Paying Off Mortgage and Retiring – 5 Reasons Why One Should Come Before the Other

Paying Off Mortgage Before RetirementBeing free of debt is a great way of enjoying your retirement years. Most people agree that paying off your mortgage before you retire is something that will give you peace of mind and more financial freedom. However, many people end up retiring before their mortgage is paid off, which might not be necessarily a bad thing. Like everything when it comes to mortgages, what is best for one home owner may not be the best for another. Essentially, paying off your mortgage before your retirement years is advantageous, but there are cases in which not paying it off is the better choice, especially if getting rid of your mortgage involves a large financial sacrifice (Read: Should You Rely on Home Equity When You Retire? Think Again!).

When is it better to Not Pay off Your Mortgage

Not having to worry about a large debt after retiring will most likely make your life much easier. Unfortunately, paying off a mortgage earlier is not always a good idea. With today’s interest rates, you are probably paying less than 5 percent on your mortgage loan, and more than 10 percent on your credit card balances. Mortgages are considered a good debt, which means that you should pay them off last, and worry more about other type of debt.

Unless you have large assets that you can use while retiring, you should think twice before paying off your mortgage. Your retirement accounts have more tax advantages, so you should put your money into those before paying off debt. An even worse idea is to pay off your mortgage using money from your retirement accounts. You will have to pay a large penalty for the withdrawal, and end up spending more than you would on your mortgage.

Also, if you are able to refinance your mortgage loan, you could be saving thousands of dollars. However, refinancing is expensive and you have to include closing costs in your calculations before deciding if refinancing will save you money, or you should keep paying the mortgage as before (Read: Do You Make These Mistakes? Don’t Kill Your Mortgage Refinance!).

Reasons to Pay Off Your Mortgage before Retiring

There are more reasons to pay off your mortgage before retiring than there are to not pay it off. To find out even more reasons click here. Taking the necessary steps to make sure that your retirement accounts are replenished is very important before deciding whether paying off your mortgage is worth it or not. Here are the reasons why getting rid of your mortgage should come before retiring.

  1. Peace of mind. After years of making large payments each month, you can finally say that you truly own your home. This is especially important after retiring, when your income probably won’t be as large as before, and the chances of generating additional income are thin. Finding a job, investing or starting a business in your retirement years is unlikely, so not having to worry about the risk of losing your home if something unforeseen happens, or about having to make a large payment each month, is a blessing. To learn more about the benefits see this.
  2. Savings in interest. Over the life of a mortgage loan, you will be paying tens or hundreds of thousands of dollars in interest, so paying it off as soon as possible means that you avoid paying all that interest. Even refinancing into a shorter loan will bring great savings, as long as you don’t spend a lot on the closing costs. Not only will you be mortgage free by the time you reach your retirement years, but you can also use the money that you saved for something that will make your retirement much more enjoyable.
  3. It allows you to focus on spending less. The process of paying off your mortgage allows you to focus on saving for retirement, as well. If you wouldn’t have a monthly mortgage payment, you might be tempted to use that money to make other large purchases, like an expensive car. Deciding to pay off your mortgage puts things into perspective and gives you a chance to focus on your future plans.
  4. Build equity. Paying off your mortgage means that, if you ever need money once you are retired, you can take out a loan against the equity in your home or sell the home and have access to all the equity in it. You can use the money to pay your medical bills, buy a condo, or even for traveling (Read: Home Equity Loan).
  5. Avoid higher interest rates if your rate is adjustable. Adjustable-rate mortgages can be either advantageous or disadvantageous, depending on how the interest rate fluctuates. If the interest rate keeps rising, then you might end up with a larger down payment during your retirement years, so paying your mortgage off makes sense.

Not paying off your mortgage before retiring makes sense in some cases, but not having to pay a large bill each month is more beneficial. Unless you have to dip into your savings and retirement accounts to pay off your mortgage, the peace of mind that not having a mortgage brings outweighs the pros of keeping your mortgage during your retirement years.

