Mortgage Loan

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Mortgage loan From Wikipedia, the free encyclopedia Jump to: navigation, search "Mortgage" redirects here. For other uses, see Mortgage (disambiguation). Finance Financial markets[show] Financial instruments[show] Corporate finance[show] Personal finance[show] Public finance[show] Banks and banking[show] Financial regulation[show] Standards[show] Economic history[show] • v • t • e A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan. However, the word mortgage alone, in everyday usage, is most often used to mean mortgage loan. The word mortgage is a French Law term meaning "death contract", meaning that the pledge ends (dies) when either the obligation is fulfilled or the property is taken through foreclosure.[1] A home buyer or builder can obtain financing (a loan) either to purchase or secure against the property from a financial institution, such as a bank or credit union, either directly or indirectly through intermediaries. Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off the loan, and other characteristics can vary considerably. In many jurisdictions, though not all (Bali, Indonesia being one exception[2]), it is normal for home purchases to be funded by a mortgage loan. Few individuals have enough savings or liquid funds to enable them to purchase property outright. In countries where the demand for home ownership is highest, strong domestic markets for mortgages have developed. Contents • • • • • • • 1 Mortgage loan basics o 1.1 Basic concepts and legal regulation o 1.2 Mortgage underwriting o 1.3 Mortgage loan types  1.3.1 Loan to value and downpayments  1.3.2 Value: appraised, estimated, and actual  1.3.3 Payment and debt ratios  1.3.4 Standard or conforming mortgages  1.3.5 Foreign currency mortgage 2 Repaying the mortgage o 2.1 Capital and interest o 2.2 Interest only o 2.3 Interest Only Lifetime Mortgage o 2.4 No capital or interest o 2.5 Interest and partial capital o 2.6 Variations o 2.7 Foreclosure and non-recourse lending 3 Jurisdictional perspectives o 3.1 United States o 3.2 United Kingdom o 3.3 Continental Europe  3.3.1 Recent trends o 3.4 Islamic 4 Mortgage insurance 5 See also o 5.1 General, or related to more than one nation o 5.2 Related to the United Kingdom o 5.3 Related to the United States o 5.4 Other nations o 5.5 Legal details 6 References 7 External links Mortgage loan basics Basic concepts and legal regulation The mortgage loan involves two separate documents:[3] the mortgage note (a promissory note) and the security interest evidenced by the "mortgage" document; generally, the two are assigned together, but if they are split traditionally the holder of the note and not the mortgage has the right to foreclose.[4] For example, Fannie Mae promulgates a standard form contract Multistate Fixed-Rate Note 3200[5] and also separate security instrument mortgage forms which vary by state.[6] According to Anglo-American property law, a mortgage occurs when an owner (usually of a fee simple interest in realty) pledges his or her interest (right to the property) as security or collateral for a loan. Therefore, a mortgage is an encumbrance (limitation) on the right to the property just as an easement would be, but because most mortgages occur as a condition for new loan money, the word mortgage has become the generic term for a loan secured by such real property. As with other types of loans, mortgages have an interest rate and are scheduled to amortize over a set period of time, typically 30 years. All types of real property can be, and usually are, secured with a mortgage and bear an interest rate that is supposed to reflect the lender's risk. Mortgage lending is the primary mechanism used in many countries to finance private ownership of residential and commercial property (see commercial mortgages). Although the terminology and precise forms will differ from country to country, the basic components tend to be similar: • • • • • • • • • Property: the physical residence being financed. The exact form of ownership will vary from country to country, and may restrict the types of lending that are possible. Mortgage: the security interest of the lender in the property, which may entail restrictions on the use or disposal of the property. Restrictions may include requirements to purchase home insurance and mortgage insurance, or pay off outstanding debt before selling the property. Borrower: the person borrowing who either has or is creating an ownership interest in the property. Lender: any lender, but usually a bank or other financial institution. Lenders may also be investors who own an interest in the mortgage through a mortgage-backed security. In such a situation, the initial lender is known as the mortgage originator, which then packages and sells the loan to investors. The payments from the borrower are thereafter collected by a loan servicer.[7] Principal: the original size of the loan, which may or may not include certain other costs; as any principal is repaid, the principal will go down in size. Interest: a financial charge for use of the lender's money. Foreclosure or repossession: the possibility that the lender has to foreclose, repossess or seize the property under certain circumstances is essential to a mortgage loan; without this aspect, the loan is arguably no different from any other type of loan. Completion: legal completion of the mortgage deed, and hence the start of the mortgage. Redemption: final repayment of the amount outstanding, which may be a "natural redemption" at the end of the scheduled term or a lump sum redemption, typically when the borrower decides to sell the property. A closed mortgage account is said to be "redeemed". Many other specific characteristics are common to many markets, but the above are the essential features. Governments usually regulate many aspects of mortgage lending, either directly (through legal requirements, for example) or indirectly (through regulation of the participants or the financial markets, such as the banking industry), and often through state intervention (direct lending by the government, by state-owned banks, or sponsorship of various entities). Other aspects that define a specific mortgage market may be regional, historical, or driven by specific characteristics of the legal or financial system. Mortgage loans are generally structured as long-term loans, the periodic payments for which are similar to an annuity and calculated according to the time value of money formulae. The most basic arrangement would require a fixed monthly payment over a period of ten to thirty years, depending on local conditions. Over this period the principal component of the loan (the original loan) would be slowly paid down through amortization. In practice, many variants are possible and common worldwide and within each country. Lenders provide funds against property to earn interest income, and generally borrow these funds themselves (for example, by taking deposits or issuing bonds). The price at which the lenders borrow money therefore affects the cost of borrowing. Lenders may also, in many countries, sell the mortgage loan to other parties who are interested in receiving the stream of cash payments from the borrower, often in the form of a security (by means of a securitization). Mortgage lending will also take into account the (perceived) riskiness of the mortgage loan, that is, the likelihood that the funds will be repaid (usually considered a function of the creditworthiness of the borrower); that if they are not repaid, the lender will be able to foreclose and recoup some or all of its original capital; and the financial, interest rate risk and time delays that may be involved in certain circumstances. Mortgage underwriting Mortgage loan types There are many types of mortgages used worldwide, but several factors broadly define the characteristics of the mortgage. All of these may be subject to local regulation and legal requirements. • • • interest: Interest may be fixed for the life of the loan or variable, and change at certain pre-defined periods; the interest rate can also, of course, be higher or lower. term: Mortgage loans generally have a maximum term, that is, the number of years after which an amortizing loan will be repaid. Some mortgage loans may have no amortization, or require full repayment of any remaining balance at a certain date, or even negative amortization. payment amount and frequency: The amount paid per period and the frequency of payments; in some cases, the amount paid per period may change or the borrower may have the option to increase or decrease the amount paid. • prepayment: Some types of mortgages may limit or restrict prepayment of all or a portion of the loan, or require payment of a penalty to the lender for prepayment. The two basic types of amortized loans are the fixed rate mortgage (FRM) and adjustable-rate mortgage (ARM) (also known as a floating rate or variable rate mortgage). In some countries, such as the United States, fixed rate mortgages are the norm, but floating rate mortgages are relatively common. Combinations of fixed and floating rate mortgages are also common, whereby a mortgage loan will have a fixed rate for some period, for example the first five years, and vary after the end of that period. • • In a fixed rate mortgage, the interest rate, and hence periodic payment, remains fixed for the life (or term) of the loan. Therefore the payment is fixed, although ancillary costs (such as property taxes and insurance) can and do change. For a fixed rate mortgage, payments for principal and interest should not change over the life of the loan, In an adjustable rate mortgage, the interest rate is generally fixed for a period of time, after which it will periodically (for example, annually or monthly) adjust up or down to some market index. Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where fixed rate funding is difficult to obtain or prohibitively expensive. Since the risk is transferred to the borrower, the initial interest rate may be, for example, 0.5% to 2% lower than the average 30-year fixed rate; the size of the price differential will be related to debt market conditions, including the yield curve. The charge to the borrower depends upon the credit risk in addition to the interest rate risk. The mortgage origination and underwriting process involves checking credit scores, debt-to-income, downpayments, and assets. Jumbo mortgages and subprime lending are not supported by government guarantees and face higher interest rates. Other innovations described below can affect the rates as well. Main article: Mortgage underwriting Loan to value and downpayments Main article: Loan-to-value ratio Upon making a mortgage loan for the purchase of a property, lenders usually require that the borrower make a downpayment; that is, contribute a portion of the cost of the property. This downpayment may be expressed as a portion of the value of the property (see below for a definition of this term). The loan to value ratio (or LTV) is the size of the loan against the value of the property. Therefore, a mortgage loan in which the purchaser has made a downpayment of 20% has a loan to value ratio of 80%. For loans made against properties that the borrower already owns, the loan to value ratio will be imputed against the estimated value of the property. The loan to value ratio is considered an important indicator of the riskiness of a mortgage loan: the higher the LTV, the higher the risk that the value of the property (in case of foreclosure) will be insufficient to cover the remaining principal of the loan. Value: appraised, estimated, and actual Since the value of the property is an important factor in understanding the risk of the loan, determining the value is a key factor in mortgage lending. The value may be determined in various ways, but the most common are: 1. Actual or transaction value: this is usually taken to be the purchase price of the property. If the property is not being purchased at the time of borrowing, this information may not be available. 2. Appraised or surveyed value: in most jurisdictions, some form of appraisal of the value by a licensed professional is common. There is often a requirement for the lender to obtain an official appraisal. 3. Estimated value: lenders or other parties may use their own internal estimates, particularly in jurisdictions where no official appraisal procedure exists, but also in some other circumstances. Payment and debt ratios In most countries, a number of more or less standard measures of creditworthiness may be used. Common measures include payment to income (mortgage payments as a percentage of gross or net income); debt to income (all debt payments, including mortgage payments, as a percentage of income); and various net worth measures. In many countries, credit scores are used in lieu of or to supplement these measures. There will also be requirements for documentation of the creditworthiness, such as income tax returns, pay stubs, etc. the specifics will vary from location to location. Some lenders may also require a potential borrower have one or more months of "reserve assets" available. In other words, the borrower may be required to show the availability of enough assets to pay for the housing costs (including mortgage, taxes, etc.) for a period of time in the event of the job loss or other loss of income. Many countries have lower requirements for certain borrowers, or "no-doc" / "low-doc" lending standards that may be acceptable in certain circumstances. Standard or conforming mortgages Many countries have a notion of standard or conforming mortgages that define a perceived acceptable level of risk, which may be formal or informal, and may be reinforced by laws, government intervention, or market practice. For example, a standard mortgage may be considered to be one with no more than 70-80% LTV and no more than one-third of gross income going to mortgage debt. A standard or conforming mortgage is a key concept as it often defines whether or not the mortgage can be easily sold or securitized, or, if non-standard, may affect the price at which it may be sold. In the United States, a conforming mortgage is one which meets the established rules and procedures of the two major government-sponsored entities in the housing finance market (including some legal requirements). In contrast, lenders who decide to make nonconforming loans are exercising a higher risk tolerance and do so knowing that they face more challenge in reselling the loan. Many countries have similar concepts or agencies that define what are "standard" mortgages. Regulated lenders (such as banks) may be subject to limits or higher risk weightings for non-standard mortgages. For example, banks and mortgage brokerages in Canada face restrictions on lending more than 80% of the property value; beyond this level, mortgage insurance is generally required.[8] Foreign currency mortgage In some countries with currencies that tend to depreciate, foreign currency mortgages are common, enabling lenders to lend in a stable foreign currency, whilst the borrower takes on the currency risk that the currency will depreciate and they will therefore need to convert higher amounts of the domestic currency to repay the loan. Repaying the mortgage In addition to the two standard means of setting the cost of a mortgage loan (fixed at a set interest rate for the term, or variable relative to market interest rates), there are variations in how that cost is paid, and how the loan itself is repaid. Repayment depends on locality, tax laws and prevailing culture. There are also various mortgage repayment structures to suit different types of borrower. Capital and interest The most common way to repay a secured mortgage loan is to make regular payments of the capital (also called the principal) and interest over a set term.[citation needed] This is commonly referred to as (self) amortization in the U.S. and as a repayment mortgage in the UK. A mortgage is a form of annuity (from the perspective of the lender), and the calculation of the periodic payments is based on the time value of money formulas. Certain details may be specific to different locations: interest may be calculated on the basis of a 360-day year, for example; interest may be compounded daily, yearly, or semiannually; prepayment penalties may apply; and other factors. There may be legal restrictions on certain matters, and consumer protection laws may specify or prohibit certain practices. Depending on the size of the loan and the prevailing practice in the country the term may be short (10 years) or long (50 years plus). In the UK and U.S., 25 to 30 years is the usual maximum term (although shorter periods, such as 15-year mortgage loans, are common). Mortgage payments, which are typically made monthly, contain a capital (repayment of the principal) and an interest element. The amount of capital included in each payment varies throughout the term of the mortgage. In the early years the repayments are largely interest and a small part capital. Towards the end of the mortgage the payments are mostly capital and a smaller portion interest. In this way the payment amount determined at outset is calculated to ensure the loan is repaid at a specified date in the future. This gives borrowers assurance that by maintaining repayment the loan will be cleared at a specified date, if the interest rate does not change. Some lenders and 3rd parties offer a bi-weekly mortgage payment program designed to accelerate the payoff of the loan. An amortization schedule is typically worked out taking the principal left at the end of each month, multiplying by the monthly rate and then subtracting the monthly payment. This is typically generated by an amortization calculator using the following formula: where: is the initial principal is the percentage rate used each payment; for a monthly payment, take the Annual Percentage Rate (APR)/12 months is the number of payments; for monthly payments over 30 years, 12 months x 30 years = 360 payments. Interest only The main alternative to a capital and interest mortgage is an interest-only mortgage, where the capital is not repaid throughout the term. This type of mortgage is common in the UK, especially when associated with a regular investment plan. With this arrangement regular contributions are made to a separate investment plan designed to build up a lump sum to repay the mortgage at maturity. This type of arrangement is called an investment-backed mortgage or is often related to the type of plan used: endowment mortgage if an endowment policy is used, similarly a Personal Equity Plan (PEP) mortgage, Individual Savings Account (ISA) mortgage or pension mortgage. Historically, investment-backed mortgages offered various tax advantages over repayment mortgages, although this is no longer the case in the UK. Investment-backed mortgages are seen as higher risk as they are dependent on the investment making sufficient return to clear the debt. Until recently it was not uncommon for interest only mortgages to be arranged without a repayment vehicle, with the borrower gambling that the property market will rise sufficiently for the loan to be repaid by trading down at retirement (or when rent on the property and inflation combine to surpass the interest rate). Interest Only Lifetime Mortgage Recent Financial Services Authority guidelines to UK lenders regarding interest only mortgages has tightened the criteria on new lending on an interest only basis. The problem for many people has been the fact that no repayment vehicle had been implemented, or the vehicle itself (e.g. endowment/ISA policy) performed poorly and therefore insufficient funds were available to repay the capital balance at the end of the term. Moving forward, the FSA under the Mortgage Market Review (MMR) have stated there must be strict criteria on the repayment vehicle being used. As such the likes of Nationwide and other lenders have pulled out of the interest only market. A resurgence in the equity release market has been the introduction of interest only lifetime mortgages. Where an interest only mortgage has a fixed term, an interest only lifetime mortgage will continue for the rest of the mortgagors life. These schemes have proved of interest to people who do like the roll-up effect (compounding) of interest on traditional equity release schemes. They have also proved beneficial to people who had an interest only mortgage with no repayment vehicle and now need to settle the loan. These people can now effectively remortgage onto an interest only lifetime mortgage to maintain continuity. Interest only lifetime mortgage schemes are offered by two lenders currently Stonehaven & more2life. They work by having the options of paying the interest on a monthly basis. By paying off the interest means the balance will remain level for the rest of their life. This market is set to increase as more retirees require finance in retirement. No capital or interest For older borrowers (typically in retirement), it may be possible to arrange a mortgage where neither the capital nor interest is repaid. The interest is rolled up with the capital, increasing the debt each year. These arrangements are variously called reverse mortgages, lifetime mortgages or equity release mortgages (referring to home equity), depending on the country. The loans are typically not repaid until the borrowers are deceased, hence the age restriction. For further details, see equity release. Interest and partial capital In the U.S. a partial amortization or balloon loan is one where the amount of monthly payments due are calculated (amortized) over a certain term, but the outstanding capital balance is due at some point short of that term. In the UK, a partial repayment mortgage is quite common, especially where the original mortgage was investment-backed and on moving house further borrowing is arranged on a capital and interest (repayment) basis. Variations Graduated payment mortgage loan have increasing costs over time and are geared to young borrowers who expect wage increases over time. Balloon payment mortgages have only partial amortization, meaning that amount of monthly payments due are calculated (amortized) over a certain term, but the outstanding principal balance is due at some point short of that term, and at the end of the term a balloon payment is due. When interest rates are high relative to the rate on an existing seller's loan, the buyer can consider assuming the seller's mortgage.[9] A wraparound mortgage is a form of seller financing that can make it easier for a seller to sell a property. A biweekly mortgage has payments made every two weeks instead of monthly. Budget loans include taxes and insurance in the mortgage payment;[10] package loans add the costs of furnishings and other personal property to the mortgage. Buydown mortgages allow the seller or lender to pay something similar to mortgage points to reduce interest rate and encourage buyers.