Graduated-Payment Mortgages (GPMs)
-is a type of fixed-rate mortgage.
-These mortgages are useful for home buyers who
expect their incomes to rise.
-For which the payments increase gradually from an
initial low base level to a higher final level.
(after reading the last sentence in Slide 1)
-This type of mortgage payment system may be
optimal for young or first-time homeowners because
their income levels tend to rise gradually.
(after reading the benefits of GPM)
-Choosing a graduated payment mortgage could
make it easier to buy a home now versus having to
wait until later when you're earning a higher income.
The key is the relative certainty that you'll be able to
afford your mortgage payments over time as they
increase.
(after reading the 1st sentence in drawbacks of GPM)
-As payments grow to higher interest rates, the
borrower may find they are only paying the interest
charges and not reducing the principal borrowed.
-Also, if the graduated payment mortgage is a
negative amortization loan, the borrower will pay
even more interest on the loan.
(after reading the 2nd sentence in drawbacks of
GPM)
-If the borrower’s income does not rise in proportion
with the monthly debt, they may default on the loan.
The default will further damage their credit, and the
lender will foreclose on the property.
Growing Equity Mortgage (GEMs)
(after reading the last sentence in Slide 2)
- Growing-equity mortgage effectively allows a
borrower to accelerate repayment of their fixed-rate
mortgage by scheduling additional principal
payments that increase over time.
-Example: Imagine you take out a Growing Equity
Mortgage (GEM) to buy a house for $200,000. The
GEM has a 30-year term with an initial interest rate
of 3%.
In the first year, your monthly mortgage payment
might be around $850. However, with a GEM, your
lender has agreed that your payments will increase
by 5% each year.
So, in the second year, your monthly payment would
increase to about $893, and in the third year, it
would be around $938, and so on.
Shared Appreciation Mortgages (SAMs)
(after reading the last sentence in Slide 3)
-Basically, shared Appreciation Mortgage (SAM) is a
type of home loan where the lender agrees to accept
a lower interest rate or a smaller loan amount in
exchange for a share of the future appreciation of
the property. In other words, the lender shares in
the increased value of the home when it's sold or
refinanced in the future.
- Example, you want to buy a house for $300,000,
but you only have a small down payment and can't
qualify for a traditional mortgage with a low-interest
rate. However, a lender offers you a SAM instead.
The lender agrees to provide you with a mortgage at
a lower interest rate or for a smaller loan amount
than you would get with a traditional mortgage. Let's
say they offer you a $250,000 loan at a reduced
interest rate.
In exchange for the favorable terms, the lender
includes a provision in the SAM that entitles them to
a share of the future appreciation of the property.
For example, they might specify that they'll receive
25% of the appreciation in the home's value when
you sell or refinance.
Several years later, you decide to sell the house for
$400,000. Since you initially bought it for $300,000,
the home has appreciated by $100,000.
According to the terms of the SAM, the lender is
entitled to 25% of the appreciation. So, they would
receive 25% of $100,000, which is $25,000.
Generally, Shared Appreciation Mortgages can be a
useful option for borrowers looking to reduce their
initial mortgage costs or qualify for a lower interest
rate. However, borrowers should carefully consider
the long-term implications of sharing the
appreciation of their home with the lender before
entering into such an agreement.
Equity Participating Mortgage (EPM)
-Equity participation mortgage is shared
between several borrowers who also split
income or proceeds generated from renting or
selling the property.
-These mortgages are most common in
commercial real estate deals
Example:
Let's say you want to buy a house for $250,000,
but you only have enough for a small down
payment and can't qualify for a traditional
mortgage with a low-interest rate. However, a
lender offers you an EPM instead.
The lender provides you with a mortgage for
$250,000 to purchase the home.
In addition to repaying the loan amount with
interest, the lender and you agree to a sharing
arrangement where the lender will receive a
percentage of the future appreciation of the
property.
Over the years, the value of the home increases
due to factors like market conditions or home
improvements. Let's say the house appreciates
in value to $300,000.
According to the terms of the EPM, the lender is
entitled to a portion of the appreciation. For
example, they might receive 20% of the
increase in the home's value.
In this case, the appreciation is $50,000
($300,000 - $250,000). The lender's share would
be 20% of $50,000, which equals $10,000.
After accounting for the lender's share, you
would keep the rest of the appreciation, which
in this example would be $40,000.
Difference between EPM and SAM
In essence, while both EPMs and SAMs involve
sharing property appreciation with the lender,
the main distinction lies in whether the lender
provides financing and participates in
appreciation directly (EPM) or offers favorable
terms in exchange for sharing appreciation
(SAM).