The Sooner You Know About Hybrid Mortgage Loans, the Better

Hybrid Mortgage LoansThe large majority of people who are purchasing a home do it by taking out a mortgage loan. Buying a home with cash is something that very few people can afford, and it’s not always a good investment (Read: Should You Pay for Your Home in Cash Upfront?). But mortgages come with interest rates, closing fees and many other costs, so finding a cheap mortgage becomes the number one priority when buying a home. Fortunately, there are many options out there when it comes to mortgages, and each are designed for certain categories of people.

The most popular mortgage loans feature fixed or adjustable interest rates. A fixed interest rate means that you will be paying the same interest rate for the duration of the loan, which means that you won’t have any surprises down the road. Adjustable interest rates fluctuate during the life of the loan, which means that you might have to pay either more or less in interest during the course of the repayment period.

The fixed-rate mortgage is considered safer than the adjustable-rate mortgage because the interest rate will remain the same, so you will always know how much your monthly payment will be, but sometimes an adjustable-rate mortgage may be a better deal (Read: Even With Fixed-Rate Mortgages So Low, Don’t Overlook Adjustable Rates!). Another type of mortgage is a combination of the fixed-rate and the adjustable-rate mortgages, and it is called a hybrid mortgage.

What is a Hybrid Mortgage Loan?

A hybrid mortgage loan is both a fixed-rate mortgage loan and an adjustable-rate mortgage loan. The hybrid mortgage starts off as a fixed-rate mortgage, and then converts to an adjustable-rate mortgage. During the fixed rate period, which can be up to 10 years, the interest rate remains unchanged. When the initial period ends and the mortgage is converted to an adjustable-rate mortgage, the interest will increase or decrease, based on several indices, annually until the end of the repayment period.

Hybrids are normally referred to as a 5/1 mortgage, for example. The first number represents the fixed interest rate period of the mortgage. In this example, the hybrid mortgage will have a fixed-rate period of 5 years. The second number represents the adjustment interval that will be applied once the fixed-rate period is over. In our example the interest is adjusted once every year.

Pros and Cons of the Hybrid Mortgage Loan

Like most mortgage loans, the hybrid mortgage is also designed to accommodate the need of a particular group of home buyers. Here are the benefits of such a mortgage:

  • Compared to 1 year adjustable-rate mortgages, hybrid mortgages have lower risk, and a lower interest rate when compared to most fixed rate mortgages.
  • Hybrid mortgages are a great choice for home buyers who only wish to live in the home for a predetermined period of time.
  • The interest during the fixed-rate period will be lower than the interest on a 30-year fixed-rate mortgage, making this type of mortgage a great choice for those who don’t plan on living in the home for a long time (Read: Is Flipping Houses for You?) .
  • There is always a chance that the interest will decrease during the adjustable-rate period, making the monthly payments and overall loan value lower.

The largest downside of hybrid mortgage loans is that once the initial period is finished, there is a large risk that your interest rate will increase significantly, making it hard for you to pay your mortgage on time each month (Read: Do You Recognize the Early Warning Signs for Increasing Home Interest Rates?). Most hybrid mortgages have a maximum interest increase set, usually 2 percent per year, but that 2 percent can mean a lot of money, depending on how much you have borrowed.

Hybrid mortgages are great for those who wish to remain in the home for less than 10 years, and they can work for some others as well. But before you start shopping around for any mortgage, be sure that you know what your budget is and how long you plan on living in the home. If it’s a short while, then you will actually save money with a hybrid mortgage, but if you plan on living for a long while, you should look at other types of mortgages.

Are Interest-Only Mortgages a Good Idea?

Are Interest Only Mortgages a Good Idea- 150x150An interest-only mortgage is a type of loan in which the borrower is required to only pay the interest on the principal for a predetermined amount of time. When the term of the interest-only mortgage comes to an end, the borrower can either renew the interest-only mortgage or pay off the loan through conventional means, such as a regular mortgage. Conventional mortgage loans require you to pay interest and part of the principal each month, which makes interest-only mortgages a more attractive choice for those who can’t afford a large mortgage payment for the time being.

Popular interest-only mortgage loans don’t allow the borrower to make interest-only payments for a long time and are usually limited to a three to ten years period of interest-only payments, after which the borrower starts making payments towards the principal as well, which will increase his or her monthly payments.