[11] Homeowners can also take out equity loans in which they receive cash for a mortgage debt on their house. Shared appreciation mortgages are a form of equity release. In the US, foreign nationals due to their unique situation face Foreign National mortgage conditions. Flexible mortgages allow for more freedom by the borrower to skip payments or prepay. Offset mortgages allow deposits to be counted against the mortgage loan. In the UK there is also the endowment mortgage where the borrowers pay interest while the principal is paid with a life insurance policy. Commercial mortgages typically have different interest rates, risks, and contracts than personal loans. Participation mortgages allow multiple investors to share in a loan. Builders may take out blanket loans which cover several properties at once. Bridge loans may be used as temporary financing pending a longer-term loan. Hard money loans provide financing in exchange for the mortgaging of real estate collateral. Foreclosure and non-recourse lending Main article: Foreclosure In most jurisdictions, a lender may foreclose the mortgaged property if certain conditions - principally, non-payment of the mortgage loan - occur. Subject to local legal requirements, the property may then be sold. Any amounts received from the sale (net of costs) are applied to the original debt. In some jurisdictions, mortgage loans are nonrecourse loans: if the funds recouped from sale of the mortgaged property are insufficient to cover the outstanding debt, the lender may not have recourse to the borrower after foreclosure. In other jurisdictions, the borrower remains responsible for any remaining debt. In virtually all jurisdictions, specific procedures for foreclosure and sale of the mortgaged property apply, and may be tightly regulated by the relevant government. There are strict or judicial foreclosures and non-judicial foreclosures, also known as power of sale foreclosures. In some jurisdictions, foreclosure and sale can occur quite rapidly, while in others, foreclosure may take many months or even years. In many countries, the ability of lenders to foreclose is extremely limited, and mortgage market development has been notably slower. Jurisdictional perspectives A study issued by the UN Economic Commission for Europe compared German, US, and Danish mortgage systems. The German Bausparkassen have reported nominal interest rates of approximately 6 per cent per annum in the last 40 years (as of 2004). In addition, they charge administration and service fees (about 1.5 per cent of the loan amount). However, in the United States, the average interest rates for fixed-rate mortgages in the housing market started in the tens and twenties in the 1980s and have (as of 2004) reached about 6 per cent per annum. However, gross borrowing costs are substantially higher than the nominal interest rate and amounted for the last 30 years to 10.46 per cent. In Denmark, similar to the United States capital market, interest rates have fallen to 6 per cent per annum. A risk and administration fee amounts to 0.5 per cent of the outstanding debt. In addition, an acquisition fee is charged which amounts to one per cent of the principal.[12] United States Main articles: Mortgage industry of the United States and Mortgage underwriting in the United States United Kingdom Main article: Mortgage industry of the United Kingdom Continental Europe In most of Western Europe (except Denmark, the Netherlands and Germany), variablerate mortgages are more common, unlike the fixed-rate mortgage common in the United States.[13][14] Much of Europe has home ownership rates comparable to the United States, but overall default rates are lower in Europe than in the United States.[13] Mortgage loan financing relies less on securitizing mortgages and more on formal government guarantees backed by covered bonds (such as the Pfandbriefe) and deposits, except Denmark and Germany where asset-backed securities are also common.[13][14] Prepayment penalties are still common, whilst the United States has discouraged their use.[13] Unlike much of the United States, mortgages loans are usually not nonrecourse debt.[13] Within the European Union, covered bonds market volume (covered bonds outstanding) amounted to about EUR 2 trillion at year-end 2007 with Germany, Denmark, Spain, and France each having outstandings above 200,000 EUR million.[15] Pfandbrief-like securities have been introduced in more than 25 European countries—and in recent years also in the U.S. and other countries outside Europe—each with their own unique law and regulations.[12] Recent trends Mortgage Rates Historical Trends 1986 to 2010 On July 28, 2008, US Treasury Secretary Henry Paulson announced that, along with four large U.S. banks, the Treasury would attempt to kick start a market for these securities in the United States, primarily to provide an alternative form of mortgage-backed securities. [16] Similarly, in the UK "the Government is inviting views on options for a UK framework to deliver more affordable long-term fixed-rate mortgages, including the lessons to be learned from international markets and institutions".[17] George Soros's October 10, 2008 Wall Street Journal editorial promoted the Danish mortgage market model.[18] Islamic Main article: Islamic economic jurisprudence Islamic Sharia law prohibits the payment or receipt of interest, meaning that Muslims cannot use conventional mortgages. However, real estate is far too expensive for most people to buy outright using cash: Islamic mortgages solve this problem by having the property change hands twice. In one variation, the bank will buy the house outright and then act as a landlord. The homebuyer, in addition to paying rent, will pay a contribution towards the purchase of the property. When the last payment is made, the property changes hands.[citation needed] Typically, this may lead to a higher final price for the buyers. This is because in some countries (such as the United Kingdom and India) there is a Stamp Duty which is a tax charged by the government on a change of ownership. Because ownership changes twice in an Islamic mortgage, a stamp tax may be charged twice. Many other jurisdictions have similar transaction taxes on change of ownership which may be levied. In the United Kingdom, the dual application of Stamp Duty in such transactions was removed in the Finance Act 2003 in order to facilitate Islamic mortgages.[19] An alternative scheme involves the bank reselling the property according to an installment plan, at a price higher than the original price. Both of these methods compensate the lender as if they were charging interest, but the loans are structured in a way that in name they are not, and the lender shares the financial risks involved in the transaction with the homebuyer.[citation needed] Mortgage insurance Main article: Mortgage insurance Mortgage insurance is an insurance policy designed to protect the mortgagee (lender) from any default by the mortgagor (borrower). It is used commonly in loans with a loanto-value ratio over 80%, and employed in the event of foreclosure and repossession. This policy is typically paid for by the borrower as a component to final nominal (note) rate, or in one lump sum up front, or as a separate and itemized component of monthly mortgage payment. In the last case, mortgage insurance can be dropped when the lender informs the borrower, or its subsequent assigns, that the property has appreciated, the loan has been paid down, or any combination of both to relegate the loan-to-value under 80%. In the event of repossession, banks, investors, etc. must resort to selling the property to recoup their original investment (the money lent), and are able to dispose of hard assets (such as real estate) more quickly by reductions in price. Therefore, the mortgage insurance acts as a hedge should the repossessing authority recover less than full and fair market value for any hard asset. See also General, or related to more than one nation • • • • Commercial mortgage Nonrecourse debt Refinancing No Income No Asset (NINA) Related to the United Kingdom • • • Buy to let Remortgage UK mortgage terminology Related to the United States • • Commercial lender (US) - a term for a lender collateralizing non-residential properties. Fixed rate mortgage calculations (USA) • • • • • • • pre-qualification - U.S. mortgage terminology pre-approval - U.S. mortgage terminology FHA loan - Relating to the U.S. Federal Housing Administration VA loan - Relating to the U.S. Veterans Administration. eMortgages Location Efficient Mortgage - a type of mortgage for urban areas Predatory mortgage lending Other nations • • Danish mortgage market Mortgage Investment Corporation Legal details • • • Deed - legal aspects Mechanics lien - a legal concept Perfection - applicable legal filing requirements References 1. Jump up ^ Coke, Edward. Commentaries on the Laws of England. "[I]f he doth not pay, then the Land which is put in pledge upon condition for the payment of the money, is taken from him for ever, and so dead to him upon condition, &c. And if he doth pay the money, then the pledge is dead as to the Tenant" 2. Jump up ^ Sonia Kolesnikov-Jessop (January 29, 2009). "Bali's cash property market keeps prices up". New York Times. International Herald-Tribune. Retrieved 2009-01-30. "'In Bali, there are no mortgages available, so everyone who owns a house here has paid cash for it,' said Nils Wetterlind, managing director of Tropical Homes, a real estate developer and brokerage based on the island." 3. Jump up ^ Online sample mortgage documents: Massachusetts Sample and Affordability Preservation Project Sample. 4. Jump up ^ Renuart E. (2012). Property Title Trouble in Non-Judicial Foreclosure States: The Ibanez Time Bomb?. Albany Law School 5. Jump up ^ Single-family notes. Fannie Mae. 6. Jump up ^ Security Instruments. Fannie Mae. 7. Jump up ^ FTC. Mortgage Servicing: Making Sure Your Payments Count. 8. Jump up ^ "Who Needs Mortgage Loan Insurance?". Canadian Mortgage and Housing Corporation. Retrieved 2009-01-30. 9. Jump up ^ Are Mortgage Assumptions a Good Deal?. Mortgage Professor. 10. Jump up ^ Cortesi GR. (2003). Mastering Real Estate Principles. p. 371 11. 12. 13. Jump up ^ Homes: Slow-market savings - the 'buy-down'. CNN Money. ^ Jump up to: a b , p. 46 ^ Jump up to: a b c d e Congressional Budget Office (2010). Fannie Mae, Freddie Mac, and the Federal Role in the Secondary Mortgage Market. p. 49. 14. ^ Jump up to: a b International Monetary Fund (2004). World Economic Outlook: September 2004: The Global Demographic Transition. pp. 81–83. ISBN 978-1-58906-406-5. 15. Jump up ^ Covered Bond Outstanding 2007 16. Jump up ^ FDIC Policy Statement on Covered Bonds 17. Jump up ^ Housing Finance Review: analysis and proposals. HM Treasury, March 2008 18. Jump up ^ "Denmark offers a model mortgage market" 19. Jump up ^ Reliefs: Alternative property finance External links • • • Mortgages at the Open Directory Project FHA loans (Department of Housing and Urban Development) Mortgages: For Home Buyers and Homeowners at USA.gov [hide] • • • v t e Mortgage loan Financial literacy Interest rate type • • • • • • • fixed-rate mortgage adjustable-rate mortgage / variable-rate / floating rate Continuous: Repayment mortgage / self-amortized Repayment at term: interest-only mortgage (endowment mortgage) No repayment: reverse mortgage Hybrid: balloon payment mortgage equity release (shared appreciation mortgage) flexible mortgage (offset mortgage, mortgage accelerator) graduated payment mortgage loan Repayment type Variable payment • • Other variations • • • • buy to let mortgage foreign currency mortgage foreign national mortgage wraparound mortgage Annual Percentage Rate (APR) Foreclosure / Repossession [hide] • • • Key concepts • • v t e Consumer debt • • Alternative financial services Financial literacy • • • • • • • • • • • • • • • • Unsecured debt Credit card debt (cash advance) Overdraft Payday loan Personal loan/Signature loan Moneylender Microcredit Mortgage loan/Home equity loan/Home equity line of credit Remortgage Car title loan/Logbook loan Tax refund anticipation loan Pawnbroker Debt consolidation Credit counseling/Debt management plan/Debt settlement Personal bankruptcy Foreclosure/Repossession Debt Support Trust Annual percentage rate (APR) Secured debt Debt managemen t Key concepts • • • Effective annual rate (EAR) Credit history [show] • v • t • e Real estate Categories: • Mortgage • Loans Navigation menu • • • • • • • Create account Log in Article Talk Read Edit source View history • • • • • • Main page Contents Featured content Current events Random article Donate to Wikipedia Interaction • • • • • Help About Wikipedia Community portal Recent changes Contact page Toolbox Print/export Languages • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • Català Dansk Deutsch Español Esperanto ‫فارسی‬ Français 한국어 Հայերեն िहिन्दी Bahasa Indonesia Íslenska Italiano ‫עברית‬ ქართული Magyar Nederlands 日本語 Norsk bokmål Polski Português Русский Slovenčina Suomi Svenska தமிழ Türkçe Українська 粵語 中文 Edit links This page was last modified on 22 September 2013 at 16:23. Text is available under the Creative Commons Attribution-ShareAlike License; additional terms may apply. By using this site, you agree to the Terms of Use and Privacy Policy. Wikipedia® is a registered trademark of the Wikimedia Foundation, Inc., a nonprofit organization. Privacy policy About Wikipedia • • • • • • Disclaimers Contact Wikipedia Developers Mobile view • • Federal Housing Administration From Wikipedia, the free encyclopedia Jump to: navigation, search Federal Housing Administration Agency overview Formed Agency executive Parent department 1934 Carol Galante, Assistant Secretary for Housing Federal Housing Commissioner United States Department of Housing and Urban Development Website FHA website The Federal Housing Administration (FHA) is a United States government agency created as part of the National Housing Act of 1934. It insured loans made by banks and other private lenders for home building and home buying. The goals of this organization are to improve housing standards and conditions, provide an adequate home financing system through insurance of mortgage loans, and to stabilize the mortgage market. The Commissioner of the FHA is Carol Galante. It is different from the Federal Housing Finance Agency (FHFA), which supervises government-sponsored enterprises. Contents • • • • • • • • • • 1 History 2 FHA today 3 FHA down payment 4 Mortgage insurance 5 Canceling FHA mortgage insurance 6 Effects o 6.1 Redlining 7 See also 8 References 9 Further reading 10 External links History During the Great Depression, the banking system failed, causing a drastic decrease in home loans and ownership. At this time, most home mortgages were short-term (three to five years), no amortization, balloon instruments at loan-to-value (LTV) ratios below fifty to sixty percent.[1] The banking crisis of the 1930s forced all lenders to retrieve due mortgages. Refinancing was not available, and many borrowers, now unemployed, were unable to make mortgage payments. Consequently, many homes were foreclosed, causing the housing market to plummet. Banks collected the loan collateral (foreclosed homes) but the low property values resulted in a relative lack of assets. Because there was little faith in the backing of the U.S. government, few loans were issued and few new homes were purchased. In 1934 the federal banking system was restructured. The National Housing Act of 1934 created the Federal Housing Administration. Its intent was to regulate the rate of interest and the terms of mortgages that it insured. These new lending practices increased the number of people who could afford a down payment on a house and monthly debt service payments on a mortgage, thereby also increasing the size of the market for single-family homes.[2] The FHA-calculated appraisal value that is based on eight criteria and directed its agents to lend more for higher appraised projects, up to a maximum cap. The two most important were "Relative Economic Stability", which constituted 40% of appraisal value, and "protection from adverse influences", which made up another 20%. In 1935, Colonial Village in Arlington, Virginia was the first large-scale, rental housing project erected in the United States that was Federal Housing Administration-insured.[3] During World War II, the FHA financed a number of worker's housing projects including the Kensington Gardens Apartment Complex in Buffalo, New York.[4] FHA today In 1965 the Federal Housing Administration became part of the Department of Housing and Urban Development (HUD). Since 1934, the FHA and HUD have insured over 34 million home mortgages and 47,205 multifamily project mortgages. Currently, the FHA has 4.8 million insured single family mortgages and 13,000 insured multifamily projects in its portfolio.[5] The Federal Housing Administration is the only government agency that is completely self-funded.[6] However, although it claims to operate solely from its own income at no cost to taxpayers, there is an implicit guarantee that the taxpayer will help them in times of need. Following the subprime mortgage crisis, FHA, along with Fannie Mae and Freddie Mac, became a large source of mortgage financing in the United States. The share of home purchases financed with FHA mortgages went from 2 percent to over one-third of mortgages in the United States, as conventional mortgage lending dried up in the credit crunch. Without the subprime market, many of the riskiest borrowers ended up borrowing from the Federal Housing Administration, and the FHA could suffer substantial losses. Joshua Zumbrun and Maurna Desmond of Forbes have written that eventual government losses from the FHA could reach $100 billion.[7][8] The troubled loans are now weighing on the agency’s capital reserve fund, which by early 2012 had fallen below its congressionally mandated minimum of 2%, in contrast to more than 6% two years earlier.[9] FHA down payment A borrower's down payment may come from a number of sources. The 3.5% requirement can be satisfied with the borrower using their own cash or receiving a gift from a family member, their employer, labor union, or government entity. Since 1998, non-profits have been providing down payment gifts to borrowers who purchase homes where the seller has agreed to reimburse the non-profit and pay an additional processing fee. In May 2006, the IRS determined that this is not "charitable activity" and has moved to revoke the non-profit status of groups providing down payment assistance in this manner. The FHA has since stopped down payment assistance program through third-party nonprofits. There is a bill currently in Congress that hopes to bring back down payment assistance programs through nonprofits. Mortgage insurance Mortgage insurance protects lenders from mortgage default. If a property purchaser borrows more than 80% of the property's value, the lender will likely require that the borrower purchase private mortgage insurance to cover the lender's risk. If the lender is FHA approved and the mortgage is within FHA limits, the FHA provides mortgage insurance that may be more affordable, especially for higher-risk borrowers. Lenders can typically obtain FHA mortgage insurance for 96.5% of the appraised value of the home or building. FHA loans are insured through a combination of an upfront mortgage insurance premium (UFMIP) and annual mutual mortgage insurance (MMI) premiums. The UFMIP is a lump sum ranging from 1 – 2.25% of loan value (depending on LTV and duration), paid by the borrower either in cash at closing or financed via the loan. MMI, although annual, is included in monthly mortgage payments and ranges from 0 – 1.15% of loan value (again, depending on LTV and duration). If a borrower has poor to moderate credit history, MMI probably is much less expensive with an FHA insured loan than with a conventional loan regardless of LTV – sometimes as little as one-ninth as much depending on the borrower's credit score, LTV, loan size, and approval status. Conventional mortgage insurance rates increase as credit scores decrease, whereas FHA mortgage insurance rates do not vary with credit score. Conventional mortgage premiums spike dramatically if the borrower's credit score is lower than 620. Due to a sharply increased risk, most mortgage insurers will not write policies if the borrower's credit score is less than 575. When insurers do write policies for borrowers with lower credit scores, annual premiums may be as high as 5% of the loan amount. Canceling FHA mortgage insurance The FHA insurance payments include two parts: the upfront mortgage insurance premium (UFMIP) and the annual premium remitted on a monthly basis—the mutual mortgage insurance (MMI). The UFMIP is an obligatory payment, which can either be made in cash at closing or financed into the loan, so that you really pay it over the life of the loan. It adds a certain amount to your monthly payments, but this is not PMI, nor is it the MMI. When a homeowner purchases a home utilizing an FHA loan, they will pay monthly mortgage insurance for a period of five years or until the loan is paid down to 78% of the appraised value – whichever comes later. The MMI premiums come on top of that for all FHA Purchase Money Mortgages, Full-Qualifying Refinances, and Streamline Refinances. When we talk about canceling the FHA insurance, we talk only about the MMI part of it. Unlike other forms of conventional financed mortgage insurance, the UFMIP on an FHA loan is prorated over a three-year period, meaning should the homeowner refinance or sell during the first three years of the loan, they are entitled to a partial refund of the UFMIP paid at loan inception. If you have financed the UFMIP into the loan, you cannot cancel this part. The insurance premiums on a 30-year FHA loan must have been paid for at least 5 years. The MMI premium gets terminated automatically once the unpaid principal balance, excluding the upfront premium, reaches 78% of the lower of the initial sales price or appraised value. A 15-year FHA mortgage annual insurance premium will be cancelled at 78% loan-tovalue ratio regardless of how long the premiums have been paid. The FHA’s 78% is based on the initial amortization schedule, and does not take any extra payments or new appraisals into account. This is the big difference between PMI and FHA insurance: the termination of FHA premiums can hardly be accelerated. Borrowers who do make additional payments towards an FHA mortgage principal, may take the initiative through their lender to have the insurance terminated using the 78% rule, but not sooner than after 5 years of regular payments for 30-year loans. PMI termination, however, can be accelerated through extra payments or a new appraisal if the house has appreciated in value. Effects The creation of the Federal Housing Administration successfully increased the size of the housing market. By convincing banks to lend again, as well as changing and standardizing mortgage instruments and procedures, home ownership has increased from 40% in the 1930s to nearly 70% in 2001. By 1938 only four years after the beginning of the Federal Housing Association, a house could be purchased for a down payment of only ten percent of the purchase price. The remaining ninety percent was financed by a 25year, self-amortizing, FHA-insured mortgage loan. After World War II, the FHA helped finance homes for returning veterans and families of soldiers. It has helped with purchases of both single family and multifamily homes. In the 1950s, 1960s, and 1970s, the FHA helped to spark the production of millions of units of privately owned apartments for elderly, handicapped, and lower-income Americans. When the soaring inflation and energy costs threatened the survival of thousands of private apartment buildings in the 1970s, FHA’s emergency financing kept cash-strapped properties afloat. In the 1980s, when the economy did not support an increase in homeowners, the FHA helped to steady falling prices, making it possible for potential homeowners to finance when private mortgage insurers pulled out of oil-producing states.[5][not in citation given] The greatest effects of the Federal Housing Administration can be seen within minority populations and in cities. Nearly half of FHA’s metropolitan area business is located in central cities, a percentage that is much higher than that of conventional loans.[10] The FHA also lends to a higher percentage of African Americans and Hispanic Americans, as well as younger, credit-constrained borrowers, contributing to the increase in home ownership among these groups. As the capital markets in the United States matured over several decades, the impact of the FHA decreased. In 2006 FHA made up less than 3% of all the loans originated in the United States. This had some in Congress questioning the government's role in the mortgage insurance business, with a vocal minority calling for the end of FHA. The subsequent deterioration in the credit markets, however, has somewhat muted criticism of the agency. Today, FHA now backs over 40 percent of all new mortgages. Redlining Main article: Redlining In the 1930s, the Federal Housing Authority established mortgage underwriting standards that significantly discriminated against minority neighborhoods. As the significance of subsidized mortgage insurance on the housing market grew, home values in inner-city minority neighborhoods plummeted. Also, the approval rates for minorities were equally low. After 1935 the FHA established guidelines to steer private mortgage investors away from minority areas. This practice, known as redlining, was made illegal by the Fair Housing Act of 1968. This had long-lasting effects on the black and minority communities, due to the lack of being able to pass on wealth to subsequent generations. Minorities are still at a disadvantage when it comes to property ownership due to the past FHA regulations during the New Deal era.