Topic 13.4: Custom mortgages

Learning Objective

After successfully completing this topic, you will be able to distinguish among the various types of custom mortgages.

Partially Amortized Mortgage

A partially amortized mortgage is amortized over a longer period than the term of the loan. At maturity, the remaining balance is due in a balloon payment. For example, if a seller agrees to finance the sale of a lakefront lot in the amount of $100,000, the payments of $665.30 are set up as if it were a 30-year mortgage. At the end of year 5, the balance of the loan would be $94,132 and must be paid in a balloon payment.

Biweekly Mortgage

A biweekly mortgage is amortized the same way as loans that have monthly payments, except that a payment is made every two weeks. The payment is exactly ½ of the normal loan payment. Because there are 52 weeks in a year, the borrower will make 26 payments, in effect making 13 full payments a year. The loan will be paid off earlier, saving the borrower some interest. Most lenders charge a fee for each payment, eating up the interest savings. A borrower may find it easier to just make one additional payment each year.

Payment on a biweekly mortgage is made every two weeks.

Package Mortgage

A package mortgage includes personal property such as a refrigerator. These loans are often made on equipment for factories or restaurants with the personal property being used as additional security.

Home Equity Loans

Home equity loans are usually second mortgages to give funds to the homeowner for repairs, college tuition for the kids, or other necessities. The borrower may take the funds at once, or establish a line of credit (HELOC). The interest on these loans is no longer tax-deductible unless the loan was used to build or acquire the property.

Purchase Money Mortgage

A purchase-money mortgage is seller financing. For example, if a seller might agree to finance the sale of a building site, the buyer might make a small down payment and the seller would take back a purchase money mortgage.

Home Equity Conversion mortgage (HECM) or Reverse Mortgage Loan

A reverse mortgage allows homeowners who are 62 or older to borrow on the equity of their home, either in a lump sum or by getting monthly payments. The FHA makes reverse mortgages called Home Equity Conversion Mortgages (HECM). The borrowers are not required to make payments on the loans for as long as they live in the house. A person’s income is not important in the qualification process. When the borrower dies, or sells the property, the loan must be paid from the proceeds of the sale. If the proceeds are insufficient to pay the mortgage, HUD will repay the lender for the loss.

Reverse mortgage allows elderly homeowners to borrow on their home equity.