Advantages and Disadvantages of an Interest-Only Mortgage

Like most mortgage loans, interest-only mortgages have their advantages and disadvantages, which means that only home buyers with a certain financial situation will benefit from this type of mortgage, while others will probably benefit from a more conventional type of loan. The most important advantages and disadvantages of an interest-only mortgage loan are:

  • Low monthly payments in the beginning. While conventional mortgage loans require each monthly payment to go towards paying both the interest and the principal, interest-only mortgages allow the borrower to make only interest payments for the initial period of three to ten years. This will result in much lower monthly payments for the duration of the initial period, which makes this type of mortgage loan more attractive for first time buyers and people or families who are expecting an increase in their income within the next few years. With this type of loan, you are able to buy a home even if you don’t have a large income at the time. However, once the initial period is over, you must be able to afford larger mortgage payments as you have to start paying off the principal as well.
  • High monthly payments later. When the interest-only payment period ends, the amount that you will have to pay on your mortgage monthly may increase significantly because you will start making payments towards the loan principal as well. Home buyers who aren’t prepared will face the risk of not being able to afford to pay their mortgage anymore. The duration of the interest-only period has a large impact on how much your monthly payments will increase. The longer the initial period, the higher your mortgage payments will be once the second repayment period begins.
  • You can qualify for a larger mortgage loan. When applying for a mortgage loan, the amount that you can borrow is closely related to your income, and how much the lender determines that you can afford to pay monthly. Because monthly payments are lower on an interest-only mortgage loan than they are on a conventional loan, you will be able to borrow more.
  • You will have to deal with an adjustable interest rate later. Interest-only mortgage loans start out with a fixed interest rate, but the rate will become adjustable later on when the second period starts or even earlier. If the interest rate decreases, you’re in luck because your monthly payment will decrease as well, but if interest rates go up, your mortgage payment will increase, too.

Interest-only mortgages are great for first time home buyers. Most of the time, new home owners, being unaccustomed to having a monthly mortgage payment, will struggle with their budget. Interest-only mortgages have lower monthly payments for the first few years, giving first time home owners the chance to get used  to making mortgage payments. Whether you are a first time home buyer or not, you should carefully weigh in on the disadvantages of this type of mortgage. The payments may be smaller in the beginning but, if you don’t plan accordingly, you can run into some serious trouble when the second repayment period comes along and your mortgage payment increases.

Reverse Mortgage Loan Rates: Fixed vs. Adjustable

Reverse Mortgage Loan Rates- Fixed vs. Adjustable-150x150A reverse mortgage is a type of mortgage loan which is available to seniors over 62 years old. Reverse mortgages allow the qualifying home owner to convert part of the equity in the home into cash. The reverse mortgage loan is only paid after the home owner dies in one of three ways: the heirs pay back the loan, the home is taken by the lender, or the home is sold by the heirs, who can cash out the remaining equity this way. The mortgage on the home must be low enough to be covered with the money received from the reverse mortgage, and there are no income or credit score requirements.

The money received from the reverse mortgage loan is not taxed and can be used at the discretion of the borrower. The amount of money that can be taken out is determined by the property value, the borrower’s age, the interest rate, and the type of loan, fixed or adjustable rate.

Fixed vs. Adjustable

Determining which of the two types of reverse mortgage loans is best for you depends entirely on your reason for wanting to take out a loan. If for example, you wish to pay off your mortgage, you will most likely take out a fixed-rate reverse mortgage loan, which allows you to receive the whole borrowed amount at once. If you need the money for repairs, improvements, or other things, you can choose to take out an adjustable-rate reverse mortgage loan, in which case you will receive an amount of money each month for as long as you live in the house. The amount that you can borrow for both types of reverse mortgage loans is determined by the age of the youngest borrower.

Besides the age of the youngest borrower, several other factors are used in determining how much you can borrow. The value of the home and current mortgage rates also come into play when determining the amount of money that you will be able to get, whether you are taking out a fixed or an adjustable-rate reverse mortgage loan.

