My Home, My Security Blanket
When I discuss retirement with mortgage clients the discussions either go like this….
“well social security won’t be there for me and I’m still recovering from the dot com bust and my financial planner is a complete moron and at the rate I’m saving, I’ll never retire”
or like this…
“I plan on retiring at 55-60 depending on what happens with my investments and my home’s value”
Your home’s equity is a solid foundation for retirement according to an article entitled Retiring on Your Home’s Equity
A recent study commissioned by Oakland, Calif.-based Bell Investment Advisors, found that seven out of 10 60-year-olds consider their home part of their retirement plan. Of that group, almost one in five — 24% to be exact — said their home’s equity represents half or more of their total savings.
Also included are the sources where current retirees will be drawing their retirement:
Wealth holdings of a typical household prior to retirement*:
Social security: 42%
Primary house: 21% of total wealth
Defined benefit plan: 16%
Defined-contribution plan: 8%
Financial assets: 7%
Business assets: 2%
Other nonfinancial assets: 4%* Households headed by individuals aged 55-64. Source: Survey of Consumer Finances 2004.
More importantly, the article continues to discuss two ways to tap your equity when you retire including downsizing into a smaller home and keeping the profits and a reverse mortgage where you get a mortgage that pays you.
This article brings to light the importance of mortgage planning as a key component in your wealth management. Your home is your security blanket since it can be the largest asset in your estate. Your mortgage allows you to manage this asset. Obviously I just scratched the surface of mortgage planning but if you need more information, contact me.
How can I save more for retirement?
If you are not currently contributing to any retirement funds, or you are not contributing the maximum amount to a retirement plan you may want to consider refinancing your home and using a Pay Option ARM to help save for retirement. A Pay Option ARM offers a minimum payment that can drastically lower your monthly mortgage payments. The money you save on your mortgage can be put towards your retirement planning. If your employer offers a match on a 401(k) and you are not maximizing your contribution that will always be a better investment, it is FREE money.
Reverse mortgages can be an option for retirees to generate monthly income.
Interest only loans and debt consolidation refinances will help free up money to help maximize your ability to invest money into retirement accounts also.
Seek out a financial planner. Let them know how much you would like to invest monthly; it can be as little as $25.00 per month. Over the course of time that small amount of money can turn into a big amount.
If you feel you can manage rental property, and can consistently maintain at least an equal income -vs.- your mortgages. Purchasing Rental property is an excellent way to build wealth for retirement.
Don’t forget that there are mutual funds out there that are triple tax free (from local, state and federal) taxes. Even with a slightly lower interest rate returns down the road are really great.
Negative Amortization
Occurs when your monthly mortgage payments submitted are not sufficient to pay all interest and principal due on the loan. The unpaid interest is added to the unpaid balance of the mortgage. It could be considered borrowing equity from yourself. The period of time the Neg-am is applicable is usually limited on each mortgage.
Neg-am or amortization »”>Negative amortization loan usually have a recast period to the loan conditions. Make sure that the recast period is 5 year or more. This will give you enough time to refinance if you are still in the loan. Contact a Mortgage Professional in regards to which lenders have a recast past 5 years.
When doing financing that has a potential for negative amortization make sure you fully understand and feel comfortable with what that means to your individual situation. Your Loan Officer can go over the risk and benefits of the program you choose.
A negative amortization loan is a rising balance loan. It differs from a fully amortized loan in that the payments made on a fully amortized loan are paying down a principal balance. A Neg-am loan does not decrease the principal balance, it adds to it. This loan can be very useful for cash flow oriented projects in that the monthly payment can be fairly low.
When used properly, mortgage loans with potential negative amortization characteristics can be beneficial to homebuyers who want to pay as little in monthly payments as possible in the first few years of the loan term.
What’s good about negative amortization is that your payment doesn’t have to increase just because the interest rate on your ARM went up. The lender can also price the loan more aggressively because a payment cap doesn’t mean that the lender can’t pass along an interest rate increase. What’s bad about negative amortization is that the payment will eventually reset to a level to allow the loan to amortize over its remaining life. The increase in the monthly payment needed to repay the larger loan over a shorter time span can be substantial. If rates have increased substantially, then refinancing may not be a viable option.
Negative amortization can occur with the Option Arms (1% or similar start rates) and reverse mortgages.
