Pick up the New York Times, or click your way to Long Island Exchange, and you will see a growing and inescapable news trend: foreclosures. They are being reported in epidemic proportions nearly everywhere, and they are happening to people and families that you least expected would ever experience such severe financial difficulties. The trouble is that there is so much ignorance surrounding the mortgage world. This has worked to the distinct advantage of unscrupulous lenders, as consumers with little experience in, or knowledge of the mortgage-lending world have fallen prey to predatory lending practices. In fact, the reality of this situation is that a great deal of the cause for our current economic crisis lies in the fact that we as Americans asked for mortgages that we could not really afford, and banks gave them to us. So, the first step is to eliminate some of that ignorance.

 

Have you ever noticed that regular working consumers often talk about mortgages and terms related to them, but don’t know the specifics about what they refer to? The sad truth of the matter is that many Americans do not know what basic mortgage and lending terms mean. Understanding these terms and the system they depict is vital to comprehension of our present financial realities. Let’s explore this a little

 

Equity:

When referring to a mortgage or home loan of any type, equity refers to the difference between what you actually owe on the home, and what the home is worth. In Suffolk County, New York, for instance, equity values have been traditionally high. This means that homeowners owe less on their homes than the home is worth. As an example, if Mr. Smith from Long Island owns a home valued at $200,000, but he only owes $120,000 on the original mortgage, then it could be said that Mr. Smith has about $80,000 in equity in his home. This is home refinancing deals are struck: banks lend money against the equity built up in a home. Negative equity, which is increasing rapidly in the United States, is when you owe more on the home than it is worth. When this happens, many homeowners simply hand the keys back to the bank and walk away, or allow foreclosure to occur.

 

Foreclosure:

A foreclosure is when a bank or other lender physically retakes possession of a home after an owner has defaulted on their mortgage loan. Sometimes an owner surrenders the home in a voluntary foreclosure, but more often than not, banks will take owners to court in order to force the owner out of the home. The bank then sells the home to satisfy the outstanding loan. However, the bank sale of the home often does not satisfy the loan amounts, and therefore the owner may still owe money after they have been foreclosed upon. This is one of the most significant risks associated with foreclosure, and a reason why so many people facing foreclosure end up declaring bankruptcy instead.

 

ARM:

ARM is an acronym for Adjustable Rate Mortgage. This is a risky mortgage, and is yet another cause of the global economic meltdown. Essentially, an ARM allows a borrower to get a very low, special interest rate for a set period on their loan. When that period expires, the rate increases based on numerous market variables, and the minimum payment due increases as well. Historically, many borrowers selected ARM based loans with the intention of moving out of the property and eliminating the loan prior to the ARM going up. For years, this was an excellent money-saving tactic. However, with the housing and economic crisis, many homeowners were not able to move or get out of their mortgage. Thus, when their payment and interest increased, they were no longer able to afford the home. Hence the resulting foreclosure explosion.

Reverse Mortgage:

You hear about reverse mortgages all the time, but few people actually know what it means. Essentially, a reverse mortgage is described as a bank slowly buying your home. Often times, when a home is owned outright, or has a significant sum of equity, a lender may let to pay you a specific amount of money each month, for the rest of your life. After your death, the bank will sell the home to repay the amounts they have “lent” you. The bank provides any remaining amounts to family members. This is perfect for senior citizens who have little or no income, and have value in their homes. Most states have age restrictions, as well as a number of other requirements, making a reverse mortgage a little more difficult to obtain than a traditional mortgage. In fact, a number of states do not allow reverse mortgages at all.

Often, fast-talking salespeople use industry jargon to confuse and distract consumers into making poor decisions. This is why it is essential to educate yourself on matters of such importance. To help you do so, keep this blog bookmarked, and we’ll cover more of the terms of the banking and mortgage lending worlds.

 

–