The rates on your reverse mortgage loan are calculated according to the London Interbank Offered Rate (LIBOR) index, which is the rate that banks lend to each other. A margin is added to this rate by each lender. Margins can differ slightly from lender to lender, but even a small, less than 1 percent difference can mean a lot of money over time.

Advantages and Disadvantages

The main advantage of a fixed-rate reverse mortgage loan is that the interest rate will remain the same for the duration of the loan, and interest rates are really low at the moment. The disadvantage of the fixed-rate reverse mortgage is that you must receive the whole amount and, while this doesn’t sound like a problem, you will be charged interest for all of the money.

Another advantage with an adjustable-rate reverse mortgage loan is that it is very flexible. You can take out what you need, then pay it back, and take out more money when needed. The disadvantage, as with all adjustable-rate mortgage loans, is that, due to the economy increasing, there is a good chance that the interest rates on your loan will increase.

Choosing between a fixed-rate and an adjustable-rate mortgage loan largely depends on what you need money for. If you need a large amount of money, then fixed-rate is the best choice. If you need a monthly check, then adjustable-rate is by far the best choice. Interest rates will change for the adjustable-rate reverse mortgage, but it is not the only factor that should matter when deciding which type of loan to choose.

Current FHA Rates: Which is Best, Fixed or Adjustable?

Current FHA Rates-Which is Best, Fixed or Adjustable- 150x150Federal Housing Administration (FHA) loans may have stricter requirements and bigger mortgage insurance premiums, but at least the interest rates are still low for now. As with conventional loans, this might be a good time to get an FHA loan because interest rates are predicted to rise in the near future. The increase won’t be substantial, but over time the small percentages will add up, making your FHA loan significantly more expensive than it is now.

What is a Federal Housing Administration Loan?

The Federal Housing Administration doesn’t actually give out the mortgage loan, but insures it against default. The Federal Housing Administration acquires the money needed to pay these claims through the mortgage insurance premiums that the homeowners are required to pay, if they acquire an FHA backed loan. Part of the mortgage insurance premium is paid up front at the time of closing, and is then paid in monthly installments after that.

FHA loans are similar to conventional loans, offered by Fannie Mae, Freddie Mac, or loans insured by the Department of Veteran Affairs. Like conventional loans, FHA loans are offered in various lengths, such as 30-year, 20-year, or 15-year; they can be fixed-rate or adjustable-rate; they can be made with full, low, or zero closing cost options.

The difference between conventional loans and FHA loans is the down payment, which is only 3.5 percent for FHA loans, and 5 percent or more for conventional loans. Another difference between the two types of loans is the fact that FHA loans don’t have such strict requirements in regards to the home buyer’s credit score. While lenders require the home buyer who applies for a conventional loan to have a high credit score, FHA loans can be given to people with lower credit scores.

Fixed-Rate or Adjustable-Rate

Current interest rates for 30-year FHA mortgage loans are lower than the interest rates for conventional loans. For example, the interest rate for a 30-year fixed-rate conventional loan is around 3.6 percent, while the rate for an FHA loan of the same length is only 3.2 percent. The interest rate for a conventional 5-year adjustable-rate loan is 2.1 percent, while the rate for an FHA adjustable-rate mortgage loan is slightly higher at 2.2 percent.

Fixed-rate FHA loans are a great choice for new home buyers. These types of mortgage loans will have the same interest rate until the loan is paid off and, with a down payment of only 3.5 percent, they allow you to finance the rest of the loan amount. Your closing costs can be paid with a gift or it can be financed, making it easier for you to qualify for the loan. Less than perfect credit scores and not so stellar credit history are not going to matter as much as they do when applying for a conventional loan.

Adjustable-rate FHA mortgage loans feature lower interest rates, but that doesn’t necessarily mean that you will save money over a fixed-rate FHA loan. Mortgage interest rates can jump up even a few percent over the life of the loan, increasing the overall cost of the loan significantly. Of course, there is always the chance that the interest rate will decrease, but based on recent predictions, it looks like the interest rates will continue their upwards trend.