When mortgage payments do not cover the full amount of interest due, and the unpaid interest is added to the principal balance of the loan. Under standard amortization, the principal balance decreases with each payment.
A gradual increase in mortgage debt that occurs when the monthly payment is insufficient to cover the interest due, and the balance owed keeps increasing (at least in the first few years).
Some investors use Neg Am loans to increase their cash flow on a property. Usually they plan on selling or refinancing the property is just a few years when using this type of loan.
In most areas where housing prices at a minimum double over the course of 10 years, negative amortization may be less of a concern, and the additional cash in your pocket may be more than worthwhile for individuals who prefer to invest their money in asset classes other than real estate.
I want to thank you for reading the information above. If you would like to continue this conversation than please contact me so you and I can discuss your financial situation. Please read more valuable information and when you feel comfortable I would like you to contact me.
Negative amortization When a borrower’s monthly payment is too small to cover both the principal and interest of a loan. In this case, the unpaid interest is added to the outstanding balance of the loan. The danger of negative amortization is that it gradually increases the mortgage debt, and therefore the home buyer can end up owing more than the original amount of the loan.
Most ARMs have a limit on the amount of negative amortization allowed, usually 110 to 125 percent of the original loan amount. If the loan balance exceeds this amount, the borrower has to start paying off the excess.
Although no one likes the term “negative” a loan with negative amortization is not always a “negative” for the borrower. The essence of such a loan is that the lender allows the borrower to use a little bit of their equity each month to keep their payment low. The additional cash flow created can often keep the borrower from incurring more expensive debt (such as credit card debt) and in most cases that is a “positive.”
Reverse Mortgage
A form of mortgage in which the lender makes periodic payments to the borrower, using the borrowers equity in the home as security. For older owners who have a lot of equity in their home, this can be used as income. The loan does not need to be repaid until the borrower sells the property or moves into a retirement community.
When you sell your home or no longer use it for your primary residence, you or your estate must repay the lender for the cash received from the reverse mortgage, plus interest and service fees. Any remaining equity belongs to you or your heirs. It’s important to remember that you can never owe more than the home’s appraised value when it is sold. None of your other assets will be affected by your reverse mortgage loan.
Reverse mortgages are a great way for an elderly person or couple to supplement income, especially if they are only getting social security as retirement income.
Any principal and interest accrued over the life of the loan is due and payable in one lump sum when the last borrower in the home is no longer the primary resident. In most cases, the amount that is due can be paid either by the selling of the home (where the difference of the selling price and remaining debt is left with the heirs), or refinancing the reverse debt with a traditional mortgage.
This is a great income supplement for those who need it.
A reverse mortgage is an agreement allowing a homeowner to borrow against home equity and receive tax-free payments until the total principal and interest reaches the credit limit of equity.
In reference to the HECM (most popular reverse mortgage), the fees associated with this loan are as follows: 1) Maximum of 2% origination fee based on the lesser of FHA’s lending limit or the home’s appraised value; 2) Closing costs such as title, escrow, appraisal, etc; 3) 2% charged by HUD on the lesser of lending limit or home value for initial mortgage insurance premium; 4) Monthly servicing fee of between $25 and $30 that is set aside initially and added to the loan balance as the loan progresses.
Loan to Value calculations, Credit requirements (FICO scores), and Debt to Income calculations are not used in determining how much a borrower can access in equity. For the HECM program, the amount that can be borrowed is based on the lesser of home value or lending limit, age of youngest borrower in the home, and an interest rate.
A Reverse Mortgage is a financial tool which provides seniors 62 years of age and older with funds from the equity in their homes. Generally speaking, no payments are made on a reverse mortgage until the borrower moves or the property is sold. The final repayment obligation is designed to not exceed the proceeds from the sale of the home.
There are currently 3 reverse mortgage programs available. The most popular reverse mortgage program is the FHA insured Home Equity Conversion Mortgage (HECM). The second program is the Fannie Mae Home Keeper, and the third is a jumbo reverse mortgage (cash account) offered by Financial Freedom. With the exception of the Home Keeper, the HECM and the Cash Account can be structured in different ways (i.e. interest rate adjustment for HECM, point variation on the Cash Account).
Possible income source for those who are on social security or limited fixed income.
