Category Archives: Personal Finance

Changes to Reverse Mortgages

Reverse Mortgage“Everyone has heard of Reverse Mortgages, but not everyone knows how they really work.  About 3 years ago a relative of ours took one out when the rates were lower and the terms were different than they are today.  Everything that you thought you knew about Mortgages has changed and Reverse Mortgages are no different.  For the most up to date information on this Personal Finance option please read on…”

DC Metro Realty Team – Denise Buck & Ed Johnson

The television ads for reverse mortgages feature amiable aging actors and even a former U.S. senator who tries to convince viewers with sincere pitches.

“A government-insured reverse mortgage allows seniors to stay in their own home and turn their equity into tax-free cash without any monthly mortgage payment,” former Tennessee Sen. Fred Thompson says in one advertisement.

It’s a compelling sales pitch, but the truth is the U.S. Department of Housing and Urban Development’s Home Equity Conversion Mortgage program was a tottering structure facing collapse during the recession. The Reverse Mortgage Stabilization Act of 2013 then bolstered the foundation and kept the whole program from caving in.

Here’s a look at how the recent changes affected reverse mortgages, and if they’re a suitable solution for seniors seeking additional income.

How do reverse mortgages work?

Reverse mortgages can be marketed and sold by private companies, but the only reverse mortgage insured by the U.S. federal government is called a Home Equity Conversion Mortgage and is only available through an Federal Housing Administration approved lender.

A reverse mortgage is a loan you never pay back. If you are at least age 62, live in your home and either own it outright or have a low mortgage balance, you might qualify for a reverse mortgage. Essentially, it allows you to access a significant portion – but not all – of the equity in your home. Unlike a home equity loan, you don’t have to repay the loan. However, you will continue to be responsible for utilities, taxes and insurance coverage.

The loan is only due once the last surviving borrower dies or no longer lives in the home for 12 consecutive months or more. If heirs want to keep the home, they will need to pay off the loan balance. But if the loan balance is more than the home is worth, the FHA will accept a 95 percent payment of the home’s value. In the event the heirs cannot afford to buy the home, they will likely have to sell it to pay off the loan.

How has the loan program changed?

In order to rescue the FHA loan program, changes were made to the structure of the loans, and fees were increased.

The maximum size of a loan will depend on the age of the youngest borrower, the value of the home and current interest rates. However, under the new rules, the maximum amount borrowers can withdraw is about 15 percent less of their home’s equity than before the changes.

The FHA also now limits the amount of money that can be withdrawn immediately as well as during the first 12 months of the loan. There are some exceptions, but in most cases borrowers are eligible to withdraw up to 60 percent of their home’s equity.

Additional steps have also been taken to ensure that borrowers will be able to meet their continuing financial obligations, including taxes and insurance. For some borrowers, the FHA now requires payment of property taxes and insurance out of the reverse mortgage line of the credit or through term payments from an escrow account.

What are the fees associated with reverse mortgages?

Reverse mortgages are generally more expensive than other home loans, and with the fee increases mandated by the Reverse Mortgage Stabilization Act, even pricier than before. Fees you can expect to pay when taking out a reverse mortgage can include lender fees, mortgage insurance and closing costs. These fees can also be taken out of the initial loan proceeds.

The mortgage insurance payment goes directly to the FHA and is an ongoing fee for the life of the loan. If you withdraw 60 percent or less of the available funds in the first year, you will be charged a mortgage insurance premium of 0.50 percent of the appraised value of the home. If you take more than 60 percent of your equity, the upfront payment will be 2.5 percent. The annual premium is 1.25 percent of the outstanding loan balance, according to the National Reverse Mortgage Lenders Association.

The bottom line: Reverse mortgages might not be the “safe, simple solution” to retirement income that the TV spokespeople would have you believe, but they probably aren’t as evil as the naysayers make them out to be, either. The reality is probably somewhere close to the middle.

Originally posted by US News and World Report

How to Pay Off a 30 Year Mortgage Sooner

“It’s not as hard as you might think to pay off your 30 Mortgage in 25-26 years.  This article explains some simple ways that you can do it, as well as alternatives to paying an extra Mortgage Payment each year.”

DC Metro Realty Team – Denise Buck & Ed Johnson 

For homeowners, one of the most burdensome financial albatrosses is mortgage debt, especially during retirement.

Your mortgage is likely your largest expense. Aside from hoarding money in an IRA or a 401(k), paying off your mortgage prior to retirement is critical. Once you enter retirement, healthcare costs are bound to increase, leaving less room to fit a mortgage payment into your retirement budget.

An effective way to cross the debt-free finish line faster is paying one additional mortgage payment per year. Aside from reducing the life of the loan, you’ll save money in interest expenses.

If you can’t afford making an extra mortgage payment at the end of the year in a lump sum, consider making mortgage payments every two weeks throughout the year, which amounts to 26 payments and accomplishes the same goal as a lump sum.

