Archive for February, 2010

An Overview of Reverse Mortgages

Posted:25 February, 2010 by admin

If you own a home, you know mortgage products have moved beyond the basic 30 year fixed option. Reverse mortgages are one such product and here is an overview.

An Overview of Reverse Mortgages

A typical mortgage is created when a lender provides you with a lump sum amount of cash to purchase real estate. In consideration of this, you agree to repay the mortgage on a monthly basis for a defined time period at a particular interest rate. The length of the repayment period and interest rate, whether fixed or adjustable, set the monthly payment amount.

A reverse mortgage works in a similar way, but backwards. It is a fact that the baby boomer generation is moving into their retirement years. A high percentage own homes with significant amounts of equity in them. The problem, of course, is equity is a fixed asset, to wit, you cant see it in your bank account. Traditionally, the best way to turn this hard asset into cash was to sell the property and move down to something cheaper. You then pocketed the difference in the form of cash.

Many people, however, are attached to their homes. A good portion of your life, including raising a family, may have occurred in your home and it is emotionally difficult to sell it. On top of that, tax issues may take a bite out of the cash you receive. Throw in the pure misery of attempting to move all of your valuables that have been accumulating for 15 or 30 years and selling your home starts to look like a dubious option at best.

Lenders being the ultimate capitalist, they have come up with a solution for this problem. The reverse mortgage. A reverse mortgage allows you to convert much of your equity into tax-free cash without having to take on a monthly payment obligation. You dont have to sell the home, go through the moving process or make any monthly payments to a lender.

A reversed mortgage gets its name from the payment process. Unlike a traditional home loan, a reverse mortgage requires a lender to make payments to YOU! You can choose to receive the money as a monthly payment for the rest of your life, a lump sum payment or even as a credit line. Lump sums are not recommended since home equity is typically your biggest asset, one you should be very careful with.

The amount of a reverse mortgage is dependent on a number of factors. Your age, interest rates, the appraised value of the home, the equity in it and so on all are involved in determining your options.

For many people, reverse mortgage options are of great interest. The tax free aspect of the payments is certainly a benefit.

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An Introduction to Mortgage Backed Securities

Posted:18 February, 2010 by admin

What Are Mortgage Backed Securities?

Mortgage backed securities are securities that are backed by the principle and interest payments on a group of mortgage loans. Lenders group together mortgages and the money that is repaid by the borrowers’ pays investors in the mortgage backed securities.

Why Do Mortgage Lenders Issue Mortgage Backed Securities?

There are a variety of reasons that lending institutions issue mortgage backed securities rather than holding the mortgage themselves. Most lenders have a limited amount of liquid assets. By selling mortgages they are able to free up money in the short term to make additional loans.

Another reason that mortgage lenders sell off their loans as mortgage backed securities is to minimize their risk. Although every effort is made to establish the creditworthiness of an individual before a loan is made, circumstances can change. If a borrower defaults on his mortgage, the lender will have unplanned for expenses just in dealing with repossession and selling of the property. Adding in the lost principal and interest, and a small, local lender could find themselves in a financial mess very quickly.

When a lender sells a mortgage as a mortgage backed security, they receive their money up front, both the loaned amount and a percentage of the loan as their fee. The investors in a mortgage backed security then receive income each month, as the borrower pays back the principal plus interest on his loan.

Types of Mortgage Backed Securities

There are a variety of mortgage backed securities. The majority of mortgage backed securities are issued by the Government National Mortgage Association, otherwise known as Ginnie Mae, the Federal National Mortgage Association, or Fannie Mae, and the Federal Loan Mortgage Company, or Freddie Mac. These are all groups sponsored by the federal government. While Ginnie Mae is backed by the full faith and credit of the government, and guarantees its investors that they will receive their payments, both Fannie Mae and Freddie Mac have the authority to borrow from the Treasury, which makes them relatively safe investments as well.

In addition to the government agencies, brokerage firms and banks often offer mortgage backed securities. These are known as private-label securities.

Are Mortgage Backed Securities Risky?

Mortgage backed securities are not generally considered a risky investment. To obtain a mortgage, the borrower must go through a qualification process that assures the bank or lending institution that the loan will be paid back. The group who sets up the mortgage backed security will then group mortgages together in order to sell. By pooling the mortgages together, the risk to the investor is minimized. One borrower, who defaults on a loan, or, conversely, pays the loan off early, depriving the group of years of interest payments, will have less of an effect when he is a member of a large group. The same borrow, particularly one who defaults on a mortgage, can cause a real financial shock to a small lending institution.

Do Mortgage Backed Securities Make a Good Investment?

All investment decisions are extremely personal, and will depend on your personal needs. Decisions on investments are best made with help from a financial advisor. For someone who would like a monthly income, a mortgage backed security can make a good choice. A mortgage backed security, particularly one sold by Freddie Mac, Fannie Mae, or Ginnie Mae, can be excellent investment vehicles. In general, the greater the amount of loans held in a mortgage backed security, the safer the investment, because the risk is spread over more people.