[11] See also • Ginnie Mae References 1. 2. 3. Jump up ^ Monroe 2001, p. 5 Jump up ^ Garvin 2002 Jump up ^ Virginia Historic Landmarks Commission Staff (May 1980). "National Register of Historic Places Inventory/Nomination: Monroe Courts Historic District".] 4. Jump up ^ Jason Wilson, Tom Yots, and Daniel McEneny (June 2010). "National Register of Historic Places Registration: Kensington Gardens Apartment Complex". Google. Retrieved December 22, 2010. 5. ^ Jump up to: a b "HUD – Federal Housing Administration". Washington, D.C.: U.S. Department of Housing and Urban Development. 6 September 2006. Retrieved December 10, 2009. 6. Jump up ^ {Homes and Communities. “The Federal Housing Administration.” U.S. Department of Housing and Urban Development. http://www.hud.gov/offices/hsg/fhahistory.cfm 7. Jump up ^ Lending Over Backward, Forbes 8. Jump up ^ The Next Hit: Quick Defaults, The Washington Post 9. Jump up ^ House Bill Aims to Save FHA Mortgage Insurance Fund in “Crisis" 10. Jump up ^ Monroe, Albert. “How the Federal Housing Administration Affects Homeownership.” Harvard University Department of Economics. Cambridge, MA. November 2001. 11. Jump up ^ http://cml.upenn.edu/redlining/intro.html Further reading • • Brown, Christopher C. “Federal Housing Administration.” The Virtual Reference Desk. Homes and Communities. “The Federal Housing Administration.” U.S. Department of Housing and Urban Development. • Monroe, Albert. “How the Federal Housing Administration Affects Homeownership.” Harvard University Department of Economics. Cambridge, MA. November 2001. External links • • • • FHA Website Federal Housing Finance Board Meeting Notices and Rule Changes from Federal Register RSS Feed National Housing Institute More Mortgage Madness by Kai Wright, The Nation, April 29, 2009 [hide] • • • v t e Agencies of the United States Department of Housing and Urban Development • • • Headquarters: Robert C. Weaver Federal Building Shaun Donovan, Secretary of Housing and Urban Development Maurice Jones, Deputy Secretary of Housing and Urban Development • Secretary of Housing and Urban Development • • • Office of Small and Disadvantaged Business Utilization Office of HUD Administrative Law Judges Federal Housing Finance Agency Office of Departmental Equal Employment Opportunity Office of Community Planning and Development Office of Fair Housing and Equal Opportunity Federal Housing Administration Government National Mortgage Association Office of Policy Development and Research Office of Public and Indian Housing Deputy Secretary of Housing and Urban Development • • • • • • ! Categories: • • • • • • New Deal agencies Government agencies established in 1934 Real estate in the United States Mortgage industry of the United States Insurance companies of the United States United States Department of Housing and Urban Development agencies Navigation menu • • • • • • • Create account Log in Article Talk Read Edit View history • • • • • • Main page Contents Featured content Current events Random article Donate to Wikipedia Interaction • • • • • Help About Wikipedia Community portal Recent changes Contact page Toolbox Print/export Languages • • Deutsch Español • • • • Français Edit links This page was last modified on 6 August 2013 at 22:40. Text is available under the Creative Commons Attribution-ShareAlike License; additional terms may apply. By using this site, you agree to the Terms of Use and Privacy Policy. Wikipedia® is a registered trademark of the Wikimedia Foundation, Inc., a nonprofit organization. Privacy policy About Wikipedia Disclaimers Contact Wikipedia Developers Mobile view • • • • • • • • Mortgage Definition: UFMIP (Up Front Mortgage Insurance Premium) inShare1 Pin it Date:August 10, 2010 | Category:FHA Loans | Author:Justin McHood Follow Zillow on Facebook Today’s Mortgage Definition is: UFMIP Main Entry: u · f · m · i · p Pronunciation: : \ˈyü ·ˈef · ˈem · ˈī · ˈpē \ UFMIP and MI – A Simple Definition: UFMIP stands for Up Front Mortgage Insurance Premium and anyone who takes out an FHA loan is required to pay the premium. This lump sum is allowed to be financed into the loan, so you don’t have to actually write a check for it at closing – but make no mistake, you are still paying it. MI stands for Mortgage Insurance (in the case of FHA loans, this is the amount of money that you pay each month) and MI is diffferent than UFMIP. With FHA loans, you are required to pay both UFMIP and MI. UFMIP and MI – An Expanded Definition: Many people are aware that FHA doesn’t actually loan you money when you get an FHA loan, they only insure your loan. The insurance does the borrower no good, the insurance is in the event of a default, then FHA agrees to pay the lender, not the borrower. And for this insurance guarantee (having an FHA insured loan), the person who wants an FHA loan gets to make insurance premium payments in the form of UFMIP and MI. For years, HUD has required that anyone getting an FHA loan pay both UFMIP and MI so that is nothing new. It is also somewhat common (every couple of years or so) for HUD to adjust either the UFMIP requirement and/or the MI requirement which makes FHA loans either slightly more or less expensive depending on the adjustment. Recently, HUD has made an announcement that the MI requirement will rise from .55% (annually) of the loan amount to .85 – .9% and has lowered the UFMIP requirement from 2.25%, down to 1%. Some simple calculations of what UFMIP and MI requirements are going to be effective September 7, 2010 on a $200,000 mortgage: • • UFMIP = $2,000 MI = $1,800 / year paid monthly ($150/month) The net change is that on an overall basis, it is going to be more expensive to get an FHA loan. The UFMIP requirements went down, but the monthly MI increased and the overall effect is that your monthly mortgage payment will now be higher with FHA loans due to higher mortgage insurance costs. 1. Money Tax Planning: U.S. • • Tax Planning Lower Your Taxes • • • • • Filing Your Taxes State Taxes Share Print Free Tax Planning: U.S. Newsletter! Discuss in my forum Mortgage Insurance Premium Tax Deduction Tax Deduction for Mortgage Insurance Premiums By William Perez, About.com Guide Ads: • • • • • Mortgage Insurance Health Insurance Premiums IRS Tax Reduction Compare Mortgage Rate Tax Deduction Ads HDFC Life™ Term Planwww.hdfclife.com/Term-InsurancePremium Starts@Just र 2000/yr. No Medicals upto 75L Cover* Buy Now SBI Life Insurance Planswww.policybazaar.com/Tax_Saving1 Cr Life Cover @ Rs 543* pm Only Save upto 50%, Get Free Quotes Now! Online valuation Sry/Deltsurreydeltahomereport.comFree Quick Over-The-Net Home value of your home. Mortgage insurance premiums may be tax deductible. To qualify, the insurance policy must be for home acquisition debt on a first or second home. Home acquisition debt are loans whose proceeds are used to buy, build, or substantially improve your residence. Thus mortgage insurance policies on cash-out refinances and home equity loans won't qualify for the deduction. Mortgage insurance premiums paid during the year are reported on Form 1098 which is sent out by the lender. Prepaid insurance premiums can be allocated over the term of the loan or 84 months (whichever period is shorter) under a ruling from the IRS (Notice 2008-15). Mortgage insurance premiums are an itemized tax deduction and are reported on Schedule A. On the 2012 version of Schedule A, this is found at Line 13. This is a temporary tax break. It's effective for mortgage insurance policies issued on or after January 1, 2007. The deduction is scheduled to expire on December 31, 2013. More Information from the IRS • • • Mortgage Insurance Premiums from Publication 936 Allocation of Prepaid Qualified Mortgage Insurance Premiums (Notice 2008-15) Tax Information for Homeowners (Publication 530) Related Tax Deductions • Mortgage Interest Deduction Related Articles • What's New for 2007 Taxes • Self-Employment Health Insurance Tax Deduction • PMI or Combo Loans - Combo Loans Versus Private Mortgage Insurance Piggyb... • Mortgage Refinancing Tax Deductions - Mortgage Refinancing Can Restrict Tax... • Home Equity Loan Tax Deduction - How the Mortgage Interest Deduction Works William Perez Tax Planning: U.S. Guide • • • Sign up for My Newsletter Headlines Forum Ads Home Loan EMI CalculatorApnapaisa.com/EmiCalculatorHow much EMI will you have to pay? Just enter amount, tenure & rate. BlueChip Stocks 2013 ListEquitymaster.com/BlueChip-StocksExclusive List of Indian BlueChip Stocks for 2013. Get Free Copy Now! Mediclaim Rate CalculatorMediclaimindia.co.in/CalculatorUse Mediclaim Premium Calculator & Get Best Offers on Health Insurance Advertisement See More About • itemized tax deductions • tax benefits for homeowners • mortgage insurance Ads HDFC ERGO™ Car Insurancewww.HDFCERGO.com/Car_InsuranceCashless Claim at 1600+ Garages! Zero Documentation. Buy Online. Aviva Life Term Insurancewww.avivaindia.com/Aviva-iLifeGet Aviva Family Protection with Minimal Premium @ Just Rs.16*/Day Need a Car Insurance ?TataAIGMotorInsurance.inInsure your car with Tata AIG. Instant Policy. Have us Call You. 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Privacy Policy Your Ad Choices ©2013 About.com. All rights reserved. Mortgage insurance From Wikipedia, the free encyclopedia Jump to: navigation, search For information on insurance guaranteeing payment of the mortgage in the event of death or disability, see mortgage life insurance. Mortgage insurance (also known as mortgage guarantee) is an insurance policy which compensates lenders or investors for losses due to the default of a mortgage loan. Mortgage insurance can be either public or private depending upon the insurer. The policy is also known as a mortgage indemnity guarantee (MIG), particularly in the UK. Contents • • • • • • 1 Private mortgage insurance o 1.1 Borrower-paid private mortgage insurance o 1.2 Lender-paid private mortgage insurance 2 Contracts 3 History 4 See also 5 References 6 External links Private mortgage insurance Private mortgage insurance is typically required when down payments are below 20%. Rates can range from 0.5% to 6% of the principal of the loan per year based upon loan factors such as the percent of the loan insured, loan-to-value (LTV), fixed or variable, and credit score.[1] The rates may be paid in a single lump sum, annually, monthly, or in some combination of the two (split premiums). In the U.S., payments by the borrower were tax-deductible until 2010. Borrower-paid private mortgage insurance BPMI or "Traditional Mortgage Insurance" is a default insurance on mortgage loans provided by private insurance companies and paid for by borrowers. BPMI allows borrowers to obtain a mortgage without having to provide 20% down payment, by covering the lender for the added risk of a high loan-to-value (LTV) mortgage. The US Homeowners Protection Act of 1998 allows for borrowers to request PMI cancellation when the amount owed is reduced to a certain level. The Act requires cancellation of borrower-paid mortgage insurance when a certain date is reached. This date is when the loan is scheduled to reach 78% of the original appraised value or sales price is reached, whichever is less, based on the original amortization schedule for fixed-rate loans and the current amortization schedule for adjustable-rate mortgages. BPMI can, under certain circumstances, be cancelled earlier by the servicer ordering a new appraisal showing that the loan balance is less than 80% of the home's value due to appreciation. This generally requires at least two years of on-time payments. Each investor's LTV requirements for PMI cancellation differ based on the age of the loan and current or original occupancy of the home. While the Act applies only to single family primary residences at closing, the investors Fannie Mae and Freddie Mac allow mortgage servicers to follow the same rules for secondary residences. Investment properties typically require lower LTVs. There is a growing trend for BPMI to be used with the Fannie Mae 3% downpayment program. In some cases, the Lender is giving the borrower a credit to cover the cost of BPMI. In Australia, borrowers must pay Lenders Mortgage Insurance (LMI) for home loans over 80% of the purchase price. Lender-paid private mortgage insurance LPMI is similar to BPMI except that it is paid for by the lender, and the borrower is often unaware of its existence. LPMI is usually a feature of loans that claim not to require Mortgage Insurance for high LTV loans. The cost of the premium is built into the interest rate charged on the loan. Contracts As with other insurance, an insurance policy is part of the insurance transaction. In mortgage insurance, a master policy issued to a bank or other mortgage-holding entity (the policyholder) lays out the terms and conditions of the coverage under insurance certificates. The certificates document the particular characteristics and conditions of each individual loan. The master policy includes various conditions including exclusions (conditions for denying coverage), conditions for notification of loans in default, and claims settlement.[2] The contractual provisions in the master policy have received increased scrutiny since the subprime mortgage crisis in the United States. Master policies generally require timely notice of default include provisions on monthly reports, time to file suit limitations, arbitration agreements, and exclusions for negligence, misrepresentation, and other conditions such as pre-existing environmental contaminants. The exclusions sometimes have "incontestability provisions" which limit the ability of the mortgage insurer to deny coverage for misrepresentations attributed to the policyholder if twelve consecutive payments are made, although these incontestability provisions generally don't apply to outright fraud.[3] Coverage can be rescinded if misrepresentation or fraud exists. In 2009, the United States District Court for the Central District of California determined that mortgage insurance could not be rescinded "poolwide".[3] History Mortgage insurance began in the United States in the 1880s, and the first law on it was passed in New York in 1904. The industry grew in response to the 1920s real estate bubble and was "entirely bankrupted" after the Great Depression. The bankruptcy was related to the industry's involvement in "mortgage pools", an early practice similar to mortgage securitization. The federal government began insuring mortgages in 1934 through the Federal Housing Administration and Veteran's Administration, but after the Great Depression no private mortgage insurance was authorized in the United States until 1956, when Wisconsin passed a law allowing the first post-Depression insurer, Mortgage Guaranty Insurance Corporation, to be chartered. This was followed by a California law in 1961 which would become the standard for other states' mortgage insurance laws. Eventually the National Association of Insurance Commissioners created a model law.[4] In 1998 the Homeowners Protection Act of 1998 came into effect in 1999 as a federal law of the United States, which requires automatic termination of mortgage insurance in certain cases for homeowners when the loan-to-value on the home reaches 78%; prior to the law, homeowners had limited recourse to cancel[5] and by one estimate, 250,000 homeowners were paying for unnecessary mortgage insurance.[6] Similar state laws existed in eight states at the time of its passage;[7] in 2000, a lawsuit by Eliot Spitzer resulted in refunds due to mortgage insurers lack of compliance with a 1984 New York state law which required insurers to stop charging homeowners after a certain point.[8] These laws may continue to apply; for example, the New York law provides "broader protection".[9] For Federal Housing Administration-insured loans, the cancellation requirements may be more difficult.[10] See also • • • • • Payment protection insurance Lenders mortgage insurance Canada Mortgage and Housing Corporation Credit default swap FHA insured loan References 1. Jump up ^ Texas Department of Insurance. Private Mortgage Insurance (PMI). 2. Jump up ^ Mortgage insurance master policies and other documents are filed with state insurance regulators and are available for public inspection. Some states make these filings available online, such as the State of Washington Office of Insurance's Online Rates and Forms Filing Search. For example, see OIC tracker ID 202889 for the mortgage insurance policy of Republic Mortgage Insurance Company of Florida. 3. ^ Jump up to: a b Ellison JN. (2010). Emerging Mortgage Insurance Coverage Disputes. Reed Smith LLP. MBA Legal Issues/Regulatory Compliance Conference. 4. Jump up ^ Jaffee D. (2006). Monoline Restrictions, with Applications to Mortgage Insurance and Title Insurance. Review of Industrial Organization. 5. Jump up ^ Federal Reserve Board. On June 3 2013, FHA will no longer eliminate mortgage insurance when the 78% LVT has been reached. FHA requires mortgageinsurance to be paid for the life of the loan.The Homeowners Protection Act (HOPA) Revised Examination Procedures. Consumer Affairs CA 04-5. 6. Jump up ^ Harney K. (1998). Congress Promises To End Unnecessary Mortgage Insurance Bill. Daily Press (Virginia). 7. Jump up ^ Harney K. (1998) New Mortgage Insurance Bill Could End Unnecessary Overpayment. Daily Press (Virginia). 8. Jump up ^ Fried JP. (2000). 10,000 Homeowners to Get Mortgage Insurance Refunds. New York Times. 9. Jump up ^ NY Ins. Section 6503(d) per FAQ: MI CANCELLATION UNDER THE HOMEOWNERS PROTECTION ACT AND REFUNDABLE VS. NONREFUNDABLE PREMIUM. United Guaranty. 10. Jump up ^ McMahon B. (2011). Mortgage Insurance Cancellation: The Myths and Realities. RIS Media. External links • Private Mortgage Insurance as a Tax Deduction from Mortgage News Daily [show] • v • t • e Insurance [show] • v • t • e Real estate Categories: • Mortgage • Types of insurance Navigation menu • • Create account Log in • • • • • Article Talk Read Edit source View history • • • • • • Main page Contents Featured content Current events Random article Donate to Wikipedia Interaction • • • • • Help About Wikipedia Community portal Recent changes Contact page Toolbox Print/export Languages • • • • Русский Edit links This page was last modified on 19 June 2013 at 05:36. Text is available under the Creative Commons Attribution-ShareAlike License; additional terms may apply. By using this site, you agree to the Terms of Use and Privacy Policy. Wikipedia® is a registered trademark of the Wikimedia Foundation, Inc., a nonprofit organization. Privacy policy About Wikipedia Disclaimers Contact Wikipedia Developers • • • • • • Mobile view • • • • • • • • Jobs Companies Salaries Interviews Write a Review Mobile Sign In Advanced XL Dynamics India Pvt. 2.9 of 5 – 12 reviews www.xldynamics.co.in Mumbai, India 50 to 149 Employees Work in HR? Unlock Your Company Profile • Overview • Salaries • Reviews • Interviews • Jobs • More o o XL Dynamics India Pvt. Financial Analyst Interview Questions & Reviews Updated Aug 25, 2013 All Interviews Received Offers Getting the Interview Other 41% 19 Interviews Applied Online 27% Campus Recruiting 22% More Interview Experience 14 Ratings Positive 21% Neutral 28% Negative 50% 19 candidate interviews Relevance Date Difficulty in Aug 25, 2013 1 person found this helpful No Offer Neutral Experience Difficult Interview Financial Analyst Interview Financial Analyst Mahape (India) I applied online and the process took 4 days - interviewed at XL Dynamics India Pvt. in August 2013. Interview Details – Round 1: Aptitude test (30 questions, 45 mins) (Easy) Round 2: Case Study (20 questions, 1 hr 40 mins) (Medium to hard) Round 3: HR interview (yet to appear) Round 4: Operations interview (yet to appear) Interview Question – Questions in case study related to: mortgage mip ufmip credit refinance loan non credit refinance loan adjustable rate mortgage fixed rate mortgage FHA streamline refinance (And many more) Answer Question Was this interview helpful? Yes | No Flag Interview | Add Employer Response Sponsored Jobs • Business Analyst NetCracker Technology – Bangalore • Senior Business Analyst UnitedHealth Group Aug 20, 2013 – Gurgaon 1 person found this helpful No Offer Positive Experience Average Interview Financial Analyst Interview Financial Analyst Mahape (India) The process took a day - interviewed at XL Dynamics India Pvt. in August 2013. Interview Details – 4 round.. 1) 2) 3) 4) aptitude test consist of logical,maths and english.. case study base on mortgage and doc order of sunwest company. personal interview technical interview Was this interview helpful? Yes | No Flag Interview | Add Employer Response Jul 14, 2013 No Offer Negative Experience Easy Interview Financial Analyst Interview Financial Analyst Mumbai (India) I applied through college or university and interviewed at XL Dynamics India Pvt.. Interview Details – There are 4 rounds of interview Apti, case study on reverse mortgages, HR and Technical round, all rounds are easy but we have to wait for the entire day for completion of all rounds. Interview Question – need to have knowledge about reverse mortgage Answer Question Was this interview helpful? Yes | No Flag Interview | Add Employer Response May 20, 2013 No Offer Negative Experience Average Interview Financial Analyst Interview Financial Analyst I applied through other source and interviewed at XL Dynamics India Pvt.. Interview Details – Aptitude Test Technical test HR interview Technical interview Interview Question – N/A Answer Question Was this interview helpful? Yes | No Flag Interview | Add Employer Response May 18, 2013 Declined Offer Neutral Experience Easy Interview Financial Analyst Interview Financial Analyst Bangalore (India) I applied through other source and the process took 2 days - interviewed at XL Dynamics India Pvt. in May 2013. Interview Details – Applied through Naukri. It was a walk in. The rounds were: 1. Aptitude test where logical reasoning and general aptitude questions were asked. 2. Case Study : Passage on mortgage. Read it carefully and try to remember the concepts and terms. Questions in the interview will be asked on the answers you write in this case study and also on the concepts mentioned. 