest-only payment, in which the principal balance will remain unchanged; and
4) a partial-interest payment, in which part of the interest is deferred and added to the principal balance.
The chart below illustrates the reduced payment on an interest-only loan.
|
Factors |
Loan 1 |
Loan 2 |
Loan 3 |
|
Loan amount |
$350,000 |
$350,000 |
$350,000 |
|
Interest rate |
7% |
6% |
5% |
|
Length of loan |
30 |
30 |
30 |
|
Traditional monthly payment |
$2,329 |
$2,098 |
$1,879 |
|
Interest-only monthly payment |
$2,042 |
$1,750 |
$1,458 |
Source: Archer Pacific, as of October 2006 (www.archerpacific.com/compare%204%20mortgage%20loans%20calculator.html). This example is hypothetical. You may not be eligible for any of these loans, and if you are, interest rates on loans will vary based on your financial circumstances and prevailing interest rates.
If you want to buy more house than you can afford with a traditional mortgage, these options can be good tools, and more people are using them. The Wall Street Journal Online/Harris Interactive survey found increased usage of three of four types of nontraditional mortgages from 2005 to 2006.
But borrower beware: Non-traditional mortgages can be riskier than standard fixed-rate or adjustable-rate mortgages. For example, with payment option mortgages, borrowers who elect to make the minimum payment could see their loan balance rise, rather than fall. That’s because the deferred principal and interest payments get tacked onto the home owner’s total debt, a process known as negative amortization.
Specifically for seniors are reverse mortgages. If you have sufficient equity, these will allow you to pay off your traditional mortgage and even pay you.
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April 12th, 2009 at 9:12 am
If they use interest only moratge thier mortgage could go up after next rate increase if it is adjustable. I know some of the problems happened to people doing this and they would owe more money and payments would go up.
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June 30th, 2009 at 9:22 am
Great Post. I especially found it useful when you stated that these none traditional loans can be risky. So many people are in crisis modes right now and are easy prey to find some sort of relief.
I have a client of mine who is on an interest only loan. He is sixty five and the principle amount of his mortgage continues to go up. He is trying to put a couple of hundred dollars on the principle each month, but it is not helping his situation. He will never pay that mortgage off.
These are facts that people need to know.
Thank you for your post. I look forward to reading more.
July 28th, 2009 at 3:23 am
This is great advice, thanks!
I recently came across a series of five videos put together by the AARP, the membership organization for those that are aged 50+.
I have grouped these videos together, they really are worth a look - each one is packed with useful information:
http://moneysavingknowhow.com/RetirementPlanningVideo1.php?id=9876780340652360
http://moneysavingknowhow.com/RetirementPlanningVideo2.php?id=9876780340652360
and so on.
Thanks again, keep up the good work!
Dom
September 17th, 2009 at 4:29 am
Thanks for sharing, I only know a bit about reverse mortgages before reading your post
November 2nd, 2009 at 5:23 am
‘Reverse Mortgages’ or Equity Release Schemes as they are called in the UK are becoming more and more popular. When you look at the retirement income provision of most of the population (here in the UK he adverage fund is supposedly £40,000), it beggars belief how some people even survive given the rising energy costs we are all facing!
Reverse mortgages, i believe, really help certain people out by, as you say, clearing off existing mortgages and potentially paying you an excess over this amount. Surely that has to be a good thing for many who are struggling to survive. But then as this interest is rolled up into one giant loan paid off on death - I just hope the people doing it let their kids know! Great post by the way, really simple advice which I too give to my clients.
November 18th, 2009 at 1:19 am
I got a nice short overview of the options that are available, I hadnt put interest into it before, but find some new ways, new possibilities, I have a 30-year mortage on me btw.
John