Before investing in a mortgage backed security, you should find out your expected rate of return. While this can vary, it is nice to know what investors have been receiving. Remember, it is not only loan defaults that can affect your income from a mortgage backed security, but also prepayments and principal only payments. The income from the security is figured on full payment of both principal and interest over the life of the mortgage, typically 15 or 30 years. Any action taken by anyone holding a mortgage in the security can affect your income. It is important to be clear about this with the person you purchase the security from.

Mortgage backed securities are an excellent development for borrowers, lenders, and investors. No matter what group you are in, it is important to understand exactly how they work and what you can expect. By doing that, you are better able to make a wise financial decision.

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Adjustable rate mortgages (ARM), developed when mortgage interest rates were high, can help you finance the purchase of a home with low interest rates. An ideal choice for those who expect their income to rise or move in a couple of years, an ARM also increases your risk for higher payments. Fortunately, lenders also offer safeguards to limit some of your risk to excessively high interest rates.

ARM Features

An ARM starts with a low interest rate, up to 3% lower than a fixed rate mortgage. With lower rates, you usually qualify to borrow more than with a fixed rate home loan.

ARMs usually start with a fixed rate period and end with fluctuating yearly interest rates, increasing or decreasing your monthly payment. So a 31 ARM means 3 years of fixed rates with interest rates changing every year after that. Interest rates are based on an index, usually the rate on the T-bill or LIBOR, and the margin the lender adds to the index.

ARM Safeguards

In order to protect borrowers from sky-rocketing monthly payments, mortgage lenders put in place safeguards. For example, a point cap limits how much interest rates can rise monthly and over the life of the loan. There are also ceiling limits on how low rates can go, protecting the lender.

Another safeguard is a pound cap on monthly payments. However, if interest rates rise higher than the pound cap allows, you may end up with a longer loan. Many financing companies also allow you to convert your ARM to a fixed rate mortgage after a predetermined period.

ARM Considerations

While an ARM has many benefits, there are other considerations to look at. For instance, interest rates can rise 4% or more over the course of your home loan. If you plan to stay in your home for several years, a fixed rate may offer lower interest costs in the long term. ARMs are also unpredictable, which makes planning long term financing goals difficult.

Before you apply for an ARM, make sure you are comfortable with the level of risk involve. However, if you expect your income to rise in the future or to move, then you may be saving yourself a lot of money in interest payments with an ARM.

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A quick guide to mortgages

Posted:4 February, 2010 by admin

Buying a dream home is one of the major milestones of any individuals life. The price of real estate is increasing day by day. The designer and flashy homes, which appeal us the most, are beyond the financial capabilities of a lot of individuals. However, this fact should not deter us from fulfilling such a dream. With widely available low interest mortgages, now even a common man can own the residence of his choice.

Starting with the basics, mortgage is a type of loan that any individual can take, in order to buy a home or a property. The property being bought is used as collateral to the loan, this often means that if the repayments schedule of the mortgage is not complied with fully, the lender can take the possession of your property, and sell it to recover his amount.

Any mortgage deal whether it is the first one, or a remortgaging effort, requires a lot of hard work. The best advice given by any lender is cleverly disguised to suit his interest the most. So, the first thing that any borrower should do is to take a closer look at any lenders advice and compare it with other offers floating in the market.
Choosing the mortgage that is right for you and getting the best deal, involves taking a lot of decisions. The two main things that require the greatest attention are the interest rates charged for the mortgage and the repayment method of the mortgage.
The rate of interest to be paid for mortgages are determined by the base rates prevailing in the loan market. A borrower should go for a low interest mortgage, since the lower the interest rate; the lower will be the monthly repayment. At any given point of time the borrower might get hundreds of offer for mortgage. Each lender has different conditions and charges. The borrower is advised not to succumb to any offer with cheap initial interest rates; instead he or she should look at all the features of mortgage before accepting any deal.

As for the repayment method the borrower has two options a repayment mortgage or an interest only mortgage.
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Mortgage, the borrower has to pay off the amount in equally spaced installments. The installments gradually recover the principal amount coupled with the interest from the borrower. Thus, the mortgage is fully paid by the end of agreed term.
In an interest only mortgage only the interest is charged in the installments. The principal amount is not included in the monthly repayments. The arrangement to repay the principal amount is made by other means, usually at the end of the mortgage term or as agreed between the two parties. The mortgage amount is guaranteed by some investment in shares, or stock. The borrower has to make sure that his investment grows, so as to pay the mortgage by the end of agreed term.
Most lenders will offer mortgage up to 95% of the property’s value under consideration, but the borrower might have to pay a higher lending charge if he borrows more than 75% of his property value. There are other costs also, which are essentially involved with a mortgage. The lender might ask you to deposit an amount upto 3-10% of the asking price of the property. Valuation fees, solicitors fees and higher lending charges also escalate the price of mortgage.

After deciding on a mortgage, the borrower has to apply formally to the lender. He should take care to fill in all the details carefully. If he feels confused at any stage he should take the help of a financial advisor, instead of making wrong assumptions. If everything goes smoothly the borrower will soon receive a mortgage offer.

Aldrich Chappel has been associated with get-secured-loans,since its inception.Having completed his Masters in Finance from Lancaster University Management School,he undertook to provide useful advice through his articles that have been found very useful by the residents of the UK.To Find Secured loans,loans for homeowners,best secured loans visit

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