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Reverse Annuity Mortgages

The Federal Housing Administration insures reverse annuity mortgages. The program is for elderly individuals (62 and over) who own their home free and clear (without a mortgage) but need additional income for day-to-day living expenses. Under this program, borrowers do not receive the entire principal balance at settlement but receive periodic payments of principal during the term of the loan up to a maximum insurable amount as defined by the FHA. The amount may increase by l/12th of the expected annual appreciation (of the property) each month. Interest on the principal advanced and FHA's annual mortgage insurance are added to the outstanding balance on a monthly basis. When the total outstanding principal balance reaches the maximum insurable by FHA, payments of principal cease. If the value of the home is not sufficient to pay off the outstanding loan amount when the borrower dies, FHA will not attempt to collect the balance from the heirs to the estate. If the value of the home is greater than the loan balance, the remainder of the proceeds is available to the estate. However, in some cases, there is an equity sharing arrangement: The lender shares in a percentage of the appreciation of the property if the value is greater than the loan balance. The program has not proven to be very popular among borrowers, and lenders who are authorized to lend under this program are limited. See your local lender for details.

Biweekly Mortgages

Payments are due on a biweekly basis (every two weeks) rather than once a month. The payment is calculated by dividing the monthly payment by two. Because payment is collected every two weeks, you make an extra month's payment every year, thus substantially speeding up the amortization of your loan. In addition, with a true biweekly mortgage, the loan is amortized on a biweekly basis, so the impact of the payment schedule is actually much greater than just making an extra payment each year. Most biweekly mortgages require that the biweekly payment be deducted directly from your checking account by the lender. If you had insufficient funds in the account under certain circumstances, the loan would revert to a normally amortizing mortgage.

Be aware, however, that some third parties offer to convert your existing traditional mortgage to a biweekly mortgage by collecting the payments on a biweekly basis and forwarding them to your mortgage lender. This offer is not such a good deal. Although an extra monthly payment is made each year, the loan does not actually amortize on a biweekly basis and the third party charges a fee for the service, which may cost more than the savings in interest over the term of the loan. You would probably be better off by making an extra mortgage payment on your own each year in this scenario.

USDA Rural Development Mortgages

Because it is sometimes difficult to find a mortgage in rural areas of the country, the U.S. Department of Agriculture offers mortgage programs through its Rural Housing Service (RHS), formerly called the Farmers Home Administration. RHS loans are primarily for low-cost housing and made to low-income borrowers. The average loan size is well below $100,000. The RHS has a direct lending program in which it is the lender, and it has a guarantee program in which loans are offered through traditional banks and mortgage companies. Highlights of the programs are as follows:

• RHS loans are only available in rural areas as defined by the U.S. Census Bureau.

• Like VA loans, the LTV ratio can be up to 100 percent (no money down).

• Borrower income generally must be no greater than 115 percent of the median income for the area in which the property is located.

• Like VA loans, the RHS charges an up-front fee (1.5 to 1.75 percent in 2006), but no monthly fees like FHA.

• The interest rates on the loans that RHS makes directly are subsidized slightly. Usually they are ½ to ¼ percent lower than market rates.

• The amount of money available each year for these loans is limited. It is set in concert with the federal budget process.

Choosing the Right Type of Mortgage for You

For most people, a conventional 30-year traditional mortgage is the right choice. It has been by far the most popular type of mortgage. It also makes a good benchmark for making comparisons with other types of loans. The type of loan that you choose depends on your needs. The chart in Figure 4.23 summarizes the characteristics that you might be looking for in a mortgage and matches loan types to those characteristics.

Not all loans are readily available for all loan amounts and all loan-to-value ratios. Figure 4.24 summarizes the limitations for various types of loans.

The Mortgage Data Form described in Figure 5.3 in Chapter 5, “Shopping for a Mortgage,” helps you determine how large a mortgage you need and your loan-to-value ratio. Chapter 2, “Qualifying for a Mortgage Loan,” helps you determine how large a loan you qualify for and if you need a loan type that makes qualifying easier. In addition to using all of this information, you can consult a loan officer of a mortgage company, bank, or savings-and-loan association for help in choosing the right type of loan.

FIGURE 4.23 Comparing Different Types of Mortgages to 30-Year Fixed Rate

Comparing Different Types of Mortgages to 30-Year Fixed Rate

FIGURE 4.24 Restrictions on Different Types of Mortgages

Restrictions on Different Types of Mortgages

 
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