3. Interview both technical and HR together. They will ask questions about 18 months bond and night shift. Be prepared. Questions from the case study and your resume. Interview Question – Nothing much apart from the one on 18 months contract and shift timings. Salary offered may be less than the maximum mentioned in the advertisement or naukri. View Answer Reason for Declining – Salary offered was ok for fresher but being experienced I was expecting more. Moreover I had a better offer in my own city. Was this interview helpful? Yes | No Flag Interview | Add Employer Response Sponsored Jobs • Business Analyst / Testing - Investment Banking PVS Associates • – Mumbai – new Financial Analyst S M Consultancy – Delhi May 8, 2013 No Offer Positive Experience Average Interview Financial Analyst Interview Financial Analyst Mumbai (India) I applied through a staffing agency and the process took 2 days - interviewed at XL Dynamics India Pvt. in May 2013. Interview Details – it was a two day process and well organised.it all started with an aptitude test followed by a case study on mortgages for 60 min. read the case carefully as they might ask question from it in the interview. Interview Question – more technical questions from the case study Answer Question Was this interview helpful? Yes | No Flag Interview | Add Employer Response Apr 23, 2013 No Offer Negative Experience Easy Interview Financial Analyst Interview Financial Analyst Mumbai (India) I applied through other source and the process took 3 days - interviewed at XL Dynamics India Pvt. in April 2013. Interview Details – Hiring process is long and tiring . Takes up full day. It consists of 4 rounds. All rounds are elimination rounds. The first round tests the reasoning ability , mathematics skillls and Di. The questions are very simple. After this round the score are not disclosed by the company but 80-90% of people are eliminated. The next round has a case study. this is important round as questions in interview are based on this case study. the third round in interview and fourth round is psychometric round. Interview Question – questions asked are easy Answer Question Was this interview helpful? Yes | No Flag Interview | Add Employer Response Apr 23, 2013 Declined Offer Negative Experience Very Easy Interview Financial Analyst Interview Financial Analyst Vāshi (India) I applied online and the process took 3 days - interviewed at XL Dynamics India Pvt. in April 2013. Interview Details – Aptitude test which is quite easy, having very easy questions from logical reasoning and one more test on mortgage banking which is again easier. followed by general HR round in which they ask you to sign bond for 2 years, dont hesitate , they just ask you to see whether you are ready to stay or not Interview Question – Asked to sing 2 years of bond Answer Question Reason for Declining – asked to sign 2 years of bond Was this interview helpful? Yes | No Flag Interview | Add Employer Response Feb 27, 2013 No Offer Neutral Experience Average Interview Financial Analyst Interview Financial Analyst I applied through other source and the process took 2 days - interviewed at XL Dynamics India Pvt.. Interview Details – There were three rounds of interview; Aptitude test, Case study based on Mortgage, HR round. The Aptitude test consisted of general questions, there were 45 questions to be solved in 30 mins. The questions had 5 options, the correct one is to be ticked. Case study consisted of general terms of Mortgage, and a sample out of which later some questions are to be answered in brief. Not very difficult, it is important to read and remember the case study nicely. HR round consisting of typical HR questions. Interview Question – No difficult question as such. Answer Question Was this interview helpful? Yes | No Flag Interview | Add Employer Response Sponsored Jobs • Financial Analyst TrustTech Solutions • Financial Analyst Erigo Consultancy Feb 21, 2013 – Bangalore – Bangalore No Offer Neutral Experience Average Interview Financial Analyst Interview Financial Analyst Lucknow (India) I applied in-person and the process took a day - interviewed at XL Dynamics India Pvt. in February 2013. Interview Details – first written ttest then interview Interview Question – how u evaluate urself Answer Question Was this interview helpful? Yes | No Flag Interview | Add Employer Response 1–10 of 19 Interviews RSS Feed Embed See What XL Dynamics employees India Pvt. Employees Are Saying Posted by “good exp” Former Associate Analyst in Mumbai (India) – Reviewed Sep 8, 2013 Pros: good salary, good place to work for short term but definitely not a long term employment option – Full Review ` Worked for XL Dynamics India Pvt.? Contribute to the Community! 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Glassdoor ® is a registered trademark of Glassdoor, Inc. Wiki Loves Monuments: Photograph a monument, help Wikipedia and win! Refinancing From Wikipedia, the free encyclopedia Jump to: navigation, search Refinancing may refer to the replacement of an existing debt obligation with another debt obligation under different terms. The terms and conditions of refinancing may vary widely by country, province, or state, based on several economic factors such as, inherent risk, projected risk, political stability of a nation, currency stability, banking regulations, borrower's credit worthiness, and credit rating of a nation. In many industrialized nations, a common form of refinancing is for a place of primary residency mortgage. If the replacement of debt occurs under financial distress, refinancing might be referred to as debt restructuring. A loan (debt) might be refinanced for various reasons: 1. To take advantage of a better interest rate (a reduced monthly payment or a reduced term) 2. To consolidate other debt(s) into one loan (a potentially longer/shorter term contingent on interest rate differential and fees) 3. To reduce the monthly repayment amount (often for a longer term, contingent on interest rate differential and fees) 4. To reduce or alter risk (e.g. switching from a variable-rate to a fixed-rate loan) 5. To free up cash (often for a longer term, contingent on interest rate differential and fees) Refinancing for reasons 2, 3, and 5 are usually undertaken by borrowers who are in financial difficulty in order to reduce their monthly repayment obligations, with the penalty that they will take longer to pay off their debt. In the context of personal (as opposed to corporate) finance, refinancing multiple debts makes management of the debt easier. If high-interest debt, such as credit card debt, is consolidated into the home mortgage, the borrower is able to pay off the remaining debt at mortgage rates over a longer period. For home mortgages in the United States, there may be tax advantages available with refinancing, particularly if one does not pay Alternative Minimum Tax. Contents • • • • • • 1 Risks 2 Points 3 Types (US loans only) o 3.1 No Closing Cost o 3.2 No Appraisal Required o 3.3 Cash-Out 4 See also 5 References 6 External links Risks Most fixed-term loans have penalty clauses ("call provisions") that are triggered by an early repayment of the loan, in part or in full, as well as "closing" fees. There will also be transaction fees on the refinancing. These fees must be calculated before embarking on a loan refinancing, as they can wipe out any savings generated through refinancing. Penalty clauses are only applicable to loans paid off prior to maturity. If a loan is paid off upon maturity it is a new financing, not a refinancing, and all terms of the prior obligation terminate when the new financing funds pay off the prior debt. If the refinanced loan has lower monthly repayments or consolidates other debts for the same repayment, it will result in a larger total interest cost over the life of the loan, and will result in the borrower remaining in debt for many more years. Calculating the upfront, ongoing, and potentially variable costs of refinancing is an important part of the decision on whether or not to refinance. In some jurisdictions, varying by American state, refinanced mortgage loans are considered recourse debt, meaning that the borrower is liable in case of default, while unrefinanced mortgages are non-recourse debt. Points Main article: Point (mortgage) Refinancing lenders often require a percentage of the total loan amount as an upfront payment. Typically, this amount is expressed in "points" (or "premiums"). 1 point = 1% of the total loan amount. More points (i.e. a larger upfront payment) will usually result in a lower interest rate. Some lenders will offer to finance parts of the loan themselves, thus generating so-called "negative points" (i.e. discounts). Types (US loans only) No Closing Cost Borrowers with this type of refinancing typically pay few if any upfront fees to get the new mortgage loan. This type of refinance can be beneficial provided the prevailing market rate is lower than the borrower's existing rate by a formula determined by the lender offering the loan. Before you read any further do not provide any lender with a credit card number until they have provided you with a Good Faith Estimate verifying it is truly a 0 cost loan. The appraisal fee cannot be paid for by the lender or broker so this will always show up in the total settlement charges at the bottom of your GFE. This can be an excellent choice in a declining market or if you are not sure you will hold the loan long enough to recoup the closing cost before you refinance or pay it off. For example, you plan on selling your home in three years, but it will take five years to recoup the closing cost. This could prevent you from considering a refinance, however if you take the zero closing cost option, you can lower your interest rate without taking any risk of losing money. In this case the broker receives a credit or what's called yield spread premium (YSP). Yield spread premiums are the cash that a mortgage company receives for originating your loan. The broker provides the client and the documentation needed to process the loan and the lender pays them for providing this service in lieu of paying one of their own loan officers. Since a brokerage can have more than one loan officer originating loans, they can sometimes receive additional YSP for bringing in a volume amount of loans. This is normally based on funding more than 1 million in total loans per month. This can greatly benefit the borrower, especially since April 1, 2011. New laws have been implemented by the federal government mandating that all brokers have set pricing with the lenders they do business with. Brokers can receive so much YSP that they can provide you with a lower rate than if you went directly to the lender and they can pay for all your closing cost as opposed to the lender who would make you pay for all the third party fees on your own. You end up with a lower rate and lower fees. Since the new RESPA law as of April came into effect in 2011, brokers can no longer decide how much they want to make off of the loan. Instead they sign a contract in April stating that they will keep only a certain percentage of the YSP and the rest will go toward the borrowers closing cost. True No Closing Cost mortgages are usually not the best options for people who know that they will keep that loan for the entire length of the term or at least enough time to recoup the closing cost. When the borrower pays out of pocket for their closing costs, they are at a higher risk of losing the money they invested. In most cases, the borrower is not able to negotiate the fees for the appraisal or escrow. Sometimes, when wrapping closing costs into a loan you can easily determine whether it makes sense to go with the lower rate with closing cost or the slightly higher rate for free. Some cases your payment will be the same, in that case you would want to choose the higher rate with no fees. If the payment for 4.5% with $2,500 in settlement charges is the same for 4.625% for free then you will pay the same amount of money over the length of the loan, however if you choose the loan with closing cost and you refinance before the end of your term you wasted money on the closing cost. Your loan amount will be 2,500 less at 4.625% and your payment is the same. No Appraisal Required The Obama Administration authorized several refinance programs aimed at helping underwater homeowners take advantage of the historically low interest rates. Most of these programs do not require an appraisal, and encompass all loan types. The programs offered in 2013 include: 1. FHA Streamline Refinance: The largest group that benefits from this refinance program will be those who have a FHA loan that was endorsed prior to May 31, 2009. For those who meet this date, the FHA PMI rates are very very low.[1] This Streamline Refinance Program without an appraisal is also available to borrowers who no longer live in the property (as their primary residence)/ own the house as Investment Property. [2] 2. VA Loan Refinance: The Veteran's Administration offers Interest Rate Reduction Refinances IRRR for Veteran Home Owners who simply want to reduce their interest rate, with no appraisal. These loans are also available to qualifying Veteran's who no longer live in the property as their primary residence. [3] 3. HARP Refinance: When the Home Affordable Refinance Program (HARP) was launched in 2009, it sought to help homeowners with underwater mortgages refinance their loans into lower monthly payments and /or interest rates. Unfortunately, the first version of the program failed to help as many homeowners with underwater mortgages as was hoped, leading to the release of a new and improved version of HARP, dubbed HARP 2, to deal with the complications.[4] HARP 2 no longer caps the loan-to value at 125%, and allows any loan-to-value acceptable, thereby covering underwater homes.[5] 4. USDA Home Loans: No appraisal required – the current residence must be in a USDA “Footprint Area” and currently be insured under the USDA program. So refinancing from a Conventional loan or a FHA loan to USDA will not work under this program. No Credit Report Required – the current mortgage must be current, and all of the previous 12 months of mortgage payments need to be made on time. That’s all. We just verify that you made your house payments on time. Employment Verification Required – we will need to verify that you are employed, and drawing enough money to meet the underwriting guidelines… meaning we must prove that you have enough income to make your house payments. Can not take cash out - All you can do is finance your current loan balance, and the new Guarantee Fee (USDA PMI) which is 1.5%. [6] Cash-Out Main article: Cash out refinancing This type of refinance may not help lower the monthly payment or shorten mortgage periods. It can be used for home improvement, credit cards, and other debt consolidation if the borrower qualifies with their current home equity; they can refinance with a loan amount larger than their current mortgage and keep the cash out. See also • • • Refinancing risk Streamline refinancing Refunding References 1. 2. 3. 4. 5. 6. ^ "FHA Streamline Refinance Endorsement Date of May 31, 2009". NC Mortgage Experts. Retrieved 24 April 2012. ^ "FHA Streamline Refinance of Investment Property". NC Mortgage Experts. Retrieved 10 January 2013. ^ "The Veteran's Administration Provides Four Different Refinance Solutions for VA Loans". NC Mortgage Experts. Retrieved 31 March 2008. ^ "Refinance When You Owe More Than Your Home Is Worth". NC Mortgage Experts. Retrieved 26 January 2013. ^ "The HARP Refinance – What Is HARP?". Streamline Refinance. Retrieved 22 June 2013. ^ "USDA Streamline Refinance With No Appraisal". NC Mortgage Experts. Retrieved 6 February 2012. External links • • • • • U.S. Department of Housing and Urban Development - Streamlining your Mortgage U.S. Department of Veteran's Affairs - Mortgage Refinancing Information Good Neighbor Next Door - FHA Good Neighbor Next Door Indian Home Loan Guarantee Program - Indian Home Loan Guarantee Program HUD - Information about HUD [hide] • • • v t e General areas of finance • • • • • • • • • • • • Computational finance Experimental finance Financial economics Financial institutions Financial markets Investment management Mathematical finance Personal finance Public finance Quantitative behavioral finance Quantum Finance Statistical finance Categories: • Personal finance • Mortgage Navigation menu • • • • • • • Create account Log in Article Talk Read Edit source View history • • • • • • Main page Contents Featured content Current events Random article Donate to Wikipedia Interaction • • • • • Help About Wikipedia Community portal Recent changes Contact page Toolbox Print/export Languages • • • • • • • • Deutsch Español Magyar Polski Русский Українська Edit links This page was last modified on 26 August 2013 at 03:29. • Text is available under the Creative Commons Attribution-ShareAlike License; additional terms may apply. By using this site, you agree to the Terms of Use and Privacy Policy. Wikipedia® is a registered trademark of the Wikimedia Foundation, Inc., a nonprofit organization. Privacy policy About Wikipedia Disclaimers Contact Wikipedia Developers Mobile view • • • • • • • • Definition of 'Refinance' 1. When a business or person revises a payment schedule for repaying debt. 2. Replacing an older loan with a new loan offering better terms. Investopedia explains 'Refinance' When a business refinances, it typically extends the maturity date. When individuals change their monthly payments or modify the rate of interest on their loans, it usually involves a penalty fee. Under most FHA programs, the borrower is required to make a minimum down payment into the transaction of at least 3.5% of the lesser of the appraised value of the property or the sales price. FREE CREDIT SCORE Do you know what's on your credit report? - SEE IT NOW - 2013 FHA Limits | FHA Refinance | FHA Loan Requirements | FHA Loans | FHA Loan Types | Mortgage Calculators | FHA Inspectors | FHA Foreclosures FHA Loan Articles News, updates, and explanations to keep you informed. FHA Loan Rules For Streamline Refinancing Loans The FHA Streamline Refinancing loan program is designed for people with existing FHA mortgages. These refinancing loans are available in two different types. One is called a "non-credit qualifying" streamline loan, while the other is the "credit qualifying" streamline refinance. A non-credit qualifying FHA streamline loan is one where the borrower doesn't have to submit a brand new application with job and credit verification. The current loan acts as a sort of template for the new application and the entire process is much faster than the original FHA home loan, hence the term "streamline". When is a borrower eligible for a no-credit check FHA streamline loan? The answer can be found in the FHA description of the streamline loan program. According to the FHA official site, "Streamline refinances are designed to lower the monthly principal and interest payments on a current FHA-insured mortgage, and must involve no cash back to the borrower, except for minor adjustments at closing that are not to exceed $500." Assuming the borrower is otherwise qualified, the no-credit check FHA streamline loan is available when those requiements listed above are met--a lower monthly principal and interest rate--but some other rules also apply. The FHA permits streamline refinancing loans with no credit check with the borrower has owned the property for at least six months. According to HUD 4155.1 Chapter 6 Section C: "...the borrower must have made at least six payments on the FHA-insured mortgage being refinanced. at least six full months must have passed since the first payment due date of the refinanced mortgage, and at least 210 days must have passed from the closing date of the mortgage being refinanced." In situations including those where the principal or interest rates actually increase as a result of the streamline refinancing loan, FHA rules do allow the loan to proceed, but the borrower must submit to a credit check. "A credit qualifying streamline refinance must be considered • when a change in the mortgage term will result in an increase in the mortgage payment of more than 20% when deletion of a borrower or borrowers will trigger the due-on-sale clause following the assumption of a mortgage that occurred less than six months previously, and does not contain restrictions (i.e. due-on-sale clause) limiting assumption only to a creditworthy borrower, or following the assumption of a mortgage that occurred less than six months previously, and did not trigger the transferability restriction (that is, the due-onsale clause), such as in a property transfer resulting from a divorce decree or by devise or descent." • • • FHA loan rules for credit-qualifying streamline refinancing loans also say, "The use of a credit qualifying streamline refinance for situations in which the change in mortgage term will result in an increase in the mortgage payment is only permissible for owner-occupied principal residences, secondary residences meeting the requirements of HUD 4155.1 4.B.3, and investment properties owned by governmental agencies and eligible nonprofit organizations as described in HUD 4155.1 4.A.6." Sometimes a non-credit qualifying streamline loan would be possible if the borrower didn't include extras into the loan such as energy efficient improvements. Examine your bottom line carefully before deciding on including any permitted extras to be rolled into your streamline loan. FHA NEWS and RELATED ARTICLES About FHA Loan Down Payment Sources Under most FHA programs, the borrower is required to make a minimum down payment into the transaction of at least 3.5% of the lesser of the appraised value of the property or the sales price. FHA Loans and Bankruptcy A Chapter 7 bankruptcy (liquidation) does not disqualify a borrower from obtaining an FHA-insured mortgage if at least two years have elapsed since the date of the discharge of the bankruptcy. FHA Updates Good Neighbor Next Door Loan Policy There is a government program known as Good Neighbor Next Door, which allows qualified borrowers to apply for home loans at a substantial discount to law enforcement officers, teachers and firefighters/emergency medical technicians. What Happens When Your FHA Loan is Approved? Did you know that in addition to all the other rules governing FHA home loans, there are regulations that govern what’s supposed to happen once your FHA loan is approved or denied? Those regulations are found in the FHA loan rules in HUD 4155.1. FHA Loan Credit Score Standards FHA minimum standards for FICO scores is that the FHA requirements are just that-minimum requirements. Lenders can and often do apply higher credit score requirements to FHA loan applications. Next 5 Privacy Policy | Terms of Use | About Us | Site Map | Contact | FHA Lenders SecureRights Advertiser Contact Information Copyright © 1997-2013 · FHA.com · All Rights Reserved Web Design: Bouncing Pixel · Houston, Texas Qualify for an FHA Loan Compare Refinance Mortgage Rates Sites and Offers of Interest Free FHA Limits Calculator Display current FHA loan limits for states and counties on your real estate, mortgage, or community website. Get: FHA Limits Widget FEATURED SITES: Helping you make the best financial choices, build wealth, and save money during and after your military service. -- Military Insurance -- Military Pay -- GI Bill Education -- Military Finance Offering VA loan products that meet the home financing needs of active duty military and veterans across the country. -- VA Loan Limits -- VA Loan Refinance -- VA Loan Guidelines Remember, the FHA does not make home loans. They insure the FHA loans that we can assist you in getting. FHA.com is a private corporation, is not a government agency, and does not make loans. FHA LOAN TYPES: -- FHA Home Loan -- FHA Secure -- FHA Reverse -- FHA Loan (fixed rate) SPECIAL FHA TOPICS: -- FHA Down Payments -- FHA Credit -- FHA Appraisals -- FHA Mortgage Tips -- FHA Loan Prequalify -- Other Loan Types -- FHA Loan Questions -- Obama Mortgage -- HOPE Act FHA Foreclosed Homes SEARCH FOR FREE! Search by State - or Enter Zip Code - A Blog About FHA Loans This blog is brought to you by the knowledgeable group of counselors at FHA.com. Our team specializes in advising our customers about the value of FHA mortgage loans. • FHA Credit Qualifications • FHA Requirements • FHA Closing Costs • Fair Housing Act > See also: VA Loans Blog - A Military Hub Site - Military guidelines, regulations, and benefits are introduced each year for everything from Military Pay Charts to your VA Loan benefits. We can help you stay informed. • Military Pay Charts • Drill Pay Charts • Incentives and Special Pay • BAH Rates > See also: Military Pay Archive Wiki Loves Monuments: Photograph a monument, help Wikipedia and win! Adjustable-rate mortgage From Wikipedia, the free encyclopedia Jump to: navigation, search A variable-rate mortgage, adjustable-rate mortgage (ARM), or tracker mortgage is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets.[1] The loan may be offered at the lender's standard variable rate/base rate. There may be a direct and legally-defined link to the underlying index, but where the lender offers no specific link to the underlying market or index the rate can be changed at the lender's discretion. The term "variable-rate mortgage" is most common outside the United States, whilst in the United States, "adjustable-rate mortgage" is most common, and implies a mortgage regulated by the Federal government,[2] with caps on charges. In many countries, adjustable rate mortgages are the norm, and in such places, may simply be referred to as mortgages. Among the most common indices are the rates on 1-year constant-maturity Treasury (CMT) securities, the Cost of Funds Index (COFI), and the London Interbank Offered Rate (LIBOR). A few lenders use their own cost of funds as an index, rather than using other indices. This is done to ensure a steady margin for the lender, whose own cost of funding will usually be related to the index. Consequently, payments made by the borrower may change over time with the changing interest rate (alternatively, the term of the loan may change). This is distinct from the graduated payment mortgage, which offers changing payment amounts but a fixed interest rate. Other forms of mortgage loan include the interest only mortgage, the fixed rate mortgage, the negative amortization mortgage, and the balloon payment mortgage. Adjustable rates transfer part of the interest rate risk from the lender to the borrower. They can be used where unpredictable interest rates make fixed rate loans difficult to obtain. The borrower benefits if the interest rate falls but loses if the interest rate increases. The borrower benefits from reduced margins to the underlying cost of borrowing compared to fixed or capped rate mortgages. Contents • • • • • • • • • • • • 1 Characteristics o 1.1 Index o 1.2 Basic features of ARMs o 1.3 Caps 2 Reasons for ARMs 3 ARM Variants o 3.1 Hybrid ARMs o 3.2 Option ARMs o 3.3 Cash flow ARMs 4 Loan caps 5 Popularity 6 Pricing 7 Prepayment 8 Criticism o 8.1 Predatory lending o 8.2 Interest rate errors and overcharges 9 History 10 See also 11 References 12 External links Characteristics Index • • • • • • 11th District Cost of Funds Index (COFI) London Interbank Offered Rate (LIBOR) 12-month Treasury Average Index (MTA) Constant Maturity Treasury (CMT) National Average Contract Mortgage Rate Bank Bill Swap Rate (BBSW) In some countries, banks may publish a prime lending rate which is used as the index. The index may be applied in one of three ways: directly, on a rate plus margin basis, or based on index movement. A directly applied index means that the interest rate changes exactly with the index. In other words, the interest rate on the note exactly equals the index. Of the above indices, only the contract rate index is applied directly.