It is hard to decide between a fixed-rate and an adjustable-rate mortgage loan based solely on the interest rates. Adjustable-rate FHA loans might seem more attractive, but there is always the risk that the interest rate can rise. Whatever type of FHA loan you decide to go with, remember this: predictions say that the economy will continue its growth, making interest rates go up. Whether it’s a fixed-rate or an adjustable-rate FHA loan that you need, this year might be the last time you can take advantage of interest rates this low.

Deciding Between Fixed-Rate FHA or Adjustable-Rate FHA

FHA- fixed and adjustable- 150x150There are many good reasons why you should choose a mortgage loan insured by the Federal Housing Administration over a conventional loan. The FHA has been helping people buy homes since 1934 and it’s a great alternative to other lending options for families who want to buy their first home, people who have less than perfect credit score, or someone who doesn’t have a large amount of money to use as a down payment. FHA mortgage loans can be obtained with a credit score as low as 500, and by making a minimum of 3.5 percent down payment. However, you should remember that FHA loans come with a fairly large disadvantage. You will be required to pay mortgage insurance for at least 5 years.

Once you have taken into consideration all of the advantages and disadvantages of a Federal Housing Administration backed mortgage loan, and decided that this type of loan is your best choice, it is time to decide between a fixed-rate FHA loan and an adjustable-rate FHA loan.

The Fixed-Rate FHA Loan

The fixed-rate mortgage loan is the most popular type of FHA loan. Also known as the 203(b) mortgage loan insurance program, the fixed-rate FHA loan is a very good choice for first time home buyers. Some very important advantages that the fixed-rate FHA mortgage loan has are:

  • The interest rate remains the same for the duration of the loan. If you are comfortable with the interest rate that you received from the lender, then the fixed-rate FHA mortgage loan will give you peace of mind for the years to come.
  • The fixed-rate FHA loan allows financing for up to 96.5 percent of the loan amount. As a result of this, you will be able to make a low down payment, and your total closing costs will also be low.
  • This is the only type of loan that allows 100 percent of the closing costs to be a gift from family, or funding from a government agency or a non-profit organization. Many of the closing cost charges can be financed, as opposed to conventional loans, where the borrower must pay 2-3 percent of the loan amount at the time of purchase.
  • It’s easy to qualify for a fixed-rate FHA loan. If you have a low credit score, a bad credit history, your debt-to-income ratio is high, or if you have a bankruptcy that is more than 2 years old.

The Adjustable-Rate FHA Loan

Designed for people or families with low and moderate income, the adjustable-rate FHA mortgage loan (ARM) is a type of loan that features low initial costs. If interest rates are high, the adjustable-rate loan will keep the initial interest rate on your mortgage low, so you can qualify for the financing that you need. While, with this kind of loan, there is always the risk that the interest rates will increase, here are a few advantages that you should take into consideration before deciding:

  • The interest rate may rise over the duration of the loan, but it may also decrease. Also, the interest rate cannot fluctuate more than 1 percent per year, and cannot increase by more than 5 percent of the initial rate.
  • 25-day notice for increased interest rate. In case the interest rate on your adjustable-rate FHA mortgage loan increases, you will have to be notified at least 25 days before.
  • Many of the closing costs can be rolled into the cost of the mortgage. This will therefore reduce the initial expense that will be involved in purchasing a home.
  • Option of refinancing. You have the option of refinancing your adjustable-rate FHA loan to a fixed-rate FHA loan at any time through FHA’s streamline refinance program.

Both fixed-rate FHA loans and adjustable-rate FHA loans have their advantages, but choosing one over the other depends entirely on your situation. Understanding all the requirements, advantages and disadvantages is very important when considering any type of FHA loan.

Top 10 Types of Mortgage Loans

top 10 loan types- 150x150A mortgage is a type of loan where the bank or another lender loans you a large amount of money, which you must repay with interest over a set period of time. There are several types of mortgage loans available, each tailored to meet the needs of a specific group of home buyers. Searching for the mortgage loan that best suits your financial situation must be treated very seriously. Here is another resource to help you decide: mortgage lender or mortgage broker?

Types of Mortgage Loans

Even if you are considering getting professional advice before choosing a mortgage, it is always wise to know what options you have before talking to a professional. Knowing what types of mortgages are available will not only make things easier to understand, but also put you in a position where you can ask the right questions, making sure that what you choose is the right option for you. Additionally, here is a list to help you find the Best Mortgage Rates.

