As conditions and needs change, new and more flexible financing techniques have been introduced by lenders. The switch from term mortgages to fully amortized mortgages and the increase in the loan to value ratio are examples of such action. While no one is sure as to exactly what lies ahead, a number of different types of financing techniques are currently being used.
Graduated Payment Mortgages (GPM)
Under the fully amortized mortgage, each month`s payment is exactly the same. The obvious advantage is that when securing a mortgage the borrower is assured of a level or constant mortgage payment. However, for some purchasers the required monthly payment is so high that a lender will not make the loan simply because the borrower`s income is insufficient. With a GPM, monthly mortgage payments start at an amount less than would be required under a level annuity payment and increase periodically over the life of the mortgage. Therefore, the borrower can finance a larger purchase than if the monthly payment were level throughout the life of the mortgage. FHA has a number of GPM programs currently available.
Flexible Loan Insurance Program (FLIP)
This is a graduated payment mortgage developed to overcome the negative amortization aspects of the GPM. The key to the FLIP mortgage is the use of the buyer`s down payment. Instead of being used as a down payment, the cash is deposited in a pledged, interest bearing savings account where it serves as both a cash collateral for the lender and as a source of supplemental payments for the borrower during the first few years of the loan.
During the early years of the mortgage, each month the lender withdraws predetermined amounts from the savings account and adds them to the borrower`s reduced payment to make a full normal mortgage payment. The supplemental payment decreases each month and vanishes at the end of a predetermined period (usually five years). By using this type of program, a borrower is likely to qualify for a larger loan than with a conventional fully amortized mortgage.
Reverse Annuity Mortgage (RAM)
Reverse mortgages are a way for seniors to enjoy their retirement as well as cope with inflation and what comes with it. The reverse mortgage enables older homeowners to convert part of the equity in their homes into income without having to sell, give up title or make monthly payments. Homeowners must be 62 or older to be eligible. In a reverse mortgage, the lender pays the homeowner – the opposite of a traditional mortgage where the homeowner pays the lender. The homeowner has the option to receive monthly payments, a lump sum payout, a line of credit or any combination.
Adjustable Rate Mortgages (ARM)
It is also known as variable rate mortgages (VRM). Under ARM, the interest rate charged by the lender can vary according to some reference index not controlled by the lender, such as the Cost of Living Index, the San Francisco District 12 Cost of Funds, the 1 year United States T Bill, and the London Interbank Offered Rate (LIBOR). For the lender, this means that as the cost of money increases, the interest being charged on the existing mortgage can be increased, thus maintaining the gap between the cost of money and return. Either the monthly payment, the maturity date or both can be changed to reflect the difference in interest rates. In addition, the mortgage usually stipulates a maximum annual charge and a maximum total increase in the interest the lender may charge. Under current regulations established by the FHLBB, the interest rate may not be raised more than 2.5% points above the initial rate. The rate can be changed each 6 month, with no more than 1/2 of 1% change each 6 months.
The 11th District Index, which is probably the most widely used benchmark for ARMs is computed by the Federal Home Loan Bank of San Francisco. It reflects the cost of deposits at savings and loans in California, Arizona and Nevada. Most ARMs written in California in recent years are tied to this index.
Renegotiated Rate Mortgages (RRM)
The renegotiated rate mortgages, also known as the rollover mortgages, helps the lender to avoid being locked in to an interest rate that is below the cost of money. Here, at intervals such as 3 to 5 years, the loan is renewed at the going rate; the borrower is guaranteed at least a 30 year term and can pay off the loan without penalty at any time. If rates go up, so would payments if the loan was renewed, but the borrower could shop around to get the best deal.
Shared Appreciation Mortgage (SAM)
A shared appreciation mortgage is a type of equity participation loan in that in exchange for charging a below market interest rate, the lender receives a predetermined percentage of any increase in value of the property over a specified period of time. For the lender, the money received from the appreciation of the property increases the effective yield on the investment. The borrower ,by agreeing to share the interest rate, in turn reduces the monthly mortgage payment. A SAM is normally written so that at the end of the shared appreciation period, the property will be appraised and the amount due to the lender through appreciation is due at that time.
Deferred Interest Mortgage
This financing technique is aimed at those people who only plan to live in a house for a short period of time. Under this mortgage, a lower interest rate and thus a lower monthly mortgage payment is charged. Upon the selling of the house, the lender receives the deferred interest plus a fee for postponing the interest that would normally have been paid each month.
This term, when used to classify types of mortgages, has numerous meanings. One common type of participation mortgage is when more than one mortgagee lends on a real estate project, such as with a large commercial project. A second type of participation mortgage involves more than one borrower being responsible for a mortgage, such as with a cooperative apartment. Finally, a participation mortgage also represents an agreement between a mortgagee and a mortgagor which provides for the lender having a certain percentage ownership in the project once the lender makes the loan.
A sale leaseback is a situation in which an owner of property sells the property to an investor and then leases the property back, usually for a twenty or 30 year term.
Jay sells a property to Laura for $500,000 and agrees to lease it at a net rental to give her a 10% return on her investment. Jay will receive $500,000 in cash and will keep the property, pay Laura a net amount of $50,000 each year. At the end of the term, the property will revert to Laura.