[1] To apply an index on a rate plus margin basis means that the interest rate will equal the underlying index plus a margin. The margin is specified in the note and remains fixed over the life of the loan.[1] For example, a mortgage interest rate may be specified in the note as being LIBOR plus 2%, 2% being the margin and LIBOR being the index. The final way to apply an index is on a movement basis. In this scheme, the mortgage is originated at an agreed upon rate, then adjusted based on the movement of the index.[1] Unlike direct or index plus margin, the initial rate is not explicitly tied to any index; the adjustments are tied to an index. Basic features of ARMs The most important basic features of ARMs are:[3] 1. Initial interest rate. This is the beginning interest rate on an ARM. 2. The adjustment period. This is the length of time that the interest rate or loan period on an ARM is scheduled to remain unchanged. The rate is reset at the end of this period, and the monthly loan payment is recalculated. 3. The index rate. Most lenders tie ARM interest rates changes to changes in an index rate. Lenders base ARM rates on a variety of indices, the most common being rates on one-, three-, or five-year Treasury securities. Another common index is the national or regional average cost of funds to savings and loan associations. 4. The margin. This is the percentage points that lenders add to the index rate to determine the ARM's interest rate. 5. Interest rate caps. These are the limits on how much the interest rate or the monthly payment can be changed at the end of each adjustment period or over the life of the loan. 6. Initial discounts. These are interest rate concessions, often used as promotional aids, offered the first year or more of a loan. They reduce the interest rate below the prevailing rate (the index plus the margin). 7. Negative amortization. This means the mortgage balance is increasing. This occurs whenever the monthly mortgage payments are not large enough to pay all the interest due on the mortgage. This may be caused when the payment cap contained in the ARM is low enough such that the principal plus interest payment is greater than the payment cap. 8. Conversion. The agreement with the lender may have a clause that allows the buyer to convert the ARM to a fixed-rate mortgage at designated times. 9. Prepayment. Some agreements may require the buyer to pay special fees or penalties if the ARM is paid off early. Prepayment terms are sometimes negotiable. It should be obvious that the choice of a home mortgage loan is complicated and time consuming. As a help to the buyer, the Federal Reserve Board and the Federal Home Loan Bank Board have prepared a mortgage checklist. Caps Any mortgage where payments made by the borrower may increase over time brings with it the risk of financial hardship to the borrower. To limit this risk, limitations on charges —known as caps in the industry—are a common feature of adjustable rate mortgages.[1] Caps typically apply to three characteristics of the mortgage: • • • frequency of the interest rate change periodic change in interest rate total change in interest rate over the life of the loan, sometimes called life cap For example, a given ARM might have the following types of interest rate adjustment caps: • • • interest adjustments made every six months, typically 1% per adjustment, 2% total per year interest adjustments made only once a year, typically 2% maximum interest rate may adjust no more than 1% in a year Mortgage payment adjustment caps: • maximum mortgage payment adjustments, usually 7.5% annually on payoption/negative amortization loans Life of loan interest rate adjustment caps: • total interest rate adjustment limited to 5% or 6% for the life of the loan. Caps on the periodic change in interest rate may be broken up into one limit on the first periodic change and a separate limit on subsequent periodic change, for example 5% on the initial adjustment and 2% on subsequent adjustments. Although uncommon, a cap may limit the maximum monthly payment in absolute terms (for example, $1000 a month), rather than in relative terms. ARMs that allow negative amortization will typically have payment adjustments that occur less frequently than the interest rate adjustment. For example, the interest rate may be adjusted every month, but the payment amount only once every 12 months. Cap structure is sometimes expressed as initial adjustment cap / subsequent adjustment cap / life cap, for example 2/2/5 for a loan with a 2% cap on the initial adjustment, a 2% cap on subsequent adjustments, and a 5% cap on total interest rate adjustments. When only two values are given, this indicates that the initial change cap and periodic cap are the same. For example, a 2/2/5 cap structure may sometimes be written simply 2/5. Reasons for ARMs ARMs generally permit borrowers to lower their initial payments if they are willing to assume the risk of interest rate changes. There is evidence that consumers tend to prefer contracts with the lowest initial rates, such as in the UK where consumers tend to focus on immediate monthly mortgage costs.[4] Decisions of consumers may also be affected by the advice they get, and much of the advice is provided by lenders who may prefer ARMs because of financial market structures.[4] In many countries, banks or similar financial institutions are the primary originators of mortgages. For banks that are funded from customer deposits, the customer deposits will typically have much shorter terms than residential mortgages. If a bank were to offer large volumes of mortgages at fixed rates but to derive most of its funding from deposits (or other short-term sources of funds), the bank would have an asset-liability mismatch due to interest rate risk:[4] in this case, it would be running the risk that the interest income from its mortgage portfolio would be less than it needed to pay its depositors. In the United States, some argue that the savings and loan crisis was in part caused by this problem, that the savings and loans companies had short-term deposits and long-term, fixed rate mortgages, and were caught when Paul Volcker raised interest rates in the early 1980s. Therefore, banks and other financial institutions offer adjustable rate mortgages because it reduces risk and matches their sources of funding. Banking regulators pay close attention to asset-liability mismatches to avoid such problems, and place tight restrictions on the amount of long-term fixed-rate mortgages that banks may hold (in relation to their other assets). To reduce this risk, many mortgage originators will sell many of their mortgages, particularly the mortgages with fixed rates. For the borrower, adjustable rate mortgages may be less expensive, but at the price of bearing higher risk. Many ARMs have "teaser periods", which are relatively short initial fixed-rate periods (typically one month to one year) when the ARM bears an interest rate that is substantially below the "fully indexed" rate. The teaser period may induce some borrowers to view an ARM as more of a bargain than it really represents. A low teaser rate predisposes an ARM to sustain above-average payment increases. ARM Variants Hybrid ARMs A hybrid ARM features an interest rate that is fixed for an initial period of time, then floats thereafter. The "hybrid" refers to the ARM's blend of fixed-rate and adjustable-rate characteristics. Hybrid ARMs are referred to by their initial fixed-rate and adjustable-rate periods, for example, 3/1, is for an ARM with a 3-year fixed interest-rate period and subsequent 1-year interest-rate adjustment periods. The date that a hybrid ARM shifts from a fixed-rate payment schedule to an adjusting payment schedule is known as the reset date. After the reset date, a hybrid ARM floats at a margin over a specified index just like any ordinary ARM.[5] The popularity of hybrid ARMs has significantly increased in recent years. In 1998, the percentage of hybrids relative to 30-year fixed-rate mortgages was less than 2%; within six years, this increased to 27.5%.[5] Like other ARMs, hybrid ARMs transfer some interest-rate risk from the lender to the borrower, thus allowing the lender to offer a lower note rate in many interest-rate environments. Option ARMs An "option ARM" is typically a 30-year ARM that initially offers the borrower four monthly payment options: a specified minimum payment, an interest-only payment, a 15year fully amortizing payment, and a 30-year fully amortizing payment.[6] These types of loans are also called "pick-a-payment" or "pay-option" ARMs. When a borrower makes a Pay-Option ARM payment that is less than the accruing interest, there is "negative amortization", which means that the unpaid portion of the accruing interest is added to the outstanding principal balance. For example, if the borrower makes a minimum payment of $1,000 and the ARM has accrued monthly interest in arrears of $1,500, $500 will be added to the borrower's loan balance. Moreover, the next month's interest-only payment will be calculated using the new, higher principal balance. Option ARMs are often offered with a very low teaser rate (often as low as 1%) which translates into very low minimum payments for the first year of the ARM. During boom times, lenders often underwrite borrowers based on mortgage payments that are below the fully amortizing payment level. This enables borrowers to qualify for a much larger loan (i.e., take on more debt) than would otherwise be possible. When evaluating an Option ARM, prudent borrowers will not focus on the teaser rate or initial payment level, but will consider the characteristics of the index, the size of the "mortgage margin" that is added to the index value, and the other terms of the ARM. Specifically, they need to consider the possibilities that (1) long-term interest rates go up; (2) their home may not appreciate or may even lose value or even (3) that both risks may materialize. Option ARMs are best suited to sophisticated borrowers with growing incomes, particularly if their incomes fluctuate seasonally and they need the payment flexibility that such an ARM may provide. Sophisticated borrowers will carefully manage the level of negative amortization that they allow to accrue. In this way, a borrower can control the main risk of an Option ARM, which is "payment shock", when the negative amortization and other features of this product can trigger substantial payment increases in short periods of time.[7] The minimum payment on an Option ARM can jump dramatically if its unpaid principal balance hits the maximum limit on negative amortization (typically 110% to 125% of the original loan amount). If that happens, the next minimum monthly payment will be at a level that would fully amortize the ARM over its remaining term. In addition, Option ARMs typically have automatic "recast" dates (often every fifth year) when the payment is adjusted to get the ARM back on pace to amortize the ARM in full over its remaining term. For example, a $200,000 ARM with a 110% "neg am" cap will typically adjust to a fully amortizing payment, based on the current fully indexed interest rate and the remaining term of the loan, if negative amortization causes the loan balance to exceed $220,000. For a 125% recast, this will happen if the loan balance reaches $250,000. Any loan that is allowed to generate negative amortization means that the borrower is reducing his equity in his home, which increases the chance that he won't be able to sell it for enough to repay the loan. Declining property values would exacerbate this risk. Option ARMs may also be available as "hybrids," with longer fixed-rate periods. These products would not be likely to have low teaser rates. As a result, such ARMs mitigate the possibility of negative amortization, and would likely not appeal to borrowers seeking an "affordability" product. Cash flow ARMs A cash flow ARM is a minimum payment option mortgage loan. This is a fancy term for a loan that allows a borrower to choose their monthly payment from several options. These payment options usually include the option to pay at the 30-year level, 15-year level, interest only level, and a minimum payment level. The minimum payment level is usually lower than the interest only payment. This type of loan can result in negative amortization. The option to make a minimum payment is usually available only for the first several years of the loan. Cash flow ARM mortgages are synonymous with option ARM or payment option ARM mortgages, however it should be noted that not all loans with cash flow options are adjustable. In fact, fixed rate cash flow option loans retain the same cash flow options as cash flow ARMs and option ARMs, but remain fixed for up to 30 years.[citation needed] Terminology Definition Hybrid ARMs are often referred to in this format, where X is the number of years during which the initial interest rate applies prior to first adjustment (common terms are 3, 5, 7, and 10 years), and Y is the interval between adjustments (common terms are 1 for one year and 6 for six months). As an example, a 5/1 ARM means that the initial interest rate applies for five years (or 60 months, in terms of payments), after which the interest rate is adjusted annually. (Adjustments for escrow accounts, however, do not follow the 5/1 Term X/Y schedule; these are done annually.) The price of the ARM as calculated by adding Index + Margin = Fully Indexed Rate. This is the interest rate your loan would be at without a Start Fully Rate (the introductory special rate for the initial fixed period). This means the Indexed loan would be higher if adjusting, typically, 1–3% higher than the fixed rate. Rate Calculating this is important for ARM buyers, since it helps predict the future interest rate of the loan. For ARMs where the index is applied to the interest rate of the note on an "index plus margin" basis, the margin is the difference between the note rate and the index on which the note rate is based expressed in percentage terms.[1] Margin This is not to be confused with profit margin. The lower the margin the better the loan is to the borrower as the maximum rate will increase less at each adjustment. Margins will vary between 2% and 7%. A published financial index such as LIBOR used to periodically adjust the Index interest rate of the ARM. The introductory rate provided to purchasers of ARM loans for the initial Start Rate fixed interest period. The length of time between interest rate adjustments. In times of falling Period interest rates, a shorter period benefits the borrower. On the other hand, in times of rising interest rates, a shorter period benefits the lender. A clause that sets the minimum rate for the interest rate of an ARM loan. Loans may come with a Start Rate = Floor feature, but this is primarily for Floor Non-Conforming (aka Sub-Prime or Program Lending) loan products. This prevents an ARM loan from ever adjusting lower than the Start Rate. An "A Paper" loan typically has either no Floor or 2% below start. Industry term to describe the severe (unexpected or planned for by borrower) Payment upward movement of mortgage loan interest rates and its effect on borrowers. Shock This is the major risk of an ARM, as this can lead to severe financial hardship for the borrower. Cap Any clause that sets a limitation on the amount or frequency of rate changes. Loan caps Loan caps provide payment protection against payment shock, and allow a measure of interest rate certainty to those who gamble with initial fixed rates on ARM loans. There are three types of Caps on a typical First Lien Adjustable Rate Mortgage or First Lien Hybrid Adjustable Rate Mortgage. Initial Adjustment Rate Cap: The majority of loans have a higher cap for initial adjustments that's indexed to the initial fixed period. In other words, the longer the initial fixed term, the more the bank would like to potentially adjust your loan. Typically, this cap is 2–3% above the Start Rate on a loan with an initial fixed rate term of three years or lower and 5–6% above the Start Rate on a loan with an initial fixed rate term of five years or greater. Rate Adjustment Cap: This is the maximum amount by which an Adjustable Rate Mortgage may increase on each successive adjustment. Similar to the initial cap, this cap is usually 1% above the Start Rate for loans with an initial fixed term of three years or greater and usually 2% above the Start Rate for loans that have an initial fixed term of five years or greater. Lifetime Cap: Most First Mortgage loans have a 5% or 6% Life Cap above the Start Rate (this ultimately varies by the lender and credit grade). • Industry Shorthand for ARM Caps Inside the business caps are expressed most often by simply the three numbers involved that signify each cap. For example, a 5/1 Hybrid ARM may have a cap structure of 5/2/5 (5% initial cap, 2% adjustment cap and 5% lifetime cap) and insiders would call this a 52-5 cap. Alternatively, a 1-year ARM might have a 1/1/6 cap (1% initial cap, 1% adjustment cap and 6% lifetime cap) known as a 1-1-6, or alternatively expressed as a 1/6 cap (leaving out one digit signifies that the initial and adjustment caps are identical). • Negative amortization ARM caps See the complete article for the type of ARM that Negative amortization loans are by nature. Higher risk products, such as First Lien Monthly Adjustable loans with Negative amortization and Home equity lines of credit (HELOCs) have different ways of structuring the Cap than a typical First Lien Mortgage. The typical First Lien Monthly Adjustable loans with Negative amortization loan has a life cap for the underlying rate (aka "Fully Indexed Rate") between 9.95% and 12% (maximum assessed interest rate). Some of these loans can have much higher rate ceilings. The fully indexed rate is always listed on the statement, but borrowers are shielded from the full effect of rate increases by the minimum payment, until the loan is recast, which is when principal and interest payments are due that will fully amortize the loan at the fully indexed rate. • Home equity lines of credit (HELOCs) Since HELOCs are intended by banks to primarily sit in second lien position, they normally are only capped by the maximum interest rate allowed by law in the state wherein they are issued. For example, Florida currently has an 18% cap on interest rate charges. These loans are risky in the sense that to lenders, they are practically a credit card issued to the borrower, with minimal security in the event of default. They are risky to the borrower in the sense that they are mostly indexed to the Wall Street Journal Prime Rate, which is considered a Spot Index, or a financial indicator that is subject to immediate change (as are the loans based upon the Prime Rate). The risk to borrower being that a financial situation causing the Federal Reserve to raise rates dramatically (see 1980, 2006) would effect an immediate rise in obligation to the borrower, up to the capped rate. Popularity Variable rate mortgages are the most common form of loan for house purchase in the United Kingdom,[4] Ireland and Canada but are unpopular in some other countries such as Germany.[4] Variable rate mortgages are very common in Australia[4] and New Zealand. In some countries, true fixed-rate mortgages are not available except for shorter-term loans; in Canada, the longest term for which a mortgage rate can be fixed is typically no more than ten years, while mortgage maturities are commonly 25 years. In many countries, it is not feasible for banks to borrow at fixed rates for very long terms; in these cases, the only feasible type of mortgage for banks to offer may be adjustable rate mortgages (barring some form of government intervention). For example, the mortgage industry of the United Kingdom has traditionally been dominated by building societies. Since funds raised by UK building societies must be at least 50% deposits, lenders prefer variable-rate mortgages to fixed-rate mortgages to reduce potential interest rate risks between what they charging in mortgage interest and what they are paying in interest for deposits and other funding sources.[4] Countries where fixed rate loans are the common form of loan for a house purchase usually need to have a specific legal framework in place to make this possible. For example, in Germany and Austria the popular Bausparkassen, a type of mutual building societies, offer long-term fixed rate loans. They are legally separate from banks and require lenders to save up a considerable amount, at a rather low fixed interest rate, before they get their loan; this is done by requiring the future borrower to begin paying in his fixed monthly payments well before actually getting the loan. It is generally not possible to pay this in as a lump sum and get the loan right away; it has to be done in monthly installments of the same size as what will be paid during the payback phase of the mortgage. Depending on whether there are enough savers in the system at any given time, payout of a loan may be delayed for some time even when the savings quota has already been met by the would-be lender. The advantage for the lender is that the monthly payment is guaranteed never to be increased, and the lifetime of the loan is also fixed in advance. The disadvantage is that this model, in which you have to start making payments several years before actually getting the loan, is mostly aimed at once-in-alifetime home buyers who are able to plan ahead for a long time. That has become a problem with the generally higher mobility that is demanded of workers nowadays. For those who plan to move within a relatively short period of time (three to seven years), variable rate mortgages may still be attractive because they often include a lower, fixed rate of interest for the first three, five, or seven years of the loan, after which the interest rate fluctuates. Pricing Adjustable rate mortgages are typically, but not always, less expensive than fixed-rate mortgages. Due to the inherent interest rate risk, long-term fixed rates will tend to be higher than short-term rates (which are the basis for variable-rate loans and mortgages). The difference in interest rates between short and long-term loans is known as the yield curve, which generally slopes upward (longer terms are more expensive). The opposite circumstance is known as an inverted yield curve and is relatively infrequent. The fact that an adjustable rate mortgage has a lower starting interest rate does not indicate what the future cost of borrowing will be (when rates change). If rates rise, the cost will be higher; if rates go down, cost will be lower. In effect, the borrower has agreed to take the interest rate risk. Some studies have shown that on average, the majority of borrowers with adjustable rate mortgages save money in the long term.