How a Graduated Payment Mortgage Can Help You

How a Graduated Payment Mortgage Can Help You- 150x150One of the many loan options that home buyers have today is the graduated payment mortgage (GPM). In a graduated payment mortgage, your mortgage payments start low and increase gradually over a pre-determined period of time. This type of loan is very beneficial for people who can’t afford a large monthly mortgage payment shortly after becoming home owners, but expect to have a better financial situation and afford larger mortgage payments in the future. Most people that his type of loan is geared towards are college/university students or recent graduates who wish to become home owners, but can’t afford to make the often large payments that come with conventional mortgage loans.

How Does a Graduated Payment Mortgage Work?

Because the graduated payment mortgage is designed to help those who can’t afford to make large payments on their mortgage, the loan has an initial period when the interest rate is very low. This is followed by a period of 3 to 5 years when the interest rate increases gradually and remains fixed for the remainder of the loan. The payment increase can be from 2.5 percent to 7.5 percent in the first 5 years, or 2-3 percent over 10 years.

The graduated payment mortgage uses a negative amortization schedule, meaning that at first your monthly mortgage payments will include a smaller interest payment than the one owed on the loan, while the remaining interest will be added to the principal. This makes it easier for you to get approved for this type of mortgage loan, but the downside is that the overall cost of the mortgage loan will be higher.

Graduated payment mortgages are not a favorite type of loan for most lenders as it is considered to have a higher degree of risk, so it is most likely that you will receive a higher interest rate than on a regular fixed -rate mortgage loan.

Benefits of a Graduated Payment Mortgage

Graduated payment mortgages can be very beneficial, depending on your situation and the plans that you have for your future. Here are the advantages that a graduated payment mortgage comes with:

  • The largest benefit that a graduated payment mortgage has is that it allows someone with a lower income to become a home owner. People who expect to see an increase in their income in the next few years after taking on a mortgage shouldn’t have a problem acquiring a GPM. Because of the low initial mortgage payments, you will be able to make monthly payments on your mortgage loan while increasing your income.
  • You have a greater flexibility in choosing the type of home that you purchase. This is also an effect of the low initial payments. By paying less for the first few years, you gain more buying power, allowing you more flexibility on the price.
  • People with lower credit scores and not so perfect credit histories can qualify for this type of loan and become home owners much easier than they would for a regular mortgage loan.

Risks of a Graduated Payment Mortgage

The greatest risk that comes with a graduated payment mortgage is that the borrower doesn’t fully understand how much his or her mortgage payments will increase after the initial period, leading to financial troubles or even losing their home. This can happen due to poor budgeting or unrealistic income growth expectations. The initial payments may seem very attractive, but before you know it, a few years go by and you are required to make much higher payments that may be more difficult for you to budget for.

Graduated payment mortgages can be very advantageous for someone who has properly researched what this type of loan offers. But, as with any loan designed to help the home buyer qualify much easier, you will find that the graduated payment mortgage will end up costing you more than a regular fixed-rate loan. This tradeoff is not necessarily that bad for people who expect an income growth but want to become home owners before this happens.

 

How Alternative Mortgage Loan Repayment Plans Can Help You

How Alternative Mortgage Loan Repayment Plans Can Help You-150x150For a home owner, the largest monthly bill is probably the mortgage bill. Paying off your mortgage will make this large bill go away, which will change your financial situation significantly. You will be able to spend more on other things, save more, travel, or even quit your job and pursue another career.

Alternative mortgage repayment plans can help you shorten your 30-year mortgage loan and get rid of that monthly payment in only 22 to 24 years, but they are not for everyone. The most commonly used mortgage loan repayment plan is the bi-weekly repayment plans.

The Bi-Weekly Mortgage Repayment Plans

This type of mortgage repayment plan takes advantage of the fact that most people are paid by their employee every two weeks, instead of twice a month. So, with this repayment plan, you are required to make a mortgage payment every other week. Because there are 52 weeks in a year, you will make 26 payments per year. If you compare the number of payments that you will make on a bi-weekly plan to the number of payments that you make on a bi-monthly plan, you will find out that you make 2 extra payments, which will reduce your loan repayment term significantly.

Because bi-monthly plans require you to make 24 payments per year, while bi-weekly plans require you to make 26, those extra 2 payments translate into one extra monthly payment per year. Not only will this help you pay off your mortgage loan quicker, but will also help you build home equity faster and pay less in interest rate.

Paying your mortgage bi-weekly is also advantageous because the payments will coincide with your paycheck schedule, but this type of repayment plan normally comes with some pretty expensive costs in fees and various charges. The money that you will be spending on fees could be spent to pay off your mortgage through a regular repayment plan. Another disadvantage is that the bi-weekly repayment plan is inflexible, meaning that, if your pay schedule changes to once or twice per month, this might interfere with your ability to make your mortgage payments on time.

Is the Bi-Weekly Plan a Good Choice?

The bi-weekly mortgage repayment plan is a great choice for those who don’t have the time, patience or discipline to manage their finances. The lender will provide a repayment plan that will coincide with your bi-weekly paycheck, which will make things more convenient for you.

But you should carefully look at the disadvantages, as well. The money spent on fees could be better spent somewhere else. Also make sure you know what your future plans are. If you plan on moving soon, then the extra payment you will make each year is simply not worth it. Make sure that paying off your mortgage doesn’t interfere with other future plans, like sending your children to college, pursuing a different career, or going into early retirement.

Alternatives to Bi-Weekly Repayment Plans

Not every lender offers bi-weekly mortgage repayment plans, but you can take advantage of most of the same benefits that these plans offer for free.

  • Try to simply ask your lender if they can allow you to pay half your monthly mortgage payment every two weeks. Some lenders will allow you to do that, others will charge you for this, while others will refuse.
  • Pay an extra one-twelfth of your mortgage payment every month. This amount should go towards your principal.
  • If you receive your paycheck every two weeks, start a savings account and deposit half of your mortgage payment in it every other week.

Alternative mortgage loan repayment plans are very convenient and a good way to pay off your mortgage loan earlier, but make sure that they suit your budget and future plans. With a little discipline and research, you can benefit from most of the advantages that these plans offer without having to spend more money.

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.