A Reverse Mortgage borrower cannot be forced out of his/her home. Nor will he ever owe more than the value of his house. Reverse Mortgages are “non-recourse” loans, meaning in the rare case of drastic declines in home prices, the homeowner can never be held liable beyond the value of the subject home.
A reverse mortgage allows homeowners that are 62 and older to unlock a portion of the equity in their home without having to make a monthly repayment. The amount that they can unlock will be determined by a combination of three things: 1)Youngest borrower’s age 2) Lesser of their home’s value or a lending limit (HECM and FNMA) 3) An interest rate.
There are three basic types of reverse mortgage are: single-purpose reverse mortgages, which are offered by some state and local government agencies and nonprofit organizations; federally-insured reverse mortgages, which are known as Home Equity Conversion Mortgages (HECMs), and are backed by the U. S. Department of Housing and Urban Development (HUD); and proprietary reverse mortgages, which are private loans that are backed by the companies that develop them.
Reverse mortgage loan advances are not taxable, and generally do not affect Social Security or Medicare benefits. You retain the title to your home and do not have to make monthly repayments. The loan must be repaid when the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence. In the HECM program, a borrower can live in a nursing home or other medical facility for up to 12 months before the loan becomes due and payable.
You can get your money in a lump sum or monthly payments.
There are no credit requirements. Only that you need to 62 years of age or older and have sufficient equity.
You maintain complete ownership of your home.
If you are a senior at least 62 years old who is “house rich, but cash poor”, a reverse mortgage may be a viable option to help get you the cash you need. Whether paid to you in lump sum or in installments, reverse mortgages require no payments from your side and are generally not taxable and generally don’t impact social security or Medicare benefits.
Because this loan must be the first lien on the home, any existing mortgage balance must be paid with the proceeds of the reverse mortgage. For instance, if the amount that can be borrowed from the reverse is $100,000 and the existing mortgage balance on the home is $50,000, the $50,000 will be paid with the amount available from the reverse ($100,000) and the remaining balance ($50,000) will be available to the homeowner. The homeowner can elect to convert the $50,000 into a monthly payment, place it in a line of credit, take any or all of the amount at closing, or any combination of the three.
The amount of cash that a borrower can receive is based on a formula of factors that include age of the youngest borrower, the interest rate, value of the home and the county where the home is located.
Types of Loan Programs
Editors Note: Due to the mortgage and credit crunch, many loan programs have been eliminated. If you’re in need of a Denver mortgage contact us to discuss your mortgage options.
There are a wide variety of loan programs available.
One of the most popular loan options in the market today is the Pay Option adjustable rate mortgage, which is often called a flex or borrower’s choice loan. Available in 30 and 40 year amortized varieties, many of our customers who value having cash in their pockets each month have taken advantage of this innovative financing program.
For example, you have fixed rate mortgages, adjustable rate mortgages, VA mortgages, FHA loans, Reverse Mortgages, Interest-Only loans, Option Arm loans, Stated-income loans, No Ratio loans, HELOC’s, 30 year loans due in 15 years, etc. The list goes on and on. You should ask your mortgage professional which loans apply to your situation, whether you qualify, and what will save you the most money.
Adjustable (or Variable) Rate Mortgage (ARM) is a mortgage in which the Note rate can change throughout the life of the loan. The interest rate of an ARM is calculated by adding a predetermined margin to an interest market index. Some of the more common indices chosen as the underlying index are the 1-year Treasury Bill, London Interbank Offered Rate, and the 11th District Cost of Funds. Because the underlying index constantly changes to reflect market conditions, any ARM that base the their interest rates on that index would move in tandem.
Interest only options can be used on many of the other types of programs. It can be used on the fixed rate or adjustable rate programs. With the interest only option the borrower is paying only the interest and not the principle. There is usually a small fee charged to the interest rate for adding this option.
NINA loans are loans that don’t require income and assets to be disclosed or verified.
A HELOC is a home equity line-of-credit.
The traditional fixed rate mortgage is the most common type of loan programs, where monthly principal and interest payments never change during the life of the loan.
With a 15 year fixed loan, you will pay off your principle faster than with a 30 year fixed loan, even if you were only to stay in the loan for a few years.
