Non-conventional mortgage loans are basically government loans: VA (Veterans Administration), FHA (Federal Housing Administration) and FmHA (Farm Housing Agency)—now RHS Rural Housing Service—loans. This article will discuss two specific non-conventional programs in more detail below:
1. VA
2. FHA
Ginnie Mae, the Government National Mortgage Association, is the agency responsible for securitizing much these non-conventional, government loans. All other types of primary mortgage loans provided by private lenders and not guaranteed by the government are considered conventional loans.
Contrary to what many people may believe, the VA and FHA normally do not fund loans.
These two governmental agencies only guarantee certain portions of a mortgage loan. But these are powerful and effective guarantees. These guarantees are reassuring to lenders in that they lower the lender’s overall risk exposure.
The biweekly plan is actually just another way of saving money by reducing the loan’s term. In addition to the
biweekly plan, consider these three additional options:
● Extra principal payments
● Refinance to a shorter term
● Graduated payment plan
Extra principal payment plan
As mentioned above, the extra principal payment program pays a little extra toward the principal balance of the loan, over and above the regular monthly requirements. By paying a little extra each month or once in a while, the borrower can dramatically lower the term of the loan.
For example, a 30-year $100,000 loan with an interest rate of 7.75% has a monthly payment of $716.41. If the borrowers were to make a monthly payment of $816.41 (an extra $100 toward principal), the loan would be paid off in about 24 years, for a total savings of about $50,000.
Refinance to a shorter term
If you can afford the commitment to a slightly higher monthly payment, refinance your 30-year mortgage into a 10-year, 15-year or 20-year mortgage loan.
The monthly payments will be higher because of the shorter amortization; however the interest rate is lower and the overall interest charges are dramatically less.
Graduated payment plan
Sometimes referred to as the graduated equity mortgage or growing equity mortgage, the graduated payment plan also shortens the loan’s term and reduces total interest cost. Although many variations exist, the basic pattern is to increase the payment amount at the beginning of each year. The extra payment earn interest income and is then applied toward repayment of the loan principal.
The biweekly program is not for all homeowners. In fact, there are disadvantages to this program. A question many financial analysts will point out is that why should you pay off future debt with current dollars.
Remember that every dollar you pay today will be worth about 50 cents (or less) in twenty years. With a typical 30-year loan, biweekly payments will trade each solid dollar today for 50 cents in the future. You are often better off using prepayment funds to pay off non-deductible, higher-rate debts—such as credit cards and personal loans.
The peace of mind of paying off your mortgage early and having fewer burdens in your later years is a big positive. But on a purely financial basis, the biweekly payment may not always be the best program for you. You have to calculate the potential savings–and non-monetary benefits–against the probable costs.
Many lenders will offer the biweekly payment plan to their borrowers. All you have to do is call the lender’s customer service department—even after the closing—and request a change in payment plan.
If the lender does not provide for a biweekly payment plan, you can accomplish these same results by merely paying an extra monthly payment each year.
However, mortgage loan borrowers should generally avoid any biweekly plans offered by an outside, independent service. There are companies who will set-up a biweekly payment plan for homeowners. But they are unnecessary, expensive and dangerous.
These biweekly service companies are unnecessary because they simply set up a payment plan by which the borrower pays an extra monthly payment each year. This is a payment plan that borrowers can set up themselves.
These companies normally operate by first obtaining a two-month deposit (sometimes more) from the borrower. The borrower then makes biweekly payment to the company. The company, however, simply makes monthly payment to the lender—with an extra month’s payment each year.
Meanwhile, the service company will usually charge the borrower an application and maintenance fee (in addition to the deposit) and reap the interest earnings from the deposit accounts.
They are also very risky because if the company goes under—as many have already done—participating borrowers can lose all of their deposits and throws their mortgage payments (and credit record) into confusion.