When you apply for a loan, you’ll have access to an amortization schedule, which shows how your monthly payment is allocated, either towards interest or principal. Your initial payments tackle interest, while later payments deeper into the life of the loan take care of principal. Making an extra mortgage payment expedites this process.

“You’ll get that 30 year mortgage reduced to 24 or 25 years with an additional yearly payment, since the amount calculated for principal and interest is based on the new principal balance,” says Dani Babb, founder and CEO of The Babb Group.

If it’s more financially viable to make bi-monthly payments, rather than a single lump sum, be sure to alert your bank ahead of time. The first of the two monthly payments will not be enough to cover the mortgage and the bank may not know what to do with the payment. Your lender could apply this money towards interest or even deem your payment as insufficient, in which you would be behind on your mortgage from the bank’s point of view.

“Tell the lender you’ll be making payments every two weeks, as opposed to once per month and ask them to allocate this money to what’s known as unapplied funds,” Babb adds. This way, you ensure your extra payments are actually applied towards your mortgage’s principal.

If bi-monthly payments are a stretch, consider adding just $50 a month towards the principal of the mortgage. Given how mortgages are amortized, with the interest at the front end, even small increases in the amount you pay per month can make a difference in paying off the mortgage sooner.

There are cases in which speedily paying off a mortgage lacks financial sense. If you have high-interest credit card debt, this should be your priority, since the credit card debt is likely at a higher interest rate than your mortgage.

Also, it may be more cost effective to refinance to a 15-year mortgage, where your rate is one or two percentage points lower than a 30-year mortgage, Babb says.

“Diverting additional money towards your mortgage isn’t always the best investment in terms of what you can do the money elsewhere, but it’s good for people who want to retire early or this is their only debt,” he says.

– Written by Scott Gamm for MainStreet. Gamm is author of MORE MONEY, PLEASE

5 Things to Know About Home Equity Loans

refinance Refinance“Very often we are asked by homeowners if the time is right to Refinance their home.  Our answer is usually “It depends”.  How long to you plan to live in your current home?  What is your current Interest rate?  What are you trying to achieve by refinancing?  For some good information on today’s options on refinancing, please read the following article.”

 

DC Metro Realty Team – Denise Buck & Ed Johnson

Home equity lending is making something of a comeback. After being nearly shut down with the collapse of housing prices during the Great Recession, lenders are once again opening up their wallets and allowing people to borrow against the value of their homes.

Newly originated home equity loans and lines of credit rose by nearly a third during the first nine months of 2013, compared to the same period 12 months earlier, according to industry publication Inside Mortgage Finance.

While still only a fraction of its pre-crash levels — total 2013 home equity lending is estimated at $60 billion, compared to a peak of $430 billion in 2006 — rising home values in recent years are putting more equity in borrowers’ hands, while a gradually stabilizing economy is giving lenders more confidence to lend.

So the fact that they’re making a comeback is one thing to know about home equity loans. If you’re thinking about pursuing one, here are four other things you’ll need to know.

1. You’ll Need Equity

Equity, of course, is the share of your home that you actually own, versus that which you still owe to the bank. So if your home is valued at $250,000 and you still owe $200,000 on your mortgage, you have $50,000 in equity, or 20%.

That’s more commonly described in terms of a loan-to-value ratio – that is, the remaining balance on your loan compared to the value of the property – which in this case would be 80% ($200,000 being 80% of $250,000).

Generally speaking, lenders are going to want you to have at least an 80% loan-to-value ratio remaining after the home equity loan. That means you’ll need to own more than 20% of your home before you can even qualify. So if you have a $250,000 home, you’d need at least 30% equity – a loan balance of no more than $175,000 – in order to qualify for a $25,000 home equity loan or line of credit.

2. One of Two Types

There are two main types of home equity loans. The first is the standard home equity loan, where you borrow a single lump sum. The second is a home equity line of credit, or HELOC, where the lender authorizes you to borrow smaller sums as needed, up to a certain fixed amount. The type you choose depends on why you need the money.

If you’re looking at a single, major expense – such as replacing the roof on your home – a standard home equity loan is usually the best way to go. You can get these as either a fixed- or adjustable-rate loan, to be repaid over a predetermined length of time, up to 30 years. You’ll need to pay closing costs, though they’re much less than you would see on a full mortgage.

If you need to access various amounts of money over time – such as if you’re doing a home improvement project over a few months, for example, or to support a small business you’re starting – a home equity line of credit may be more suitable to your needs.

With a HELOC, you’re given a predetermined limit you’re allowed to borrow against as you wish. You only pay interest on what you actually borrow and you don’t have to begin repaying the loan until a certain period of time, known as the draw (typically 10 years), has elapsed.  There are usually no closing costs, though you may have to pay an annual fee. The interest rates are adjustable, meaning you don’t get the predictability offered by a fixed-rate standard home equity loan, though you can often convert a HELOC to a fixed rate once the draw period ends.