The option arm loan is a loan that provides four payment options each month:-minimum payment-interest only-30 year amortization-15 year amortization This loan has a variable interest rate. However, the minimum payment is very low – much lower than the interest payment. The unpaid interest for each month is added to the total loan amount. This is referred to as “negative amortization“, because the amount you owe on the house will go up in time, not down. This loan can be good for short terms, such as for investors who will soon sell the property. It is also good for people whose income may change from month-to-month, and they need some flexibility.
Who Can Benefit From an Payment Option ARM
Editors Note: Due to the mortgage and credit crunch, option arm mortgages are more difficult to get. If you’re in need of a Denver mortgage contact us to discuss your mortgage options.
Self-employed borrowers with inconsistent income Borrowers with inadequate or no retirement savings Borrowers who want cash reserves for emergencies Borrowers who need money to start or expand a business Borrowers who need mortgage payments to be as small as possible Borrowers who want to stop using high interest credit cards Borrowers seeking financial flexibility
The great thing about the Pay Option ARM is that it can benefit most people. Because of its flexibility, it can be catered to meet the needs and goals of most people. I personally like the Pay Option ARM because it gives me more cash flow on my rental property and I have more money to invest in other properties or investments.
However, it really needs to be conveyed that this loan is NOT meant for everyone. The Pay Option mortgage can have its down falls and if you are not the type of person who is very involved with their finances, you might want to consider a 3/1 or 5/1 Interest only ARM.
The pay option arm is a great alternative for those considering a Reverse Mortgage giving them a much lower payment option.
Pay Option ARMs are great for many borrowers. Another common situation is borrowers who own a rental property. The flexibility and minimum payments can be used to maximize cash flow from the property and or to off set additional expenses such as repairs.
Pay Option ARM is also referred to as a Pick a Payment loan. It gives the borrower the option to make one of four payment types every month, (1) minimum payment, (2) interest only payment, (3)payment based on 30 year amortizations, and (4) payment based on 15 year amortizations.
Why use a mortgage broker
Here are some reasons why you would use a mortgage broker:
There are many reasons that you should use a mortgage broker and many advantages to using a mortgage broker. One reason to use a mortgage broker is because a mortgage broker has access to all kinds of different home loan programs.
A mortgage broker’s job is to assess your situation and then shop your loan via 100 different lenders in order to find you the most beneficial loan for your situation. We have access to over 1200 different loan programs and are able to obtain wholesale rates which can save you $100,000 plus over the life of your loan.
Here’s something to keep in mind. As a mortgage broker, I’m completely independent. I’m not employed by or work for any bank or lending institution. I work for my clients. The bank is going to look out for its best interests, isn’t it nice to have someone working for you, the borrower, and looking out for your best interests?
Many mortgage brokers have expertise in certain types of loans, such a construction-to-permanent loans, poor credit loans, or reverse mortgages. If your situation has special obstacles a mortgage broker may be the best answer.
A mortgage broker is an individual or firm that acts as an independent agent for both the borrower and the lender of a mortgage loan. Mortgage brokers are the middle man between you and the lending institution, which can be a bank, trust company, credit union, mortgage corporation, finance company or even an individual private investor. A mortgage broker will analyze your financial situation to determine which lender is the best fit for your loan needs.
Mortgage brokers have the advantage of being able to access dozens of rates quickly for similar loan programs from different lenders. Although banks have similar programs, their rates can vary widely. Mortgage brokers, through experience and through searching rates, can find which lenders are offering the lowest rates at any given moment.
Mortgage brokers have more options than banks. For example. if you have poor credit and need a sub-prime loan, your bank may have access to one option. A mortgage broker would have access to dozens. Other situations where mortgage brokers would be able to provide you with more options than a bank include manufactured homes, rural properties, commercial properties, first time home buyers, and special credit situations, such as bankruptcies and foreclosures.
Working with a mortgage broker has many benefits. Just to name a few: we discuss and explain the programs that are available to you in your particular situation. We inform you in writing that you loan interest rate is locked and wont change. We explain all the documents in plain English so you understand what you are signing. We explain all the costs involved in closing the loan. We give you a time-line of the loan process. We provide you with a good faith estimate. We also coordinate the final closing of your loan.
Mortgage brokers have access to wholesale rates, where as your local bank only has access to the rates that they offer. This can save you money on your monthly payment, especially if you have a unique situation that your bank will not be able to handle.