Top 10 Mortgage Loans Available from Most Lenders

  1. Fixed Rate Mortgage. This type of mortgage is the most popular mortgage in the United States, and is suitable for individuals who plan to keep their house for more than a couple of years. Usually, the life of a fixed rate mortgage is 15 or 30 years, but it can also come in terms of 10, 20, 40, or even 50 years. The interest rate and the monthly payments remain fixed during the life of the loan, thus homeowners can manage their budget more easily knowing exactly how much they owe to the lender every month. In case rates drop, homeowners have the possibility of mortgage refinancing to get a more advantageous interest rate. Here is a list of the Best 5-Year Fixed Mortgage Rates.
  2. Adjustable Rate Mortgage. Also known as ARMs, adjustable rate mortgages are preferred by people who aren’t expecting to own a house for a long period of time. With an ARM, individuals have a predetermined adjustment interval (6 months to 5 years), for which the interest rate will be fixed.  After the adjustment period, the interest rate will usually go up, and then change periodically over the term of the loan, as specified by the lender.  Before committing to this type of mortgage, homeowners should make sure that they can afford the highest possible payment of their loan, as sometimes the interest rate can go up by 6 percent. Some of the most common ARMs are: 1-year Adjustable Rate Mortgage, Hybrid or Intermediate ARM, Flexible Payment Option ARM, and Convertible ARM.
  3. Balloon Mortgage. A balloon mortgage will have a fixed rate for a period of 5 to 7 years, after which the remaining balance is due in its entirety. Because of its large size, the final payment is also known as a balloon payment. Balloon mortgages are best for people who intend to sell their house before the balloon payment must be made.
  4. Jumbo Mortgage. When the mortgage loan is over Freddie Mac and Fannie Mae traditional loan limits, the mortgage is called a jumbo mortgage. The conforming limit for a jumbo loan is $625,000. A jumbo mortgage will require a larger down payment, and the interest rates will be higher compared to the interest rates of a conforming loan.
  5. Interest-Only Mortgage. With this type of mortgage, homeowners have the option to pay only the interest of their principal, for a period of five or ten years. After this initial period of time, the principal balance will be paid down over the remaining years of the loan. Due to the fact that interest-only loans are riskier for the lenders, the interest rate might be higher, but these loans are still attractive to homeowners because they offer financial flexibility during the interest-only period.
  6. Reverse Mortgage. Available to elderly individuals 62 years old and over, a reverse mortgage is a lifetime mortgage secured by the equity in the borrower’s home. Elderly homeowners can transform a portion of their home’s equity into cash. During the term of the loan, homeowners are not required to make any monthly payments. Reverse mortgages allow elderly persons to live in their own homes, and the owners only repay the loan if they sell the house or move to a nursing home. In the event of homeowners’ death, the loan must be paid in full by their heirs. Here is a list of the Top Reverse Mortgage Lenders.
  7. Veteran Affairs (VA) Mortgage. A VA loan is a government insured mortgage available for veterans, their eligible spouses, and service members only. Issued by a regular lender, a VA loan requires no down payment, and the borrowers don’t pay any mortgage insurance, or a penalty fee in case they pay off the loan earlier.
  8. Federal Housing Administration (FHA) Loan. Insured by the FHA, this government guaranteed loan is great for first-time home buyers, as well as individuals who can’t afford a large down payment, or have a poor credit score. A FHA mortgage offers better interest rates than conventional mortgages, and the lender might show the borrowers leniency in case of financial setback.
  9. Graduated Payment Mortgage (GPM). GPMs are available in 15 and 30-year loan terms, and are more suitable for young individuals, such as students, who wish to purchase a home, but currently do not have financial resources to pay for a loan. A GPM offers affordable monthly payments in the beginning, after which the payments will gradually grow by a percentage decided in advance. This increase stops after several years (5 to 15 years), and the borrower will pay a fixed amount every month for the rest of his loan life. The GPM is a type of negative amortization mortgage. Negative amortization (NegAm) occurs when the mortgage payment for a period of time is lower than the interest due for the same period of time, causing the balance of the loan to rise.
  10. Pledged Asset Mortgage. Also known as Asset Integrated Mortgages, and Asset Backed, pledged asset mortgages allow burrowers to use their financial commodities, such as bonds, stocks, CDs, as collateral for the mortgage loan, instead of a down payment. This kind of mortgage is intended for individuals who have enough income to easily afford the monthly payments of a loan, but who have their cash engaged in investments. A pledged asset mortgage offers attractive rates, and don’t require a mortgage insurance, but it is more accessible by wealthier people.