[8] The actual pricing and rate analysis of adjustable rate mortgage in the finance industry is done through various computer simulation methodologies like Monte Carlo method or Sobol sequences. In these techniques, by using an assumed probability distribution of future interest rates, numerous (10,000–100,000 or even 1,000,000) possible interest rate scenarios are explored, mortgage cash flows calculated under each, and aggregate parameters like fair value and effective interest rate over the life of the mortgage are estimated. Having these at hand, lending analysts determine whether offering a particular mortgage would be profitable, and if it would represent tolerable risk to the bank. Prepayment Adjustable rate mortgages, like other types of mortgage, usually allow the borrower to prepay principal (or capital) early without penalty. Early payments of part of the principal will reduce the total cost of the loan (total interest paid), but will not shorten the amount of time needed to pay off the loan like other loan types. Upon each recasting, the new fully indexed interest rate is applied to the remaining principal to end within the remaining term schedule. If a mortgage is refinanced, the borrower simultaneously takes out a new mortgage and pays off the old mortgage; the latter counts as a prepayment. Some ARMs charge prepayment penalties of several thousand dollars if the borrower refinances the loan or pays it off early, especially within the first three or five years of the loan.[1] Criticism Predatory lending Adjustable rate mortgages are sometimes sold to consumers who are unlikely to repay the loan should interest rates rise.[9] In the United States, extreme cases are characterized by the Consumer Federation of America as predatory loans. Protections against interest rate rises include (a) a possible initial period with a fixed rate (which gives the borrower a chance to increase his/her annual earnings before payments rise); (b) a maximum (cap) that interest rates can rise in any year (if there is a cap, it must be specified in the loan document); and (c) a maximum (cap) that interest rates can rise over the life of the mortgage (this also must be specified in the loan document). Interest rate errors and overcharges In September 1991, the Government Accountability Office (GAO) released a study of Adjustable Rate Mortgages[10] in the United States which found between 20% and 25% of the ARM loans out of the estimated 12 million at the time contained Interest Rate Errors. A former federal mortgage banking auditor estimated these mistakes created at least US$10 billion in net overcharges to American home-owners. Such errors occurred when the related mortgage servicer selected the incorrect index date, used an incorrect margin, or ignored interest rate change caps. In July 1994, Consumer Loan Advocates, a non-profit mortgage auditing firm announced[11] that as many as 18% of Adjustable Rate Mortgages have errors costing the borrower more than $5,000 in interest overcharges. In December 1995, a study by the Federal Savings and Loan Insurance Corporation (FSLIC) concluded that 50–60% of all Adjustable Rate Mortgages in the United States contain an error regarding the variable interest rate charged to the homeowner.[12] The study estimated the total amount of interest overcharged to borrowers was in excess of $8 billion. Inadequate computer programs, incorrect completion of documents and calculation errors were cited as the major causes of interest rate overcharges. No other government studies have been conducted into ARM interest overcharges. History TITLE VIII, ALTERNATIVE MORTGAGE TRANSACTIONS, Garn–St. Germain Depository Institutions Act of 1982 allowed Adjustable rate mortgages.[13] See also [hide] • • • v t e Mortgage loan Financial literacy Interest rate type • • fixed-rate mortgage adjustable-rate mortgage / variable-rate / floating rate Repayment type • • • • • Continuous: Repayment mortgage / self-amortized Repayment at term: interest-only mortgage (endowment mortgage) No repayment: reverse mortgage Hybrid: balloon payment mortgage equity release (shared appreciation mortgage) flexible mortgage (offset mortgage, mortgage accelerator) graduated payment mortgage loan buy to let mortgage foreign currency mortgage foreign national mortgage wraparound mortgage Annual Percentage Rate (APR) Variable payment • • • • • • Other variations Key concepts • • • • • • • Foreclosure / Repossession Introductory rate Teaser rate VA loan United States housing bubble US mortgage terminology References 1. 2. 3. 4. 5. 6. 7. 8. ^ Jump up to: a b c d e f Wiedemer, John P, Real Estate Finance, 8th Edition, pp 99–105 Jump up ^ The Definition of a Variable-Rate Mortgage Jump up ^ Mishler, Lon; Cole, Robert E. (1995). Consumer and business credit management. Homewood: Irwin. pp. 132–133. ISBN 0-256-13948-2. ^ Jump up to: a b c d e f g International Monetary Fund (2004). World Economic Outlook: September 2004: The Global Demographic Transition. pp. 81–83. ISBN 978-1-58906-406-5. ^ Jump up to: a b Fabozzi, Frank J. (ed), Handbook of Mortgage-Backed Securities, 6th Edition, pp 259–260 Jump up ^ Simon, Ruth (2006-08-21). "Option ARMs Remain Popular Despite Risks and Higher Rates". RealEstateJournal.com (The Wall Street Journal). Retrieved 2001-09-01. Jump up ^ "Payment Shock Is The Latest Worry In Mortgage Markets". MortgageNewsDaily.com. 2006-08-24. Retrieved 2006-09-01. Jump up ^ www.ifid.ca 9. Jump up ^ "Option ARMs At The Center of Rate Shock Fears". MortgageNewsDaily.com. 2006-09-11. Retrieved 2006-09-15. 10. Jump up ^ "Adjustable-Rate Mortgage Mistakes Add Up". Los Angeles Times. 1991-09-22. p. 2. Retrieved 2010-11-09. 11. Jump up ^ "Costly Errors Lurk in Some Mortgages". The New York Times. 1994-07-23. p. 3. Retrieved 2010-11-09. 12. Jump up ^ "Government study concludes 50%-60% of all adjustable rate mortgages contain errors". Allbusiness.com (Allbusiness.com). 1995-12-01. p. 2. Retrieved 2010-11-09. 13. Jump up ^ FRB Philadelphia - PL 97-320, Garn-St Germain Act External links • • • • U.S. Federal Reserve Consumer Handbook on Adjustable Rate Mortgages US historical ARM index rates US historical mortgage rates, 1982 – present Adjustable Rate Mortgage Video and Audio on MarketWatch Categories: • Mortgage industry of the United States • Banking • United States housing bubble • Mortgage Navigation menu • • • • • • • Create account Log in Article Talk Read Edit View history • • • • • • Main page Contents Featured content Current events Random article Donate to Wikipedia Interaction • • • • • Help About Wikipedia Community portal Recent changes Contact page Toolbox Print/export Languages • • • Edit links This page was last modified on 8 August 2013 at 08:43. Text is available under the Creative Commons Attribution-ShareAlike License; additional terms may apply. By using this site, you agree to the Terms of Use and Privacy Policy. Wikipedia® is a registered trademark of the Wikimedia Foundation, Inc., a nonprofit organization. Privacy policy About Wikipedia Disclaimers Contact Wikipedia Developers Mobile view • • • • • • • • Sign In • Register • Free Annual Reports • Free Tools Search Invest • Dictionary • • • • • • • • • • • • • • • • • • • • • • • Investing Markets Personal Finance Active Trading Forex Professionals Tutorials Video Simulator Free Newsletters Active Trading Forex Technical Analysis Brokers Options Futures Personal Finance Retirement Acronyms Accounting Banking Bonds Tweet 0 Disqus Email Print Feedback Adjustable-Rate Mortgage - ARM Filed Under » Mortgage Definition of 'Adjustable-Rate Mortgage ARM' A type of mortgage in which the interest rate paid on the outstanding balance varies according to a specific benchmark. The initial interest rate is normally fixed for a period of time after which it is reset periodically, often every month. The interest rate paid by the borrower will be based on a benchmark plus an additional spread, called an ARM margin. An adjustable rate mortgage is also known as a "variable-rate mortgage" or a "floating-rate mortgage". Investopedia explains 'Adjustable-Rate Mortgage - ARM' Both 2/28 and 3/27 mortgages are examples of ARMs. A 2/28 mortgage's initial interest rate is fixed for a period of two years and then resets to a floating rate for the remaining 28 years of the mortgage. A 3/27 mortgage is typically the same as a 2/28 mortgage, except that the interest rate is fixed for three years and then floats for the remaining 27 years of the mortgage. Related Definitions 1. Annual Cap 2. Floater 3. Interest Rate Ceiling 4. Lifetime Cap 5. 2/28 Adjustable-Rate Mortgage - 2/28 ARM 6. 3/27 Adjustable-Rate Mortgage - 3/27 ARM 7. Mortgage Index 8. ARM Margin 9. ARM Index 10.Fixed-Rate Mortgage Penny Stock of the Day Articles Of Interest 1. Understanding Your Mortgage We walk through the steps needed to secure the best loan to finance the purchase of your home. 2. Mortgages: Fixed-Rate Versus Adjustable-Rate Both of these have advantages and disadvantages depending on your financial needs and prospects. 3. Make A Risk-Based Mortgage Decision Find out how to choose which mortgage style is right for you. 4. 5 Risky Mortgage Types To Avoid There are plenty of ways to end up with a bad mortgage. The risks of these five should make every homebuyer think twice before signing. 5. Adjustable-Rate Mortgage Indexes: Know Your Benchmark Understanding these benchmarks can help you select the most competitive adjustable-rate loan. 6. ARMed And Dangerous In a climate of rising interest rates, having an adjustable-rate mortgage can be risky. 7. Option ARMs: American Dream Or Mortgage Nightmare? Option adjustable rate mortgages could make or break your home-buying experience. 8. Subprime Lending: Helping Hand Or Underhanded? These loans can spell disaster for borrowers, but that doesn't mean they should be condemned. 9. How To Keep Costs Low When Refinancing Your Home With interest rates still being relatively low, now is a great time to capitalize on refinancing your home. Be aware of what fees are involved in a refinance, and how to keep these costs low. 10. How To Properly Research For The Best Mortgage Rate You’ve probably been told to shop around for the best rate, but what exactly does that entail? Find out how to ensure you're getting the best possible rate on your mortgage. comments powered by Disqus Follow Us: Fixed-rate mortgage From Wikipedia, the free encyclopedia Jump to: navigation, search The examples and perspective in this article deal primarily with the United States and do not represent a worldwide view of the subject. Please improve this article and discuss the issue on the talk page. (March 2011) A fixed-rate mortgage (FRM), often referred to as a "vanilla wafer" mortgage loan, is a fully amortizing mortgage loan where the interest rate on the note remains the same through the term of the loan, as opposed to loans where the interest rate may adjust or "float". As a result, payment amounts and the duration of the loan are fixed and the person who is responsible for paying back the loan benefits from a consistent, single payment and the stuff to plan a budget based on this fixed cost. Other forms of mortgage loans include interest only mortgage, graduated payment mortgage, variable rate (including adjustable rate mortgages and tracker mortgages), negative amortization mortgage, and balloon payment mortgage. Unlike many other loan types, FRM interest payments and loan duration is fixed from beginning to end. Fixed-rate mortgages are characterized by amount of loan, interest rate, compounding frequency, and duration. With these values, the monthly repayments can be calculated. Contents • • • • • • 1 Overview 2 Popularity 3 Comparisons 4 Pricing 5 See also 6 References Overview Unlike adjustable rate mortgages (ARM), fixed-rate mortgages are not tied to an index. Instead, the interest rate is set (or "fixed") in advance to an advertised rate, usually in increments of 1/4 or 1/8 percent. The fixed monthly payment for a fixed-rate mortgage is the amount paid by the borrower every month that ensures that the loan is paid off in full with interest at the end of its term. Popularity The United States Federal Housing Administration (FHA) helped develop and standardize the fixed rate mortgage as an alternative to the balloon payment mortgage by insuring them and by doing so helped the mortgage design garner usage.[1] Because of the large payment at the end of the loan, refinancing risk resulted in widespread foreclosures. It was the first mortgage loan that was fully amortized (fully paid at the end of the loan) precluding successive loans, and had fixed interest rates and payments. Fixed-rate mortgages are the most classic form of loan for home and product purchasing in the United States. The most common terms are 15-year and 30-year mortgages, but shorter terms are available, and 40-year and 50-year mortgages are now available (common in areas with high priced housing, where even a 30-year term leaves the mortgage amount out of reach of the average family). Outside the United States, fixed-rate mortgages are less popular, and in some countries, true fixed-rate mortgages are not available except for shorter-term loans. For example, in Canada the longest term for which a mortgage rate can be fixed is typically no more than ten years, while mortgage maturities are commonly 25 years. The mortgage industry of the United Kingdom has traditionally been dominated by building societies, whose raised funds must be at least 50% deposits, so lenders prefer variable-rate mortgages to fixedrate mortgages to reduce asset-liability mismatch due to interest rate risk.[2] Lenders, in turn, influence consumer decisions which already prefer lower initial monthly payments. [2] Comparisons Fixed rate mortgages are usually more expensive than adjustable rate mortgages. Due to the inherent interest rate risk, long-term fixed rate loans will tend to be at a higher interest rate than short-term loans. The relationship between interest rates for short and long-term loans is represented by the yield curve, which generally slopes upward (longer terms are more expensive). The opposite circumstance is known as an inverted yield curve and occurs less often. The fact that a fixed rate mortgage has a higher starting interest rate does not indicate that this is a worse form of borrowing compared to the adjustable rate mortgages. If interest rates rise, the ARM cost will be higher while the FRM will remain the same. In effect, the lender has agreed to take the interest rate risk on a fixed-rate loan. Some studies [3] have shown that the majority of borrowers with adjustable rate mortgages save money in the long term, but that some borrowers pay more. The price of potentially saving money, in other words, is balanced by the risk of potentially higher costs. In each case, a choice would need to be made based upon the loan term, the current interest rate, and the likelihood that the rate will increase or decrease during the life of the loan. Pricing • Note: Fixed-rate mortgage interest may be compounded differently in other countries, such as in Canada, where it is compounded every 6 months. The fixed monthly payment for a fixed rate mortgage is the amount paid by the borrower every month that ensures that the loan is paid off in full with interest at the end of its term. This monthly payment depends upon the monthly interest rate (expressed as a fraction, not a percentage, i.e., divide the quoted yearly nominal percentage rate by 100 and by 12 to obtain the monthly interest rate), the number of monthly payments called the loan's term, and the amount borrowed known as the loan's principal; rearranging the formula for the present value of an ordinary annuity we get the formula for : For example, for a home loan for $200,000 with a fixed yearly nominal interest rate of 6.5% for 30 years, the principal is , the monthly interest rate is , the number of monthly payments is , the fixed monthly payment . This formula is provided using the financial function PMT in a spreadsheet such as Excel. In the example, the monthly payment is obtained by entering either of the these formulas: =PMT(6.5/100/12,30*12,200000) =((6.5/100/12)/(1-(1+6.5/100/12)^(-30*12)))*200000 This monthly payment formula is easy to derive, and the derivation illustrates how fixedrate mortgage loans work. The amount owed on the loan at the end of every month equals the amount owed from the previous month, plus the interest on this amount, minus the fixed amount paid every month. Amount owed at month 0: Amount owed at month 1: ( principal + interest – payment) (equation 1) Amount owed at month 2: Using equation 1 for (equation 2) Amount owed at month 3: Using equation 2 for Amount owed at month N: (equation 3) Where progression) With the exception of two terms the and you subtract all but two terms cancel: Using equation 4 and 5 (equation 4) (see geometric (equation 5) series are the same so when (equation 6) Putting equation 6 back into 3: will be zero because we have paid the loan off. We want to know Divide top and bottom with This derivation illustrates three key components of fixed-rate loans: (1) the fixed monthly payment depends upon the amount borrowed, the interest rate, and the length of time over which the loan is repaid; (2) the amount owed every month equals the amount owed from the previous month plus interest on that amount, minus the fixed monthly payment; (3) the fixed monthly payment is chosen so that the loan is paid off in full with interest at the end of its term and no more money is owed. See also • • VA loan FHA loan References 1. Jump up ^ Fabozzi, Frank J.; Modigliani, Franco (1992), Mortgage and Mortgage-backed Securities Markets, Harvard Business School Press, p. 19 2. ^ Jump up to: a b International Monetary Fund (2004). World Economic Outlook: September 2004: The Global Demographic Transition. pp. 81–83. ISBN 978-1-58906-406-5. 3. Jump up ^ http://www.mortgagecalculatorx.ca/WP2001A.pdf [hide] • • • v t e Mortgage loan Financial literacy Interest rate type • • • • • • • fixed-rate mortgage adjustable-rate mortgage / variable-rate / floating rate Continuous: Repayment mortgage / self-amortized Repayment at term: interest-only mortgage (endowment mortgage) No repayment: reverse mortgage Hybrid: balloon payment mortgage equity release (shared appreciation mortgage) flexible mortgage (offset mortgage, mortgage accelerator) graduated payment mortgage loan buy to let mortgage foreign currency mortgage foreign national mortgage wraparound mortgage Annual Percentage Rate (APR) Foreclosure / Repossession Repayment type Variable payment • • • • • • Other variations Key concepts • • Categories: • Mortgage • Mortgage industry of the United States Navigation menu • • • • • • • Create account Log in Article Talk Read Edit View history • • • • • • Main page Contents Featured content Current events Random article Donate to Wikipedia Interaction • • • • • Help About Wikipedia Community portal Recent changes Contact page Toolbox Print/export Languages • • • • • • • • • • Česky Dansk Deutsch Nederlands Norsk bokmål Norsk nynorsk Suomi Svenska Edit links This page was last modified on 21 July 2013 at 03:49. • Text is available under the Creative Commons Attribution-ShareAlike License; additional terms may apply. By using this site, you agree to the Terms of Use and Privacy Policy. Wikipedia® is a registered trademark of the Wikimedia Foundation, Inc., a nonprofit organization. Privacy policy About Wikipedia Disclaimers Contact Wikipedia Developers Mobile view • • • • • • • • FHA streamline refinance loans allow you to reduce the interest rate on your current home loan quickly and oftentimes without an appraisal. FREE CREDIT SCORE Do you know what's on your credit report? - SEE IT NOW - 2013 FHA Limits | FHA Refinance | FHA Loan Requirements | FHA Loans | FHA Loan Types | Mortgage Calculators | FHA Inspectors | FHA Foreclosures FHA Streamline Refinance Learn About Your Mortgage Options Sending a child to college, consolidating bills, taking a much needed vacation, or making home improvements are some of the ways homeowners tap into the equity they have accumulated in their home to help with these expenses. Keep in mind that FHA refinancing is only available to homeowners who are currently using their home as their principal residence. FHA REFINANCE: STREAMLINED REFINANCING This refinancing option is considered streamlined because it allows you to reduce the interest rate on your current home loan quickly and oftentimes without an appraisal. FHA Streamlined Refinance also cuts down on the amount of paperwork that must be completed by your lender saving you valuable time and money. In order to qualify for a Streamlined Refinance your original home loan must be an FHA loan in good standing and the refinance must lower your monthly interest payments. This type of refinancing option reduces your monthly expenses by lowering your payments but there is no option to receive cash back. This works well for people who are in good financial standing with no significant debt because it allows you a little extra money each month that can be put to good use elsewhere. If you have a conventional loan you wish to refinance with an FHA refinance loan, you'll need to apply with the usual employment verification, credit check, debt ratio requirements and other considerations. An FHA refinance loan can get you many of the same results, and you may get better rates and lower payments. FHA NEWS and RELATED ARTICLES FHA Streamline Loan Seasoning Periods There is a required wait time between the date when the borrower begins making mortgage loan payments on the home and the day the borrower becomes eligible to apply for FHA Streamline Refinancing on that mortgage. How Long are the Terms for FHA Mortgages? If you're applying for a first-time FHA home loan, you're likely wondering how long your mortgage will be and what kinds of options you might have for shorter or longer loans, early payoff or what happens if you just pay the monthly mortgage minimum. Lower Interest and Mortgage Payments: Streamline Refinance In the last part of 2012 and the early parts of 2013, mortgage loan interest rates have been reported at lows not seen in many years, causing many FHA borrowers to think about refinancing an existing FHA home loan. FHA Mortgage Insurance Premium Guidance Early in 2012, the FHA and HUD issued some guidance in the form of Mortgagee Letter 2012-4, including news of a decrease to the annual Mortgage Insurance Premium for certain Streamline Refinance transactions. FHA Streamline Refinancing: The Net Tangible Benefit If you are looking to refinance an existing FHA mortgage with an FHA Streamline Loan, there are some details you should know when planning for the loan application. Next 5 Privacy Policy | Terms of Use | About Us | Site Map | Contact | FHA Lenders SecureRights Advertiser Contact Information Copyright © 1997-2013 · FHA.com · All Rights Reserved Web Design: Bouncing Pixel · Houston, Texas Qualify for an FHA Loan Compare Refinance Mortgage Rates Sites and Offers of Interest Free FHA Limits Calculator Display current FHA loan limits for states and counties on your real estate, mortgage, or community website. Get: FHA Limits Widget FEATURED SITES: Helping you make the best financial choices, build wealth, and save money during and after your military service. -- Military Insurance -- Military Pay -- GI Bill Education -- Military Finance Offering VA loan products that meet the home financing needs of active duty military and veterans across the country. -- VA Loan Limits -- VA Loan Refinance -- VA Loan Guidelines Remember, the FHA does not make home loans. They insure the FHA loans that we can assist you in getting. FHA.com is a private corporation, is not a government agency, and does not make loans. FHA LOAN TYPES: -- Refinance Mortgage -- FHA Refinance -- FHA Streamline -- FHA Cash-Out -- FHA Home Loan -- FHA Secure -- FHA Reverse -- FHA Loan (fixed rate) SPECIAL FHA TOPICS: -- FHA Down Payments -- FHA Credit -- FHA Appraisals -- FHA Mortgage Tips -- FHA Loan Prequalify -- Other Loan Types -- FHA Loan Questions -- Obama Mortgage -- HOPE Act FHA Foreclosed Homes SEARCH FOR FREE! Search by State - or Enter Zip Code - A Blog About FHA Loans This blog is brought to you by the knowledgeable group of counselors at FHA.com. Our team specializes in advising our customers about the value of FHA mortgage loans. • FHA Credit Qualifications • FHA Requirements • FHA Closing Costs • Fair Housing Act > See also: VA Loans Blog - A Military Hub Site Military guidelines, regulations, and benefits are introduced each year for everything from Military Pay Charts to your VA Loan benefits. We can help you stay informed. • Military Pay Charts • Drill Pay Charts • Incentives and Special Pay • BAH Rates > See also: Military Pay Archive Federal Housing Administration From Wikipedia, the free encyclopedia Jump to: navigation, search Federal Housing Administration Agency overview Formed Agency executive Parent department 1934 Carol Galante, Assistant Secretary for Housing Federal Housing Commissioner United States Department of Housing and Urban Development Website FHA website The Federal Housing Administration (FHA) is a United States government agency created as part of the National Housing Act of 1934. It insured loans made by banks and other private lenders for home building and home buying. The goals of this organization are to improve housing standards and conditions, provide an adequate home financing system through insurance of mortgage loans, and to stabilize the mortgage market. The Commissioner of the FHA is Carol Galante. It is different from the Federal Housing Finance Agency (FHFA), which supervises government-sponsored enterprises. Contents • • • • • • • • • • 1 History 2 FHA today 3 FHA down payment 4 Mortgage insurance 5 Canceling FHA mortgage insurance 6 Effects o 6.1 Redlining 7 See also 8 References 9 Further reading 10 External links History During the Great Depression, the banking system failed, causing a drastic decrease in home loans and ownership. At this time, most home mortgages were short-term (three to five years), no amortization, balloon instruments at loan-to-value (LTV) ratios below fifty to sixty percent.