Home Sweet Home: Home Mortgages, Second Mortgages,

Home Sweet Home: Home Mortgages, Second Mortgages,

Home Equity Lines of Credit, and Reverse Mortgages

Maine is a state with high homeownership rates, and like most Americans, Mainers’ homes are often their most important investments. Many consumers begin their lives as homeowners by purchasing so-called “starter homes.” As their incomes increase, they often move to dwellings more suitable to meet their changing needs.
Financing the Purchase
There are a variety of lending sources that consumers can turn to when interested in financing a home purchase.  These include:
•    Banks
•    Savings Banks
•    Mortgage Companies
•    Mortgage Loan Brokers
•    Credit Unions
•    Savings and Loans
•    Private Lenders
•    Family Members
The term of a conventional mortgage generally runs from 20 to 30 years and requires a minimum 20% down payment. Many established consumers who have recently sold a home are able to apply the equity gained through years of homeownership toward the purchase of a new home. Oftentimes, first-time homebuyers do not have the funds necessary to meet this conventional downpayment requirement. Agencies like the Maine State Housing Authority (MSHA), Federal Housing Administration (FHA), the Department of Veteran Affairs (VA), and Rural Development, offer programs that allow less-established applicants to offer down payments that are less than the traditional 20%. Contact these agencies for more information about their programs:


Private Mortgage Insurance
Private Mortgage Insurance (PMI) is an insurance product that lenders require from most homebuyers who obtain loans that are more than 80% of their new home’s value (thus, buyers with less than a 20% down payment are usually required to pay for PMI coverage). PMI protects the lender in the event that the mortgagor (borrower) is not able to repay the loan, and the lender is not able to pay off the loan’s balance after foreclosing and selling the mortgaged property. The borrower must pay this insurance until the loan-to-value ratio is 80% or less. Under the Home Owner’s Protection Act of 1998, homeowners may request cancellation of PMI when their loan in paid down to 80% of the original purchase price or the appraised value when the loan was obtained, whichever is less. A loan-to-value ratio of 77% or less requires an automatic termination of PMI insurance.  This is a federal law. 

Fixed vs. Variable Rate Mortgages: Which Rate is Right?

At the time of the publication of this booklet, mortgage rates (see the top of page 33) remain historically low, and thus, many borrowers are opting for fixed-rate mortgages to “lock in” a low rate for the entire term of the loan. During the early-to mid-1980s, and in other times of high interest rates, a greater proportion of borrowers opted for Adjustable Rate Mortgages (ARMs) that are based on current (market) interest rates. Borrowers typically select ARMs when they believe interest rates have peaked, and will subsequently steadily decline. Other borrowers select ARMs because of low “teaser rates” which, while providing lower initial monthly payments, eventually increase to their “fully indexed” rate and, can cause payment difficulties or even foreclosure for the consumer.

Annual and Lifetime Rate Caps

ARMs set annual and lifetime caps/limitations on the upward and downward movement of mortgage interest rates. Traditionally, annual caps are 2% and lifetime caps are 6%.  An ARM that starts at 9% APR can go no higher than 15%, or lower than 3%.




* The National Average Contract Mortgage Rate is derived from the Federal Housing Finance Board's Monthly Interest Rate Survey (MIRS) and is reported by the FHFB on a monthly basis. This index is the weighted average rate of initial mortgage interest rates paid by home buyers reported by a sample of mortgage lenders for loans closed for the last 5 working days of the month. The weights are determined by the type, size and location of the lender. The rate is based on conventional fixed and adjustable rate mortgages on previously occupied non-farm single-family homes.

Mortgage Chart Monthly Payment Mortgage
All examples are based on a home selling for $125,000 with the buyer making a $25,000 (20%) down payment.  In each example the borrower finances $100,000 at 7% APR (no points loan). All mortgages in the following two charts begin payments in January of 2010.
	Monthly Payment*	Total of Payments Principal and Interest	Pay off Date
15 Year Mortgage	$898	$161,792	Oct. 2025
20 Year Mortgage	$776	$186,072	Oct. 2030
25 Year Mortgage	$706	$212,034	Oct. 2035
30 Year Mortgage	$666	$239,509	Oct. 2040

* The National Average Contract Mortgage Rate is derived from the Federal Housing Finance Board's Monthly Interest Rate Survey (MIRS) and is reported by the FHFB on a monthly basis. This index is the weighted average rate of initial mortgage interest rates paid by home buyers reported by a sample of mortgage lenders for loans closed for the last 5 working days of the month. The weights are determined by the type, size and location of the lender. The rate is based on conventional fixed and adjustable rate mortgages on previously occupied non-farm single-family homes.

Mortgage Chart Bi-Weekly (Every Two Weeks) Mortgage
	Bi-Weekly Payment*	Total of Payments Principal and Interest	Pay off Date
15 Year Mortgage	$449	$152,771	August 2023 12 years 11 months
20 Year Mortgage	$388	$170,977	July 2027 16 years 9 months
25 Year Mortgage	$353	$188,592	February 2031 20 years 2 months
30 Year Mortgage	$333	$205,047	April 2034 23 years 7 months

* All monthly payments are rounded to the nearest dollar. The “total of payments” column is based on actual (non-rounded) monthly payments.

The previous two charts clearly demonstrate how a borrower’s choice of loan term (15-30 years) and repayment options (monthly vs. bi-weekly payments) can impact the amount of money a consumer must remit to a lender in order to pay off their mortgage.  From a high of $239,509 (total of payments) on a traditional 30-year monthly payment mortgage to a low of $152, 771 on a 15-year bi-weekly payment scenario, repayment costs vary greatly on a $100,000 mortgage based on length of term and frequency of payments!

Advice from the Bureau

When shopping for mortgage financing, find a loan term that best fits your ability to repay.  While a shorter term mortgage (15-20 years) may save you thousands of dollars over the life of the loan, make sure your budget will allow you to comfortably make those payments and maintain a suitable lifestyle. Bi-weekly mortgages, which save borrowers a substantial amount of interest paid (finance charges), require the borrower to make 26 one-half (1/2) payments per year – the equivalent of one full extra monthly payment during a 12-month period.