3. Think Big

There’s one thing about home equity loans – they’re not particularly useful for borrowing small amounts of money. Lenders typically don’t want to be bothered with making small loans – $10,000 is about the smallest you can get. Bank of America, for example, has a minimum of $25,000 on its home equity loans, while Wells Fargo won’t go below $20,000. Discover offers home equity loans in the range of $25,000 to $100,000.

If you don’t need quite that much, you can opt for a HELOC and only borrow what you need. Remember though, that you still may be charged an annual fee for the duration of the draw period.

Even if you plan to use only a fraction of your line of credit, say $5,000 out of a $20,000 HELOC, you’ll still need to have enough equity in your home to cover the full amount. So if the smallest home equity loan or line of credit your lender will allow is $20,000, you’ll need to have at least $20,000 in home equity over and above the 20% equity you’ll need left after taking out the loan.

4. It’s Still a Mortgage

It’s easy to forget sometimes, but a home equity loan or line of credit is a type of mortgage, just like the primary home loan you used to fund the purchase of your home. And as a mortgage, it offers certain advantages and disadvantages.

One of the advantages is that the interest you pay is usually tax-deductible for those who itemize deductions, the same as regular mortgage interest. Federal tax law allows you to deduct mortgage interest on up to $100,000 in home equity debt ($50,000 apiece for married persons filing separately). There are certain limitations though, so check with a tax adviser to determine your own eligibility.

Second, because it is a mortgage secured by your home, the rates tend to be lower than you’d pay on credit cards or other unsecured loans. They do tend to be somewhat higher than what you’d currently pay for a full mortgage, however.

On the downside, because the debt is secured by your home, your property is at risk if you fail to make the payments. You can be foreclosed on and lose your home if you’re delinquent on a home equity loan, the same as on your primary mortgage. The difference is that in a foreclosure, the primary mortgage lender is paid off first, and then the home equity lender is paid off out of whatever is left.

So you want to treat a home equity loan with the same seriousness you would a regular mortgage.  That’s the most important thing of all to know.

This article was originally published on Yahoo! Finance

Find a Better Financial Return

“Understanding your investment options is critical to your future financial success.  It pays to know what the multiple options are as well as the Pros and Cons of each.”

DC Metro Realty Team – Denise Buck & Ed Johnson

A certificate of deposit will generate a cash flow based on the interest rate that it pays which is the only way it generates a return for the investor.

An investment in a stock that doesn’t pay dividends, would need to be worth more than you paid for it to earn a profit. On the other hand, a stock that paid dividends could make the investor a profit even if it sold for the same price that he paid for it.

Investors can profit four different ways with an investment in rental real estate.

1. Cash flows that result from having a surplus after collecting the rent and paying the expenses.

2. Equity build-up results from a portion of each monthly payment reducing the unpaid balance.

3. Tax benefits can result from the depreciation allowed on the property and the preferential long-term capital gains tax rate.

4. Appreciation benefits the investor when the value of the property increases.

The most conservative investors in real estate make decisions to purchase a rental property based on its ability to generate a cash flow and reduce the mortgage through normal amortization. If the property can offer an acceptable rate of return compared to other available investments, the tax benefits and possible appreciation become an added bonus.

With increased rents and low mortgage rates for investors, rental property can offer significantly higher returns than many of the available alternatives. Contact me for more information- Denise.Buck@DCMetroRealtyTeam.com; you may be amazed about what is available in the market.

Personal Finance Review

“It’s amazing how things can change over time.  Even short periods of time.  Knowing where your money is going is a critical step in financial planning.  This article explains how to periodically review your expenses to make sure you are not spending more than you should.”

DC Metro Realty Team – Denise Buck & Ed Johnson 

You’ll need to earn $2.00 for every $1.00 you want to spend assuming you pay 50% of your earnings on income tax, social security and Medicare. On the other hand, you get to keep 100% of every dollar you save on your personal expenses because the taxes have already been paid.

Periodically, review your expenditures with the diligence of an exuberant IRS agent on commission. It’s an exercise that most people don’t feel they have time to do but the rewards make it entirely worthwhile.

  • Get comparative quotes on insurance – car, home, other
  • Review and compare utility providers
  • Review plans on cell phones
  • Review plans on cable TV, satellite for unused channels and packages or receivers
  • Review available discounts on property taxes
  • Consider refinancing home – lower rate, shorter term or cash out to payoff higher rate loans
  • Consider refinancing cars
  • Call credit card companies to ask for a lower rate
  • Review all of the automatic charges on your credit cards – consider no-fee cards
  • Search for late fees that are regularly being paid and eliminate them.
  • Review all bank charges for accounts and debit cards; determine if they can be reduced or eliminated.

If you don’t want to review your credit card accounts, consider reporting the cards stolen so that new numbers will be issued. You can notify the companies that need your number. Companies who might have your number won’t be able to automatically renew services that you may no longer be using. You can be assured that they’ll contact you when the old number doesn’t go through and you can re-evaluate the decision at that time.