Reverse Annuity Mortgages (RAMs)
(after reading the last sentence in Slide )
-Meaning RAM is a type of home loan designed
for homeowners aged 62 or older. Instead of
the homeowner making monthly payments to
the lender as with a traditional mortgage, a
reverse mortgage allows homeowners to
convert a portion of their home equity into cash
without having to sell their home or take on a
new monthly mortgage payment.
-Example: Let's say you're 65 years old and own
a home worth $300,000 with no existing
mortgage. You're looking to supplement your
retirement income.
You apply for a reverse mortgage, and based on
your age, home value, and current interest
rates, the lender approves you for a reverse
mortgage loan of up to 50% of your home's
appraised value, which amounts to $150,000.
You decide to receive the loan proceeds as a
line of credit, which means you can access the
funds as needed. Alternatively, you could
choose to receive monthly payments or a lump
sum.
Unlike a traditional mortgage, you're not
required to make monthly payments to the
lender. Instead, the loan balance accumulates
over time, with interest accruing on the
outstanding balance.
The loan becomes due when you pass away, sell
the home, or permanently move out of the
property. At that point, the loan balance, along
with any accrued interest and fees, must be
repaid. Typically, this is done by selling the
home. If the home sells for more than the loan
balance, the remaining equity belongs to you or
your heirs.
Let's say you live in the home for another 15
years and pass away at age 80. During that time,
you've accessed $100,000 of the available
$150,000 line of credit to supplement your
income. The loan balance has accumulated with
interest over the years.
After your passing, your heirs sell the home for
$350,000. The remaining loan balance, including
accrued interest and fees, is repaid to the
lender from the proceeds of the home sale. If
the remaining equity exceeds the loan balance,
your heirs receive the remaining funds.
In here, the reverse mortgage allowed you to
access a portion of your home's equity to
supplement your retirement income without
the burden of making monthly mortgage
payments.
Second Mortgage
A second mortgage is an additional loan taken
out on a property that already has an existing
mortgage. It allows homeowners to borrow
against the equity they've built up in their
home. Here's an easy-to-understand
explanation:
1. Existing Mortgage: When you buy a
home, you typically take out a primary
mortgage to finance the purchase. This
is your main loan, secured by the
property.
2. Second Mortgage: A second mortgage
is a separate loan taken out while you
still have the primary mortgage. It's
secured by the same property and uses
the equity you've built up in the home
as collateral.
3. Uses of a Second Mortgage: People
often use second mortgages for large
expenses like home renovations, debt
consolidation, education costs, or
unexpected expenses. They can also be
used to access cash when needed.
4. Types of Second Mortgages: There are
two main types: home equity loans and
home equity lines of credit (HELOCs).
 Home Equity Loan: This is a
lump sum loan with a fixed
interest rate, where you receive
the full amount upfront and
repay it over time in regular
installments.
 HELOC: This works like a credit
card, allowing you to borrow up
to a certain limit, repay it, and
borrow again as needed. You're
only charged interest on the
amount you borrow.
5. Risk and Benefits: Second mortgages
can be beneficial for accessing funds,
but they also come with risks. Since
they're secured by your home, failure to
repay could result in foreclosure.
Additionally, interest rates on second
mortgages may be higher than those on
primary mortgages.
Among the types of mortgage loans, what is
the most beneficial to a borrower?
-Conventional mortgages are loans that are not
insured or guaranteed by the government.
Instead, they are offered by private lenders like
banks and credit unions.
-Conventional mortgages often come with
lower costs compared to insured mortgages,
such as FHA loans, which typically require
mortgage insurance premiums (MIP). With a
conventional mortgage, you may avoid these
additional costs if you can make a down
payment of at least 20% of the home's purchase
price.
-It offer a wide range of loan terms, including
fixed-rate and adjustable-rate options, allowing
borrowers to choose the one that best fits their
needs and preferences.
-Furthermore, there is no government
restrictions. Also, depending on your
creditworthiness and financial profile, you may
be able to secure a lower interest rate with a
conventional mortgage compared to other
types of loans.
-With an insured mortgage, borrowers often
have to pay upfront premiums or fees.
Conventional mortgages typically don't have
these additional upfront costs, which can save
borrowers money at the outset of the loan.
-Generally, conventional mortgage is often the
best choice for many because it typically comes
with lower costs (especially if you can make a
20% down payment), flexible terms, no
government restrictions, potential for lower
interest rates, and no upfront premiums.
However, it's important to assess your
individual financial situation and goals to
determine the best option for you.