Choosing the right type of mortgage loan will not only save you money, but give you peace of mind for the following years. Being aware of your financial situation, budget, and understanding that paying off a loan can take a while, in which many things can happen or change, are keys to making the best choice when it comes to mortgage loans.

The Best 5 Year Fixed Mortgage Rates

The Best 5 Year Fixed Mortgage RatesA 5-year mortgage, also known as a 5/1 ARM, is a hybrid mortgage with a fixed interest rate for the first 5 years of the loan, and an adjustable interest rate for the rest of the repayment term. This type of mortgage combines an adjustable rate mortgage (ARM) with a fixed mortgage. The benefit of this type of a loan is that it offers a fixed low interest rate for the first 5 years. The risk is that, after the initial 5 years, the interest rate will be adjusted every year, and will most likely increase, making your monthly payments rise. The increase or decrease in interest rates is determined by an index based on the returns of investments, such as US Treasury securities, and changes in international interest rates.

A hybrid mortgage, such as the 5/1 ARM, features lower interest rates than fixed mortgages, but higher interest rates than a standard adjustable rate mortgage. It gives you the safety of knowing what your interest rate will be for the first 5 years, but the downside is that you won’t know if your payment will go up or down each year for the remainder of the loan.

The Advantage and Disadvantage of a 5 Year Mortgage

After the first 5 years, the owner can keep the 5/1 ARM mortgage and keep making payments with an adjustable interest rate, or refinance into a new mortgage. 5/1 ARM mortgages are ideal if you decide to refinance before the end of the initial 5 years of your mortgage.

The disadvantage to a 5/1 ARM mortgage is that, after the initial 5 years have passed, you could see your payments go up by a lot, depending on what the mortgage interest rates will be then, or you can’t qualify for a refinance anymore.

Rate Caps

Rate CapsThe most important thing when looking at a 5-year fixed loan is to make sure that it has low caps on every interest rate change and the duration of the loan. To be certain that you will save the most money, make sure that the 5-year loan has low interest rate caps between every rate change and overall interest rate cap. Using an online mortgage calculator can help you find out how big your payments will be, given your interest rate caps for each 6 month period.

You must weigh your options carefully before deciding to go with any mortgage, but you should be extra careful if you decide to go with a 5/1 ARM. While it can feel like the right choice due to the advantages that it has for the first 5 years, it can quickly become a burden if you haven’t taken everything into consideration before jumping.

Reverse Mortgage Interest Rates – What You Need to Know

A-seniors-guide-to-reverse-mortgage-loansAvailable only to home owners or buyers over 62 years of age, reverse mortgage loan that gives you the possibility of converting a part of the equity in your home into cash. In a regular mortgage, the loan has to be paid back monthly, but in a reverse mortgage the loan is paid when the borrower dies. The heirs have the option of refinancing and paying back the loan, give the home to the lender, or selling the home and cashing out the remaining home equity. When applying for a reverse mortgage loan, there are no credit score requirements because there are no payments made on the mortgage.

Types of Reverse Mortgages

The three basic types of reverse mortgages are:

  • The single-purpose reverse mortgage. This is a type of reverse mortgage that is offered by government agencies and non-profit organizations, and it’s geared towards seniors with low to medium income. The single-purpose reverse mortgage can only be used towards the purpose defined by the organization that gives the loan, like paying for home repairs or property taxes.
  • The federally-insured reverse mortgage. Also known as Home Equity Conversion Mortgages (HECM) and backed by the government through the U. S. Department of Housing and Urban Development (HUD), the federally-insured reverse mortgage is more expensive, but can be used for any purpose and has no income requirement.
  • The proprietary reverse mortgage. A type of reverse mortgage that is offered by a private company, based on the borrower’s age, income and property value.

