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Newest Product Hits The Equity Mortgage Marketplace

Mar 16, 2008
Just when the public thought that nothing else could be invented or introduced to the mortgage lending marketplace, word comes up from "down under" that a new, innovative and revolutionary product made its entry on March 13, 2007 in Australia.

The equity mortgage is currently an Australian sensation that gives the buyer some financial leeway. The equity finance mortgage allows some buyers to get a better mortgage than would be possible with a traditional mortgage. Other buyers may realize the opportunity to acquire a larger piece of real estate than they could ordinarily consider.

Equity is that part of the real estate property that the homeowner actually owns. It is free and clear of loans or bank levies. Most banks require a down payment at the time of purchase so that the buyer has an immediate "stake" in the property. This "stake" is equity, the buyer's commitment to the property. It is easy to determine the amount of equity that a homeowner has in the real estate.

A recent property appraisal by an independent appraiser will declare the fair market value of the owned property. The declared amount is valid as a snapshot of value on the day of the appraisal. Add together the principal balances on all mortgages or loans outstanding on your property. When you subtract the total of these obligations from the fair market value, the result is your equity.

The mortgage is the amount of money that a lender approves for a buyer to use to purchase a piece of real estate. This mortgage represents the lender's interest in your property and usually are available with a fixed or an adjustable interest rate. The lender's guidelines for a mortgage uses your consistently available income as part of their formula for determining the dollar amount, interest rate and term of a loan.

Sometimes the borrower doesn't qualify for anything. Other times, the potential buyer will qualify for a loan that is less than they need to make a purchase. They must produce more funds for their down payment or lower their expectations of the amount of property that they can afford. Now this borrower has another alternative in the equity mortgage.

In the simplest form, an equity mortgage boils down to a lender offering an appealing interest rate in exchange for a portion of the profits when the property is later sold. Since the equity finance mortgage (efm) is an emerging concept, it still remains to identify exactly how this might work.

The equity finance mortgage does offer an awesome investment opportunity in the form of a silent partner who would provide (match) funds already given to the lender by the buyer in the form of the down payment. Generally, this investment amount will be 20% of the purchase, although this will depend upon how much of a down payment was required of the mortgage applicant. The best part for the buyer is that no interest is paid on the investment made by the silent partner.

When the house is sold or refinanced, this silent partner will receive up to 40% of the profits - or double the original investment - capping at 40%. Presently, this is set up to insure that the mortgagee will always get at least 60% of the profits. The equity mortgage is new, innovative and subject to some tweaking as time moves along.

The equity mortgage concept is starting to spread. However, it has taken on a different configuration in the United States and the United Kingdom. The original intent, which favored the potential buyer and eventual seller, has been lost in transit. This equity mortgage is currently referred to as "shared appreciation mortgages" in the United Kingdom. The United States version is yet to be unveiled.
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