[1] The banking crisis of the 1930s forced all lenders to retrieve due mortgages. Refinancing was not available, and many borrowers, now unemployed, were unable to make mortgage payments. Consequently, many homes were foreclosed, causing the housing market to plummet. Banks collected the loan collateral (foreclosed homes) but the low property values resulted in a relative lack of assets. Because there was little faith in the backing of the U.S. government, few loans were issued and few new homes were purchased. In 1934 the federal banking system was restructured. The National Housing Act of 1934 created the Federal Housing Administration. Its intent was to regulate the rate of interest and the terms of mortgages that it insured. These new lending practices increased the number of people who could afford a down payment on a house and monthly debt service payments on a mortgage, thereby also increasing the size of the market for single-family homes.[2] The FHA-calculated appraisal value that is based on eight criteria and directed its agents to lend more for higher appraised projects, up to a maximum cap. The two most important were "Relative Economic Stability", which constituted 40% of appraisal value, and "protection from adverse influences", which made up another 20%. In 1935, Colonial Village in Arlington, Virginia was the first large-scale, rental housing project erected in the United States that was Federal Housing Administration-insured.[3] During World War II, the FHA financed a number of worker's housing projects including the Kensington Gardens Apartment Complex in Buffalo, New York.[4] FHA today In 1965 the Federal Housing Administration became part of the Department of Housing and Urban Development (HUD). Since 1934, the FHA and HUD have insured over 34 million home mortgages and 47,205 multifamily project mortgages. Currently, the FHA has 4.8 million insured single family mortgages and 13,000 insured multifamily projects in its portfolio.[5] The Federal Housing Administration is the only government agency that is completely self-funded.[6] However, although it claims to operate solely from its own income at no cost to taxpayers, there is an implicit guarantee that the taxpayer will help them in times of need. Following the subprime mortgage crisis, FHA, along with Fannie Mae and Freddie Mac, became a large source of mortgage financing in the United States. The share of home purchases financed with FHA mortgages went from 2 percent to over one-third of mortgages in the United States, as conventional mortgage lending dried up in the credit crunch. Without the subprime market, many of the riskiest borrowers ended up borrowing from the Federal Housing Administration, and the FHA could suffer substantial losses. Joshua Zumbrun and Maurna Desmond of Forbes have written that eventual government losses from the FHA could reach $100 billion.[7][8] The troubled loans are now weighing on the agency’s capital reserve fund, which by early 2012 had fallen below its congressionally mandated minimum of 2%, in contrast to more than 6% two years earlier.[9] FHA down payment A borrower's down payment may come from a number of sources. The 3.5% requirement can be satisfied with the borrower using their own cash or receiving a gift from a family member, their employer, labor union, or government entity. Since 1998, non-profits have been providing down payment gifts to borrowers who purchase homes where the seller has agreed to reimburse the non-profit and pay an additional processing fee. In May 2006, the IRS determined that this is not "charitable activity" and has moved to revoke the non-profit status of groups providing down payment assistance in this manner. The FHA has since stopped down payment assistance program through third-party nonprofits. There is a bill currently in Congress that hopes to bring back down payment assistance programs through nonprofits. Mortgage insurance Mortgage insurance protects lenders from mortgage default. If a property purchaser borrows more than 80% of the property's value, the lender will likely require that the borrower purchase private mortgage insurance to cover the lender's risk. If the lender is FHA approved and the mortgage is within FHA limits, the FHA provides mortgage insurance that may be more affordable, especially for higher-risk borrowers. Lenders can typically obtain FHA mortgage insurance for 96.5% of the appraised value of the home or building. FHA loans are insured through a combination of an upfront mortgage insurance premium (UFMIP) and annual mutual mortgage insurance (MMI) premiums. The UFMIP is a lump sum ranging from 1 – 2.25% of loan value (depending on LTV and duration), paid by the borrower either in cash at closing or financed via the loan. MMI, although annual, is included in monthly mortgage payments and ranges from 0 – 1.15% of loan value (again, depending on LTV and duration). If a borrower has poor to moderate credit history, MMI probably is much less expensive with an FHA insured loan than with a conventional loan regardless of LTV – sometimes as little as one-ninth as much depending on the borrower's credit score, LTV, loan size, and approval status. Conventional mortgage insurance rates increase as credit scores decrease, whereas FHA mortgage insurance rates do not vary with credit score. Conventional mortgage premiums spike dramatically if the borrower's credit score is lower than 620. Due to a sharply increased risk, most mortgage insurers will not write policies if the borrower's credit score is less than 575. When insurers do write policies for borrowers with lower credit scores, annual premiums may be as high as 5% of the loan amount. Canceling FHA mortgage insurance The FHA insurance payments include two parts: the upfront mortgage insurance premium (UFMIP) and the annual premium remitted on a monthly basis—the mutual mortgage insurance (MMI). The UFMIP is an obligatory payment, which can either be made in cash at closing or financed into the loan, so that you really pay it over the life of the loan. It adds a certain amount to your monthly payments, but this is not PMI, nor is it the MMI. When a homeowner purchases a home utilizing an FHA loan, they will pay monthly mortgage insurance for a period of five years or until the loan is paid down to 78% of the appraised value – whichever comes later. The MMI premiums come on top of that for all FHA Purchase Money Mortgages, Full-Qualifying Refinances, and Streamline Refinances. When we talk about canceling the FHA insurance, we talk only about the MMI part of it. Unlike other forms of conventional financed mortgage insurance, the UFMIP on an FHA loan is prorated over a three-year period, meaning should the homeowner refinance or sell during the first three years of the loan, they are entitled to a partial refund of the UFMIP paid at loan inception. If you have financed the UFMIP into the loan, you cannot cancel this part. The insurance premiums on a 30-year FHA loan must have been paid for at least 5 years. The MMI premium gets terminated automatically once the unpaid principal balance, excluding the upfront premium, reaches 78% of the lower of the initial sales price or appraised value. A 15-year FHA mortgage annual insurance premium will be cancelled at 78% loan-tovalue ratio regardless of how long the premiums have been paid. The FHA’s 78% is based on the initial amortization schedule, and does not take any extra payments or new appraisals into account. This is the big difference between PMI and FHA insurance: the termination of FHA premiums can hardly be accelerated. Borrowers who do make additional payments towards an FHA mortgage principal, may take the initiative through their lender to have the insurance terminated using the 78% rule, but not sooner than after 5 years of regular payments for 30-year loans. PMI termination, however, can be accelerated through extra payments or a new appraisal if the house has appreciated in value. Effects The creation of the Federal Housing Administration successfully increased the size of the housing market. By convincing banks to lend again, as well as changing and standardizing mortgage instruments and procedures, home ownership has increased from 40% in the 1930s to nearly 70% in 2001. By 1938 only four years after the beginning of the Federal Housing Association, a house could be purchased for a down payment of only ten percent of the purchase price. The remaining ninety percent was financed by a 25year, self-amortizing, FHA-insured mortgage loan. After World War II, the FHA helped finance homes for returning veterans and families of soldiers. It has helped with purchases of both single family and multifamily homes. In the 1950s, 1960s, and 1970s, the FHA helped to spark the production of millions of units of privately owned apartments for elderly, handicapped, and lower-income Americans. When the soaring inflation and energy costs threatened the survival of thousands of private apartment buildings in the 1970s, FHA’s emergency financing kept cash-strapped properties afloat. In the 1980s, when the economy did not support an increase in homeowners, the FHA helped to steady falling prices, making it possible for potential homeowners to finance when private mortgage insurers pulled out of oil-producing states.[5][not in citation given] The greatest effects of the Federal Housing Administration can be seen within minority populations and in cities. Nearly half of FHA’s metropolitan area business is located in central cities, a percentage that is much higher than that of conventional loans.[10] The FHA also lends to a higher percentage of African Americans and Hispanic Americans, as well as younger, credit-constrained borrowers, contributing to the increase in home ownership among these groups. As the capital markets in the United States matured over several decades, the impact of the FHA decreased. In 2006 FHA made up less than 3% of all the loans originated in the United States. This had some in Congress questioning the government's role in the mortgage insurance business, with a vocal minority calling for the end of FHA. The subsequent deterioration in the credit markets, however, has somewhat muted criticism of the agency. Today, FHA now backs over 40 percent of all new mortgages. Redlining Main article: Redlining In the 1930s, the Federal Housing Authority established mortgage underwriting standards that significantly discriminated against minority neighborhoods. As the significance of subsidized mortgage insurance on the housing market grew, home values in inner-city minority neighborhoods plummeted. Also, the approval rates for minorities were equally low. After 1935 the FHA established guidelines to steer private mortgage investors away from minority areas. This practice, known as redlining, was made illegal by the Fair Housing Act of 1968. This had long-lasting effects on the black and minority communities, due to the lack of being able to pass on wealth to subsequent generations. Minorities are still at a disadvantage when it comes to property ownership due to the past FHA regulations during the New Deal era.[11] See also • Ginnie Mae References 1. 2. 3. Jump up ^ Monroe 2001, p. 5 Jump up ^ Garvin 2002 Jump up ^ Virginia Historic Landmarks Commission Staff (May 1980). "National Register of Historic Places Inventory/Nomination: Monroe Courts Historic District".] 4. Jump up ^ Jason Wilson, Tom Yots, and Daniel McEneny (June 2010). "National Register of Historic Places Registration: Kensington Gardens Apartment Complex". Google. Retrieved December 22, 2010. 5. ^ Jump up to: a b "HUD – Federal Housing Administration". Washington, D.C.: U.S. Department of Housing and Urban Development. 6 September 2006. Retrieved December 10, 2009. 6. Jump up ^ {Homes and Communities. “The Federal Housing Administration.” U.S. Department of Housing and Urban Development. http://www.hud.gov/offices/hsg/fhahistory.cfm 7. Jump up ^ Lending Over Backward, Forbes 8. Jump up ^ The Next Hit: Quick Defaults, The Washington Post 9. Jump up ^ House Bill Aims to Save FHA Mortgage Insurance Fund in “Crisis" 10. Jump up ^ Monroe, Albert. “How the Federal Housing Administration Affects Homeownership.” Harvard University Department of Economics. Cambridge, MA. November 2001. 11. Jump up ^ http://cml.upenn.edu/redlining/intro.html Further reading • • • Brown, Christopher C. “Federal Housing Administration.” The Virtual Reference Desk. Homes and Communities. “The Federal Housing Administration.” U.S. Department of Housing and Urban Development. Monroe, Albert. “How the Federal Housing Administration Affects Homeownership.” Harvard University Department of Economics. Cambridge, MA. November 2001. External links • • • • FHA Website Federal Housing Finance Board Meeting Notices and Rule Changes from Federal Register RSS Feed National Housing Institute More Mortgage Madness by Kai Wright, The Nation, April 29, 2009 [hide] • • • v t e Agencies of the United States Department of Housing and Urban Development • • • Headquarters: Robert C. Weaver Federal Building Shaun Donovan, Secretary of Housing and Urban Development Maurice Jones, Deputy Secretary of Housing and Urban Development • Secretary of Housing and Urban Development • • • Office of Small and Disadvantaged Business Utilization Office of HUD Administrative Law Judges Federal Housing Finance Agency Office of Departmental Equal Employment Opportunity Office of Community Planning and Development Office of Fair Housing and Equal Opportunity Federal Housing Administration Government National Mortgage Association Office of Policy Development and Research Office of Public and Indian Housing Deputy Secretary of Housing and Urban Development • • • • • • ! Categories: • New Deal agencies • Government agencies established in 1934 • Real estate in the United States • Mortgage industry of the United States • Insurance companies of the United States • United States Department of Housing and Urban Development agencies Navigation menu • • • Create account Log in Article • • • • Talk Read Edit View history • • • • • • Main page Contents Featured content Current events Random article Donate to Wikipedia Interaction • • • • • Help About Wikipedia Community portal Recent changes Contact page Toolbox Print/export Languages • • • • • • Deutsch Español Français Edit links This page was last modified on 6 August 2013 at 22:40. Text is available under the Creative Commons Attribution-ShareAlike License; additional terms may apply. By using this site, you agree to the Terms of Use and Privacy Policy. Wikipedia® is a registered trademark of the Wikimedia Foundation, Inc., a nonprofit organization. Privacy policy About Wikipedia Disclaimers Contact Wikipedia • • • • • • Developers Mobile view • • Wiki Loves Monuments: Photograph a monument, help Wikipedia and win! Reverse mortgage From Wikipedia, the free encyclopedia Jump to: navigation, search A reverse mortgage is a financial instrument that allows seniors to access the equity in their home without income or credit qualifications. The important distinction between a reverse mortgage and a conventional mortgage is that there are no principal or interest payments required on the home while the borrower occupies the property. Repayment is only required if the borrower sells the home, or moves out of the property for more than 365 consecutive days. In a conventional mortgage, the homeowner makes a monthly amortized payment to the lender; after each payment the equity increases by the amount of the principal included in the payment, and when the mortgage has been paid in full, the property is released from the mortgage. In a reverse mortgage, the home owner is under no obligation to make payments, but is free to do so with no pre-payment penalties. The line of credit portion operates like a revolving credit line, so a payment in reduction of a line of credit increases the available credit by the same amount. Interest that accrues is added to the mortgage balance. As with any mortgage, title to the property remains in the name of the homeowners, to be disposed of as they wish. As with a conventional mortgage, the title is encumbered by the security interest the bank has in the reverse mortgage. If a borrower does not make full monthly payments to cover the interest, that interest is capitalized (added to the principal). In the event that the interest accrues to a point that the amount owed is less than the home's value the borrower may stay in the home and FHA will cover any loss to the lender or borrower. A reverse mortgage may be refinanced if enough equity is present in the home and interest rates have reduced, or more proceeds will be available to the borrower. A reverse mortgage lien is often recorded at a higher dollar amount than the amount of money actually disbursed at the loan closing. This recorded lien is at times misunderstood by some borrowers as being the payoff amount of the mortgage. The recorded lien works in similar fashion to a home equity line of credit where the lien represents the maximum lending limit, but the payoff is calculated based on actual disbursements plus interest owing. Contents • • • • • • • 1 Reverse mortgages in Australia o 1.1 Eligibility o 1.2 Loan size and cost o 1.3 Proceeds from a reverse mortgage o 1.4 Taxes and insurance o 1.5 When the loan comes due 2 Reverse mortgages in Canada o 2.1 Eligibility o 2.2 Loan size and cost o 2.3 Proceeds from a reverse mortgage o 2.4 Taxes and insurance o 2.5 When the loan comes due 3 Reverse mortgages in the United States o 3.1 Eligibility o 3.2 Loan size o 3.3 Costs and interest rates o 3.4 Proceeds from a reverse mortgage  3.4.1 Cash from a reverse mortgage  3.4.2 Purchase of a new residence with "HECM for Purchase" o 3.5 Taxes and insurance o 3.6 When the loan comes due o 3.7 Volume of loans o 3.8 Loan program options o 3.9 Other options 4 Criticism 5 See also 6 References 7 External links Reverse mortgages in Australia Eligibility Reverse mortgages are available in Australia. However, there is little regulation: the Financial Services Reform Act does not regulate the loans,[1] and although potential borrowers should seek financial advice before applying for a reverse mortgage, there is no legislation that requires the advisor to be licensed.[1] Eligibility requirements vary by lender. To qualify for a reverse mortgage in Australia, • • the borrower must be over a certain age, usually 60[2] or 65[3] years of age; if the mortgage has more than one borrower, the youngest borrower must meet the age requirement[2] the borrower must own the property, or the existing mortgage balance must be low enough that it will be paid off with the reverse mortgage proceeds[2] Loan size and cost Reverse mortgages in Australia can be as high as 50%[2] of the property's value. The exact amount of money available (loan size) is determined by several factors: • • • • • the borrower's age, with a higher amount available at a higher age[2] current interest rates property value[2] the property's location[2] program minimum and maximum; for example, the loan might be constrained to a minimum of $10,000[2] and a maximum of 425,000[4] The cost of getting a reverse mortgage depends on the particular reverse mortgage program the borrower acquires. These costs are frequently rolled into the loan itself and therefore compound with the principal.[2] Typical costs for the reverse mortgage include: • • an application fee (establishment fee) = $950[5] stamp duty, mortgage registration fees, and other government charges[5] = vary with location The interest rate on the reverse mortgage varies. Some programs offer fixed rate loans,[2] while others offer variable rate loans.[5] In addition, there are costs during the life of the reverse mortgage. A monthly service charge may be applied to the balance of the loan (for example, $12 per month[3]), which then compounds with the principal.[2] Proceeds from a reverse mortgage The money from a reverse mortgage can be distributed in several different ways:[2] • • • • as a lump sum, in cash, at settlement as an annuity, with a cash payment at regular intervals as a line of credit, similar to a home equity line of credit as a combination of these. Taxes and insurance The borrower remains entirely responsible for the property. This includes physical maintenance.[2] In addition, some programs require that the property is periodically revalued.[2][4] Income from a reverse mortgage set up as an annuity or as a line of credit should not affect Government Income Support entitlements.[2][6] However, income from a reverse mortgage set up as a lump sum could be considered a financial investment and thus deemed under the Income Test; this category includes all sums over $40,000 and sums under $40,000 that are not spent within 90 days.[6] When the loan comes due The reverse mortgage comes due – the loan plus interest must be repaid – when the borrower dies, sells the property, moves out of the house, or breaches the contract in some way.[2] Prepayment of the loan – when the borrower pays the loan back before it reaches term – may incur penalties, depending on the program.[2][5] An additional fee could also be imposed in the event of a redraw.[5] "Some providers offer a ‘no negative equity guarantee’. This means that if the balance of the loan exceeds the proceeds of sale of the property, no claim for this excess will be made against the estate or other beneficiaries of the borrower."[2][4] Reverse mortgages in Canada Eligibility Reverse mortgages are available through private corporations in Canada, although none of the programs is insured by the government.[7] Examples include:[8] • • • the Canadian Home Income Plan (CHIP) provided by HomEquity Bank,[9] a plan that started in 1986 and is the largest program in Canada[7] the Fixed Term Reverse Annuity Mortgage through Royal Bank of Canada (RBC Royal Bank)[10] Home Income Plan (Canadian Reverse Mortgage) from Origin Mortgages DLC[11] Eligibility requirements vary some by lender. To qualify for a reverse mortgage in Canada, • the borrower (or both borrowers if married[11]) must be over a certain age, usually at least 55[9][11] or 62[7] years of age • • the borrower must own the property "entirely or nearly";[7] in addition, "any outstanding loans secured by your home must be retired with the proceeds"[9] of the reverse mortgage there is no qualification requirement for minimum income level.[7] Loan size and cost Reverse mortgages in Canada are usually a maximum of 25[7] to 50%[9] of the property's value.[7] The exact amount of money available (loan size) is determined by several factors:[7] • • • • the borrower's age, with higher payments for higher age[7] current interest rates property value, including location[9] and a factor for future appreciation[7] program minimum and maximum; for example, the loan might be constrained to a minimum $20,000 and a maximum of $750,000[11] The interest rate on the reverse mortgage varies by program. The length of loan also varies, with some programs offering no fixed term and some offering fixed terms ranging from 6 months to 5 years.