Loan Size and Cost

The maximum amount that you can borrow through a reverse mortgage loan is $625,500. Loans that exceed this amount are called jumbo reverse mortgages and, besides having higher fees, are not insured by the Federal Housing Administration (FHA). The factors that determine the amount that you can borrow are the property value, interest rate and age of the borrower.

Reverse mortgage loans are not taxed and won’t interfere with your Social Security or Medicare benefits. You will have to pay an origination fee, a mortgage insurance premium(MIP) for HECMs, a title insurance, and different other closing costs.

Interest Rates

Interest-RatesAdjustable interest rates were offered through all reverse mortgage programs before 2007. Several reverse mortgage organizations offer fixed interest rates now, but with the condition that the borrower takes out the whole amount offered after closing. On the other hand, when taking out a loan with an adjustable interest rate, the funds can be provided as a monthly payment or a line of credit.

Interest rates are usually lower for a reverse mortgage loan than they are for a regular home equity loan, but they are not deductible on income tax returns until the loan is paid off in part or in full.

One disadvantage to reverse mortgages is the raised upfront cost, but the high upfront cost is later mitigated by the lower interest rates. Seniors must be fully documented before taking this step, as it’s a fairly confusing process that can become very costly for them or their heirs.

Fixed Rate vs. Adjustable Rate Mortgages

When you’re looking for a mortgage, you need to pay extra attention to mortgage interest rates. Finding the lowest rates out there will help make your mortgage incredibly affordable. Generally, lenders offer two different types of mortgages: fixed-rate mortgages and adjustable-rate mortgages.

Fixed and Adjustable Rate Mortgages- The Basics
Fixed-Rate Mortgages: A lender will set a constant, unchanging interest rate for your home loan. This means that you willfixed or adjustable rate mortgage rates pay the same amount of money to the lender every month. Fixed-rate mortgages are wonderful because you can anticipate exactly how much you need to spend every month.

Adjustable-Rate Mortgages: If you choose adjustable rate mortgages, then your rates will fluctuate based on current market conditions. You might pay 4 percent one month, then 3.9 the next month. Or, you might pay 4.3 the next month. Adjustable rates do exactly what they say they do—they adjust.

Benefits of Fixed Rate Mortgages for First Time Home buyers

If you’re a first-time homeowner, you should probably go with a fixed-rate mortgage. This way, you can ease into owning a home by paying off fixed premiums every month. Also, if you intend to hold onto your home for a very long time, then fixed-rate mortgages are more sensible than adjustable-rate mortgages.

You also need to take a look at your income. If you think you’ll remain in the same income bracket for a long time, then a fixed rate mortgage can help you afford your home. Remember, however, that homeowners insurance fees and certain taxes can increase the amount you pay for your home monthly.

More Risk and More Reward for Speculators
If you feel that you are going to make a lot more income in the future, then you ought to consider an adjustable-rate mortgage. These mortgages usually offer much lower rates than fixed-rate mortgages. However, they can go up or down over a long period of time. If you are considering an adjustable-rate mortgage, you should use a mortgage calculator to figure out just how much your mortgage might fall or rise.

That way, you’ll be prepared for whatever comes your way. Also, if you plan on living in your home for a short period of time, then adjustable-rate mortgages are much more financially sensible. The lower overall rates mean you’ll save money on your loan.

You can also consult with a loan professional to compose a loan prospectus. This way, you can attempt to estimate mortgage trends. While it may be difficult to predict the future, there are statistical methods of evaluating your risk.

Consider Both Options Carefully

fixed and adjustable rate mortgage ratesBoth fixed and adjustable mortgages offer concrete advantages and disadvantages to home-buyers. Many lenders customize mortgages and offer special interest rates based on credit history or home prices. It is crucial to compare prices as much as possible.

Empower yourself as a consumer and keep looking for the right loan until you find something that makes sense for you and your family. You will be glad that you acquired a loan that you can afford, and you’ll be much more comfortable in a new home if you feel financially secure.