Aug 18
adminCheap Mortgages
What Is An Endowment Mortgage?
An endowment mortgage, in theory, is supposed to lower your mortgage payment. Ideally, endowment mortgages are much cheaper than standard mortgage policies such as repayment mortgages. When you get an endowment mortgage, you pay only the interest on the amount borrowed. In addition to this, you pay an addition small sum into a policy that is supposed to be ever-increasing: the endowment policy. This policy is supposed to grow and grow, and at the end of the mortgage term you use this money to pay off your capital.
The customer pays only the interest on the capital borrowed, thus saving money with respect to an ordinary repayment loan; the borrower instead makes payments to an endowment policy. The objective is that the investment made through the endowment policy will be sufficient to repay the mortgage at the end of the term and possibly create a cash surplus.
-Endowment Mortgages, Wikipedia, June 2006
Endowment mortgage is actually not a legal term. This type of mortgage policy was popular in the 1980s, especially in the UK, but natural fiscal problems and stock market lows made many of these policies practically worthless. An endowment mortgage is always going to be hit or miss. When they work, they really work well. When they dont workthen, things arent so great.
With an endowment mortgage, the borrower only pays the monthly interest to the lender while investing an additional monthly sum into a policy that is usually invested in equities. The theory is that this “endowment policy” should grow sufficiently, with long-term share price rises, over the course of the mortgage (usually 25 years) that the capital debt can be repaid at the end of the term.
-Q & A: Endowment Mortgages, Business Times Online, June 2006
And If Things Go Wrong With My Endowment Mortgage?
With an endowment policy, you lay yourself open to the vagaries of the stock market and the competence of the policy manger. You must also closely monitor the performance of your policy to make sure you are contributing enough.
- Q & A: Endowment Mortgages, Business Times Online, June 2006
Lets say, for instance, that you get an endowment mortgage. This type of mortgage has been getting more and more attention recently, and some consumers are starting to think it might just be a good idea again. So you get an endowment mortgage and start paying off your interest regularly. With equal regularity, you deposit a certain amount of pounds into your endowment policy. Only, the stock market doesnt do so well. Stocks are low, the economy takes a plunge. Twenty-five years go by, and you discover that your endowment policy does not have enough in it to pay off your capital. All your interest has been paid, quite nicely, for two and a half decades, however. So, what about that capital loan that needs to be paid off?
Youd better find a way to pay it offsomehow.
The underlying premise with endowment policies being used to repay a mortgage is that the rate of growth of the investment will exceed the rate of interest charged on the loan. Towards the end of the 1980s when endowment mortgage selling was at its peak, the anticipated growth rate for endowments policies was high (7-12% per annum). By the middle of the 1990s the change in the economy towards lower inflation made the assumptions of a few years ago looks optimistic.
-Endowment Mortgages, Wikipedia, June 2006
When you took out your mortgage with an endowment policy, the aim was that the policy would grow in value. However, as the value of most policies is linked to the performance of the stock market there is usually no guarantee that the policy value will be sufficient to repay the mortgage at the end of the mortgage term.
-Consumer Information, FSA, June 2006
Apr 28
adminCheap Mortgages
Adjustable Rate Mortgages: This Home Mortgage Loan May Not Be For The Weak At Heart
I heard the news about another interest rate hike and thought it was about time to look into refinancing my mortgage. I contacted my mortgage company first.
“I am interested in a fixed mortgage rate.” I said.
“May I ask why that is?” The broker asked politely.
“I don’t want to deal with the risk of rising interest rates. At my age, I cannot afford the risk.
“Looking at your last ten years of history, you have done pretty well with the adjustable rate. In fact, you had paid less in interest than most people with a fixed loan. May I suggest that we look at some adjustable rates, which are even less than the rate youre paying and with caps you dont have to worry about the interest rate hikes. I think we can save you a few hundred pounds off your monthly payment.”
At this point the broker took a breather so that I can say, “No thank you. I am only interested in a fixed rate mortgages.” “I don’t understand. Are you not interested in saving money?” He asked before launching into a lecture that had a mix of economy 101, budgeting 1, a dash of fortune telling and a healthy and totally unrealistic optimism of future trend in interest rates.
When he was done I explained to him that I recall the 18%-19% interest on mortgage loans in the early 1980′s that he seemed too young to remember. I pointed out that on a 100,000 loan, the 18% interest is 1,500 per month on the mortgage interest alone. If you have a 200,000 loan the interest alone would be a back-breaking payment of 3,000 per month.
I knew he thought I am out of my mind thinking about an 18% mortgage interest rate in todays environment. At the end we ended the phone conversation without any resolution. The gap in understanding wasnt about fixed rate mortgages vs adjustable rate mortgages (ARM). The gap was in age, experience, expectation, hopes and fears; a gap too wide to bridge.
To understand this gap, lets look at the adjustable rate mortgages. This type of mortgage loan is usually lower than the fixed rate and the lower rate means lower payment that in turn means easier qualification.
When lenders are considering your mortgage loan application, they look at what percentage of your income is available for repaying their loan. With an income of 5,000 per month, a 2,000 loan payment is 40% of your income and a 1,000 payment is 20% of your income. The closer you get to 1,000 or 20% of your income, the easier it is to qualify for the loan. This easier qualification appeals to younger people who are just starting and those with income limitation.
Adjustable mortgage rates appeal to young people with an innate optimism, hopes of increased income and the high possibility of moving to a different home in a short period of time. They need to look at what they can afford to pay and cannot worry too much about the distant future. To them anything is better than renting which is absolute waste of money.
There are also those older individuals who have suffered from some set back in life and do not enjoy a high credit score or do not have a very high income. Since a poor credit score increases the interest rate a bank offers to potential borrowers, a fixed rate may be too high for these individuals to consider.
Lets take a look at some terms that help you understand ARM better.
Margin – This is the lender’s markup and where they make their profits. The margin is added to the index rate to determine your total interest rate.
ARM Indexes – These are benchmarks that lenders use to determine how much the mortgage should be adjusted. The more stable the index is the more stable your adjustable loan remains. Consider both the index and the margin when you are shopping around.
Adjustment Period – Refers to the holding period in which your interest rate will not change. You will come across ARM figures like 5-1 that means your mortgage interest remains the same for five years and then it will adjust every year.
Interest Rate Caps – This is the maximum interest a lender can charge you.
Periodic caps – The lenders may limit how much they can increase your loan within an adjustment period. Not all ARMs have periodic rate caps.
Overall caps- Mortgage lenders may also limit how much the interest rate can increase over the life of the loan. Overall caps have been required by law since 1987. Payment Caps – The maximum amount your monthly payment can increase at each adjustment.
Negative Amortization – In most cases a portion of your payment goes toward paying down the principal and reducing your total debt. But when the payment is not enough to even cover the interest due, the unpaid amount is added back to the loan and your total mortgage loan obligation is increased. In short, if this continues you may owe more than you started with.
Negative amortization is the possible downside of the payment cap that keeps monthly payments from covering the cost of interest.
As you compare lenders, loans and rates remember Henry Moore who said, “What’s important is finding out what works for you.”
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