[9] The cost of getting a reverse mortgage from a private sector lender may exceed the costs of other types of mortgage or equity conversion loans. Exact costs depend on the particular reverse mortgage program the borrower acquires. Depending on the program, there may be the following types of costs:[12] • • • Real estate appraisal = $175–$400 Legal advice = $400–$600 Other legal, closing, and administrative costs = $1,495 Proceeds from a reverse mortgage The money from a reverse mortgage can be distributed in several different ways:[7] • • • • as a lump sum, in cash, at settlement as an annuity, with a monthly cash payment as a line of credit, similar to a home equity line of credit as a combination, with a smaller lump some at settlement and then a smaller annuity.[9] Once the reverse mortgage is established, there are no restrictions on how the funds are used. "The money from the reverse mortgage can be used for any purpose: to repair a home, to pay for in-home care, to deal with an emergency, or simply to cover day-to-day expenses."[7] The borrower retains title to the property, including unused equity,[9] and will never be forced to vacate the house.[7] Taxes and insurance The borrower remains entirely responsible for the property. This includes physical maintenance and payment of all taxes,[7] fire insurance and condominium or maintenance fees.[9] Money received in a reverse mortgage is an advance and is not taxable income. It therefore does not affect government benefits from Old Age Security (OAS) or Guaranteed Income Supplement (GIS).[9][11] In addition, if reverse mortgage advances are used to purchase non-registered investments – such as Guaranteed Investment Certificates (GICs) and mutual funds – then interest charges for the reverse mortgage may be deductible from investment income earned.[9] When the loan comes due The reverse mortgage comes due – the loan plus interest must be repaid – when the borrower dies,[11] sells the property, or moves out of the house. Depending on the program, the reverse mortgage may be transferable to a different property if the owner moves.[11] Prepayment of the loan – when the borrower pays the loan back before it reaches term – may incur penalties, depending on the program.[12] In addition, if interest rates have dropped since the reverse mortgage was signed, the mortgage terms may include an "'interest-rate differential' penalty."[12] If the borrower lived long enough that the principal and interest together exceed the fair market value when the mortgage is due, the borrower or heirs do not have to pay more than the house's value at the time.[7] Reverse mortgages in the United States Eligibility To qualify for a reverse mortgage in the United States, the borrower must be at least 62 years of age and must occupy the property as their principal residence.[13] In addition, any mortgage on the property must be low enough that it will be paid off with the reverse mortgage proceeds.[14] There are no minimum income or credit requirements because no payments are required on the mortgage. The proceeds from the loan may be used at the discretion of the borrower and are not subject to income tax payment. While credit is not part of the qualification process a current or pending bankruptcy will require court approval prior to closing. Reverse mortgages follow FHA standards for property types, meaning most 1–4 family dwellings, FHA approved condominiums and PUD's will qualify. Manufactured housing qualifies based on standard FHA guidelines. Before starting the loan process for an FHA/HUD reverse mortgage, applicants must take an approved counseling course. This counseling is available at no or low cost.[14] The counseling is meant to serve as a safeguard for the borrowers, to ensure they completely understand the reverse mortgage. The counselor will explain the legal and financial obligations of a reverse mortgage. The borrower will receive a certificate of completion that is required before the loan application can be processed. Loan size The maximum lending limit varies by county, but may not exceed $625,500.00. Reverse mortgages for homes valued over the maximum limit are called "Jumbo" reverse mortgages, and are generally offered as proprietary reverse mortgages. For owners of higher-valued homes, a Jumbo loan can provide a larger loan amount; however, these loans are currently uninsured by the FHA and their fees are often higher. The amount of money available (the loan size) is determined by the borrower's age, the lesser of the value of the home or county lending limit, and the interest rate of the program the senior selects. The primary factors are: • • • • The appraised value of the property; this includes any health or safety repairs that need to be made, plus the value of any existing liens on the house. The interest rate, as determined by the U.S. Treasury 1 year T-Bill, the LIBOR index or 1 Year CMT. The age of the senior; the older the owner is, the more money will be received Whether the payment is taken as a line of credit, lump sum, or monthly payments; see below more discussion of the options. All these factors contribute to the Total Annual Lending Cost (TALC) – the single rate, including all the loan costs – as defined by the US Federal Government in Regulation Z. The specific formulas to calculate the impact of the factors listed above can be found in Appendix 22 of the HUD Handbook 4235.1.[15] Costs and interest rates The cost of getting a reverse mortgage from a private sector lender may exceed the costs of other types of mortgage or equity conversion loans. Exact costs depend on the particular reverse mortgage program the borrower acquires. For the most popular type of reverse mortgage in the U.S., the FHA-insured Home Equity Conversion Mortgage (HECM), there will be the following types of costs: • • • Mortgage Insurance Premium (MIP) = 2% of the appraised value[14] Origination fee, depending on the home's appraised value[14] o appraised value under $125,000 = $2,500 o appraised value over $125,000 = 2% of the first $200,000 plus 1% of the value over $200,000, with a $6,000 cap Title insurance = varies by location • • • Title, attorney, and county recording fees = varies by location Real estate appraisal = $300–$500 Survey (may be required) = $300–$500 In all of these cases, except the real estate appraisal, the costs of a reverse mortgage can be financed with the proceeds of the loan itself. In addition, there are costs during the life of the reverse mortgage. A monthly service charge (between $25 and $35) is usually added monthly to the balance of the loan. An annual Mortgage Insurance Premium is levied every year, equal to 1.25% of the mortgage balance[14] – note that this is in addition to the MIP paid at settlement. Interest rates on reverse mortgages are determined on a program-by-program basis. Because the loans are secured by the home itself, and backed by HUD, the interest rate should always be below any other available interest rate in the standard mortgage marketplace for an FHA reverse mortgage.[citation needed] Prior to 2007, all major reverse mortgage programs had adjustable interest rates. Such adjustable rate reverse mortgages are still being offered, in programs that are adjusted on a monthly, semi-annual, or annual rate up to a maximum rate. Several lenders now offer FHA HECM reverse mortgages that have fixed interest rates.[16] Some fixed rate reverse mortgages limit the cash proceeds to half of that offered by adjustable rate reverse mortgages. The borrower(s) will be required to take out the entire amount offered at closing. Some state and local governments offer low-cost reverse mortgages to seniors. These "public sector" loans generally must be used for specific purposes, such as paying for home repairs or property taxes,[17] but most of them often have more favorable interest rates and fewer or no fees associated with them. These programs are typically very restrictive in terms of qualification and location, and many regions, states, and areas do not have such programs at all.[18] Proceeds from a reverse mortgage Cash from a reverse mortgage The most common reverse mortgage is one in which the owner receives cash or a credit line from an existing home. The money from a reverse mortgage can be distributed in several different ways:[14][19] • • • • in a lump sum, in cash, at settlement; this provides the cash immediately, but the interest fees are the highest as a cash payment (cash advance) every month, applied for a fixed term or for the owner's life; monthly payments may be set up by HUD as a line of credit, similar to a home equity line of credit; this maximizes the money available, which can be withdrawn only as needed some combination of the above, as selected by the borrower. Once the reverse mortgage is established, there are no restrictions on how the funds are used. The borrower can move money into investments or spend it as they wish. If a borrower wishes interest-bearing instruments, the money can be kept with the lender (in which case the account grows by the same percentage as the interest rate of the loan), the funds can be moved to a directed account with a financial specialist (an option that is risky unless the borrower directs the specialist's investment options), or the money can be invested and managed by the borrower.[citation needed] Purchase of a new residence with "HECM for Purchase" The Housing and Economic Recovery Act of 2008 provided HECM mortgagors with the opportunity to purchase a new principal residence with HECM loan proceeds — the socalled HECM for Purchase[20] program, effective January 2009. The "HECM for Purchase" applies if "the borrower is able to pay the difference between the HECM and the sales price and closing costs for the property.[14] The program was designed to allow seniors to purchase a new principal residence and obtain a reverse mortgage within a single transaction by eliminating the need for a second closing. The program was also designed to enable senior homeowners to relocate to other geographical areas to be closer to family members or downsize to homes that meet their physical needs (i.e., handrails, one-level properties, ramps, wider doorways, etc.). Texas is the only state that does not allow for reverse mortgages for purchase. Taxes and insurance It is important to note that the homeowner must ensure that taxes and insurance are kept current at all times. Unlike common practice in a standard mortgage, funds for taxes and insurance are not paid out of an escrow fund; they are paid directly by the homeowner.[21] A lapse in either taxes or insurance could result in a default on the reverse mortgage. The American Bar Association guide[22] advises that generally, • • • • The Internal Revenue Service does not consider loan advances to be income Annuity advances may be partially taxable Interest charged is not deductible until it is actually paid, that is, at the end of the loan. The mortgage insurance premium is deductible on the 1040 long form. The money received from a reverse mortgage is considered a loan advance. It therefore is not taxable and does not directly affect Social Security or Medicare benefits. However, an American Bar Association guide[22] to reverse mortgages explains that if borrowers receive Medicaid, SSI, or other public benefits, loan advances will be counted as "liquid assets" if the money is kept in an account (savings, checking, etc.) past the end of the calendar month in which it is received; the borrower could then lose eligibility for such public programs if total liquid assets (cash, generally) is then greater than those programs allow.[17] When the loan comes due The loan comes due when the borrower dies, sells the house, fails to keep the taxes or insurance current, or moves out of the house for more than 12 consecutive months. Once the mortgage comes due, the borrower or heirs of the estate have an option to refinance the home and keep it, sell the home and cash out any remaining equity, or turn the home over to the lender. Once a reverse mortgage is called due and payable, the borrower (or their heirs) can possibly be granted time extensions by the lender to give them up to one year to make this decision. If the property is turned over to the lender, the borrower or the heirs have no more claim to the property or equity in the property. The lender has recourse against the property, but not against the borrower personally and not against the borrower's heirs. Thus the mortgage is within the category known as "nonrecourse limit". Volume of loans Home Equity Conversion Mortgages account for 90% of all reverse mortgages originated in the U.S. As of May 2010, there were 493,815 active HECM loans.[23] As of 2006, the number of HECM mortgages that HUD is authorized to insure under the reverse mortgage law was capped at 275,000.[24] However, through the annual appropriations acts, Congress has temporarily extended HUD's authority to insure HECM's notwithstanding the statutory limits.[25] Program growth in recent years has been very rapid. In fiscal year 2001, 7,781 HECM loans were originated. By the fiscal year ending in September 2008, the annual volume of HECM loans topped 112,000 representing a 1,300% increase in six years. For the fiscal year ending September 2011, loan volume had contracted in the wake of the financial crisis, but remained at over 73,000 loans that were originated and insured through the HECM program.[26] Loan volume is expected to grow further as the U.S. population ages. The U.S. senior population is expected to increase from 35 million in 2000 to 64 million in 2025, and seniors are expected to make up a larger share of the population.[27] Loan program options HECM Standard - Allows the borrower to take out the most equity in the home, but comes with a Upfront Mortgage Insurance, by the FHA, at a cost of 2%.[28] As of April 1, 2013, HUD eliminated the HECM Standard fixed rate product, currently the HECM Standard only comes as a variable rate loan.[29] HECM Saver - FHA allows the Upfront Mortgage Insurance cost to be just .01%, but the borrower has access to less equity in the home.[30] The HECM saver comes as a fixed rate or variable rate loan. Other options A drawback to reverse mortgages is the high upfront costs. Upfront cost, however, is tempered by the lower interest rate as time goes by, but some seniors choose other options to draw on their home equity, particularly if they don't plan to remain at the property more than five years. Other options which can free up home equity but avoid the high upfront costs of a reverse mortgage include: 1) intra-family loan or sale-leaseback and, 2) selling and moving to a less expensive dwelling or location. However, when selling, the homeowner incurs high closing costs including, typically, a 6% commission, moving costs, and purchase costs on the new dwelling. Also, there is the issue of capital gains taxes (though the first $250,000 of gain is usually exempt from taxation for a single person who has lived in the house for at least two years). Currently, there is a coordinated government program called "Aging in Place" intended to assist homeowners wishing to remain in their homes and/or neighborhoods. Studies conducted by various agencies and organizations, including AARP, show that over 80% of elderly homeowners do not want to move.[17] No-cost and low-cost mortgages are available for those homeowners who anticipate moving from the home in the near future. For example, they may select a home equity line of credit, commonly called a "HELOC", requiring interest-only payments for 10 years. These loans typically have very low (or zero) upfront costs, but the interest rates are usually slightly higher than those of a reverse mortgage. Since monthly payments are required on a HELOC, borrowers need to qualify based on their incomes and credit scores. Often, seniors who may be on a limited fixed income can't get approved for a HELOC for this reason. Reverse mortgages do not require monthly payments and, as a result, income and credit score are not considered as part of the approval process. Criticism Reverse mortgages have been criticized for several major shortcomings: • • • High up-front costs make reverse mortgages expensive. In the U.S., entering into a reverse mortgage will cost approximately the same as a traditional FHA mortgage. The interest rate on a reverse mortgage may be higher than on a conventional "forward mortgage".[31] Interest compounds over the life of a reverse mortgage, which means that "the mortgage can quickly balloon".[12] Since no monthly payments are made by the borrower on a reverse mortgage, the interest that accrues is treated as a loan advance. Each month, interest is calculated not only on the principal amount received by the borrower but on the interest previously assessed to the loan. • Because of this compound interest, the longer a senior has a reverse mortgage, the more likely it is that most or all of the home equity is depleted when the loan becomes due. That translates to "less cash for your estate or to pay your bills."[12] That said, with the FHA-insured HECM reverse mortgage, the borrower can never owe more than the value of the property and cannot pass on any debt from the reverse mortgage to any heirs. The sole remedy the lender has is the collateral, not assets in the estate, if applicable. Reverse mortgages are confusing. Many seniors entering into reverse mortgages don't fully understand the terms and conditions associated with the loans,[31] and it has been suggested that some lenders have sought to take advantage of this.[32][33] But in a 2006 survey of borrowers by AARP, 93 percent said their reverse mortgage had a mostly positive effect on their lives, compared with 3 percent who said the effect was mostly negative. Some 93 percent of borrowers reported that they were satisfied with their experiences with lenders, and 95 percent reported that they were satisfied with the counselors that they were required to see.[34] See also [hide] • • • v t e Mortgage loan Financial literacy Interest rate type • • • • • • • fixed-rate mortgage adjustable-rate mortgage / variable-rate / floating rate Continuous: Repayment mortgage / self-amortized Repayment at term: interest-only mortgage (endowment mortgage) No repayment: reverse mortgage Hybrid: balloon payment mortgage equity release (shared appreciation mortgage) flexible mortgage (offset mortgage, mortgage accelerator) graduated payment mortgage loan buy to let mortgage foreign currency mortgage Repayment type Variable payment Other variations • • • • • • foreign national mortgage wraparound mortgage Annual Percentage Rate (APR) Key concepts • • • • • • Foreclosure / Repossession Compare reverse mortgage with home equity loan and home equity line of credit. Negative amortization Bankruptcy Global Financial Crisis References ^ Jump up to: a b "Getting advice". National Information Centre on Retirement Investments Inc (NICRI). Retrieved 12 September 2012. 2. ^ Jump up to: a b c d e f g h i j k l m n o p q r "Reverse Mortgages". National Information Centre on Retirement Investments Inc (NICRI). Retrieved 12 September 2012. 3. ^ Jump up to: a b "Equity Unlock Loan for Seniors". Commonwealth Bank of Australia. Retrieved 13 September 2012. 4. ^ Jump up to: a b c "Features". Commonwealth Bank of Australia. Retrieved 13 September 2012. 5. ^ Jump up to: a b c d e "Rates & fees". Commonwealth Bank of Australia. Retrieved 13 September 2012. 6. ^ Jump up to: a b "Impacts on your pension". National Information Centre on Retirement Investments Inc (NICRI). Retrieved 12 September 2012. 7. ^ Jump up to: a b c d e f g h i j k l m n o "Reverse Mortgages: How the Strategy Works". Canada Mortgage and Housing Corporation. Retrieved 11 September 2012. 8. Jump up ^ Most of the programs listed by the Canada Mortgage and Housing Corporation at Reverse Mortgages: How the Strategy Works are no longer valid. Only programs current as of 12 September 2012 are listed in this article. 9. ^ Jump up to: a b c d e f g h i j k "ABCs of CHIP". CHIP Home Income Plan Provided by HomEquity Bank. Retrieved 12 September 2012. 10. Jump up ^ No information about reverse mortgages on the web. Contact 1-800-716-1916. 11. ^ Jump up to: a b c d e f g "Home Income Plan (Reverse Mortgage in Canada): How Does a Canadian Reverse Mortgage Work". Origin Mortgages DLC. Retrieved 12 September 2012. 12. ^ Jump up to: a b c d e Heinzl, John (31 October 2010). "The reverse mortgage quandary". The Globe and Mail. Retrieved 12 September 2012 13. Jump up ^ "HUD Handbook 4235.1 REV-1 Chapter 1, Section 3". Retrieved 16 August 2012. 1. ^ Jump up to: a b c d e f g "FHA's Home Equity Conversion Mortgage Program". United States Department of Housing and Urban Development. 14 October 2010. Retrieved 11 September 2012. 15. Jump up ^ Department of Housing and Urban Development. HUD Guide. Appendix 22. 16. Jump up ^ "Pumping Up Your Reverse Mortgage". BusinessWeek 17. ^ Jump up to: a b c "Information on Reverse Mortgages". AARP. 18. Jump up ^ Low-Cost Public Loans, AARP.org, American Association of Retired Persons. 19. Jump up ^ "How Reverse Mortgages Work". AARP.com. March 2010. Retrieved 11 September 2012. 20. Jump up ^ http://www.fhasecure.gov/offices/hsg/sfh/hecm/faqs_hecm.cfm 21. Jump up ^ Coates, Tara (11 February 2011). "10 Things You Should Know About Reverse Mortgages: Before you sign, make sure you know about restrictions, fees". AARP.com. Unknown parameter |unused_data= ignored (help) 22. ^ Jump up to: a b Reverse Mortgages: A Lawyer's Guide. American Bar Association. 1997. 23. Jump up ^ See Home Equity Conversion Mortgages Monthly Report (May 2010), http://www.hud.gov/offices/hsg/comp/rpts/hecm/hecmmenu.cfm 24. Jump up ^ Pub. L. No. 109-289, s.131 (2006). 25. Jump up ^ See for example the Omnibus Appropriations Act, 2009, Pub. L. No. 111-8, s217 (Mar. 11, 2009). 26. Jump up ^ For HUD's HECM Summary Reports, see http://www.hud.gov/pub/chums/f17fvc/hecm.cfm 27. Jump up ^ U.S. National Population Projections (2008) at tables 2 and 3, http://www.census.gov/population/www/projections/summarytables.html 28. Jump up ^ See HECM Standard (June 2013), http://www.reversemortgageloanfinancing.com/reverse-mortgageproducts/hecm-standard 29. Jump up ^ HUD Eliminates HECM Standard Fixed Rate Reverse Mortgage in April 2013 (June 2013), http://www.reversemortgageloanfinancing.com/2013/06/17/hudeliminates-hecm-standard-fixed-rate-reverse-mortgage-in-april-2013 30. Jump up ^ See HECM Saver (June 2013), http://www.reversemortgageloanfinancing.com/reverse-mortgageproducts/hecm-saver 31. ^ Jump up to: a b Santow, Simon (25 May 2011). Reverse mortgages grow, but so do warnings. Australian Broadcasting Corporation (ABC). Retrieved 12 September 2012 32. Jump up ^ "Report to Congress on Reverse Mortgages". June 2012. Retrieved 12 September 2012. "In the past, government investigations and consumer advocacy groups raised significant consumer protection concerns about the business practices of reverse mortgage lenders and other companies in the reverse mortgage industry" (Executive Summary, pages 6 and 7). 14. 33. Jump up ^ Hallman, Ben (27 June 2012). "Reverse Mortgage Foreclosures On The Rise, Seniors Targeted For Scams". Huffington Post. Retrieved 12 September 2012. 34. Jump up ^ Jack Guttentag (January 23, 2010). "Reverse mortgages are not the next subprime". Washington Post. External links • • Reverse mortgages at the Open Directory Project How Can the Equity in Your Home Help Pay for Long-Term Care? at SeniorHomes.com Categories: • Mortgage • Income Navigation menu • • • • • • • Create account Log in Article Talk Read Edit source View history • • • • • • Main page Contents Featured content Current events Random article Donate to Wikipedia Interaction • • • • • Help About Wikipedia Community portal Recent changes Contact page Toolbox Print/export Languages • • • • • • • • • • • • Català Dansk Deutsch Español Français Italiano ‫עברית‬ 日本語 Polski Edit links This page was last modified on 19 September 2013 at 19:05. Text is available under the Creative Commons Attribution-ShareAlike License; additional terms may apply. By using this site, you agree to the Terms of Use and Privacy Policy. Wikipedia® is a registered trademark of the Wikimedia Foundation, Inc., a nonprofit organization. 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