Mortgage brokers are also familiar with the area in which they operate. Using someone local has big advantages. With so much mortgage information online, it’s hard to know who to choose. If something goes wrong along the way with your loan, it is easier to deal with if you have a loan officer you can meet with face to face rather than a website or 800 number.
A mortgage broker is also able to move your file to another lender should a better deal appear. Or if there is a problem with your file in underwriting your mortgage broker can switch lenders within minutes and ensure you meet your close date. Local banks cannot do this.
Product of the month: Reverse Mortgage
Until recently, seniors 62 years of age and older have not had the best choices when it came to getting cash from their homes. Traditional home loans only offered the option of either selling one’s house or borrowing against its equity.
With reverse mortgages coming on the scene, seniors now have some additional cash-flow alternatives. This type of loan allows mature borrowers to convert their home equity into tax-free income without leaving their current home or making mortgage payments – and they do not need an existing income to qualify.
How a Reverse Mortgage Works
Reverse mortgages are probably best understood when compared side-by-side with traditional home mortgages, otherwise known as “forward” mortgages. The following table shows the differences between the two:
| FORWARD MORTGAGE | REVERSE MORTGAGE |
| Uses income to pay debt | Uses home equity to get cash or credit |
| Monthly mortgage payments | No payments; debt is due when the borrower(s) pass away or relocate. |
| Falling debt, rising equity | Rising debt, falling equity |
Both loans incur debt against your home, and both affect equity, but they do so in different ways. Traditional home mortgages require making monthly payments to a lender. With a Reverse Mortgage, payments are made to you.
What a Reverse Mortgage Involves
Here are some important points to know when considering a reverse mortgage:
Eligibility: To qualify for a reverse mortgage, you must be at least 62 years of age. All owners who are on the title deed must meet this age requirement. You must also have paid off all, or most, of your home mortgage. Lastly, the home you reside in must remain your principal place of residence.
Mandatory Counsel: To receive a reverse mortgage, federal law requires that you first undergo counseling to understand how these mortgages work. This ensures you will make the right decision when it comes to choosing a plan. Also, the counseling service must be provided free of charge.
Tax-Free Income: One of the advantages of a reverse mortgage is that the money you receive will not be taxed. The amount you’ll obtain depends on several factors including the plan you select, the type of cash advances you choose, your age, and the value of your home. Typically, the older you are the larger the loan, as you will have more equity in the house.
Cost: The cost of a reverse mortgage varies considerably from one type to the next. However, you can typically use the money you receive to offset the loan fees. The costs will be added to the loan balance and must be repaid with interest once the loan terminates.
Repayment: Reverse mortgages do not require any payment as long as the borrower(s) remain in the home. Should the borrower(s) pass away, sell the home, or permanently relocate, then the loan would be due in full, along with interest and additional costs. If two borrowers are on the loan and one dies, the loan would not be due since one of them still occupies the home.
Home Equity Conversion Mortgage – The Federally Insured Loan
The most common type of reverse mortgage is the Home Equity Conversion Mortgage, otherwise known as a HECM mortgage. This is the only reverse mortgage program that’s federally insured and backed by the U. S. Department of Housing and Urban Development (HUD). This type of reverse mortgage is popular for a few reasons:
- Ability to choose your own interest rate. You can select one that changes annually or one that changes every month.
- You have several payment options. You may receive monthly loan advances for a fixed term or for as long as you live in the home. You may also choose to receive a line of credit or combine monthly loan advances with a line of credit.
- The loan can be used for any purpose. With a HECM, you don’t have to designate the loan to a specific use; you can apply the funds to anything you choose.
- Protection. This is one of the most attractive features of a HECM. This plan protects you by guaranteeing continued loan advances even if your lender defaults.
Sell or Stay?
The main reason people choose a reverse mortgage is to gain financial independence and maintain an adequate standard of living without leaving their current home. The best way to decide if a reverse mortgage is right for you is to compare it to the other option of selling your house. To do this, ask yourself these three questions:
- How much cash can I get by selling my home?
- How much will it cost to buy or rent a new place?
- Is it worth my moving now, or do I prefer to do something else with the money?
Perhaps you’ll confirm what you knew all along, where you now live is the best place to be.
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