Baltimore Refinance Guide

By ANNE TERGESEN

A reverse mortgage has long been considered a loan of last resort because of its high fees. Now, a new type of reverse mortgage is attracting the attention of more-affluent borrowers eager to extract cash from their homes. But older homeowners—and the adult children who advise them—need to be aware of the new trade-offs.

Reverse mortgages allow people age 62 or older to convert their home equity into cash. The homeowner can elect to receive a lump sum, a line of credit or monthly payments. The loan is due, with interest, when the borrower dies, moves, sells the house or fails to pay property taxes or homeowner’s insurance. (With a conventional loan, such as a home-equity line of credit, a borrower can tap into a home’s equity but must make monthly repayments.)

Alex Nabaum

One of the biggest criticisms of reverse mortgages is their upfront fees, which can total as much as 5% of a home’s value. Last fall, the Federal Housing Administration, which insures virtually all reverse mortgages, introduced the “Saver,” which reduces these fees by about 40%. Lenders such as MetLife Bank, Bank of America and Wells Fargo have since begun marketing them.

To cover its potential losses on a reverse mortgage—which can occur when a home isn’t worth enough to repay the loan—the FHA traditionally pockets as much as 2% of the value of the property. This “mortgage insurance premium” is typically the largest upfront charge in a regular reverse mortgage.

More

AARP’s Reverse Mortgage Calculator

With the Saver, the FHA has cut this insurance premium to 0.01%. That is because homeowners who apply for a Saver are typically limited to borrowing about 80% to 90% of what they could get with a regular reverse mortgage, says Peter Bell, president of the National Reverse Mortgage Lenders Association. On a $500,000 home, for example, a 75-year-old New York resident would receive about $262,000 with a Saver, versus $331,500 with a traditional reverse mortgage, according to MetLife Bank.

The lower lending limits mean the FHA is less likely to incur a loss—allowing for a smaller insurance premium.

Waiving Fees

At the same time, many lenders are reducing or waiving other fees on all reverse mortgages, including servicing fees and the upfront “origination fee,” which is generally 2% of the first $200,000 of a home’s value, plus 1% of the balance up to a maximum of $6,000. (Because of projected losses on reverse mortgages issued in its current fiscal year, though, the FHA recently raised a separate mortgage-insurance premium it levies to 1.25% from 0.5%.)

One caveat: While fee reductions can be especially attractive these days on fixed-rate reverse mortgages, these generally require borrowers to take out a lump sum and pay interest on the full amount over the loan’s life.

Whether a Saver makes sense for you or your parents depends on how much money you need and the amount of time your loan will remain outstanding, among other factors.

Typically, reverse mortgages are used for long-term needs, such as medical expenses. But the Saver “increases the ways in which older homeowners might use a reverse mortgage,” says Barbara Stucki, vice president for home-equity initiatives at the nonprofit National Council on Aging.

For instance, a borrower paying high upfront fees “may need to stay in the home a long time before the benefits of a reverse mortgage exceed the costs,” Ms. Stucki says. But with the Saver, that calculation could be different.

Matthew Gregory, an Atlanta-based reverse-mortgage consultant at Generation Mortgage, says a 68-year-old client with a $635,000 home near Dallas recently opted for a $300,000 Saver to avoid tapping his savings for a few years. “He thinks his investments are likely to appreciate by more than the housing market,” Mr. Gregory says.

Lower ‘Effective’ Rates

The client, a retired management consultant, could do better with a Saver than a home-equity line of credit, Mr. Gregory says. The Saver’s 4.01% “effective” rate—consisting of a 2.76% variable interest rate, plus a 1.25% annual fee—”compares favorably” with the 4.78% variable rate the client would pay for a home-equity line of credit, he says.

Although closing costs on the Saver are higher, the client plans to hold the reverse mortgage long enough to come out ahead thanks to the lower interest payments, Mr. Gregory says. The client also didn’t want to worry about his wife being saddled with monthly loan payments if something were to happen to him.

So far, lenders say, Saver loans appear to be attracting a more-affluent borrower who likes the idea of a smaller reverse mortgage and lower fees. At MetLife Bank, for example, customers with a Saver have an average home value of about $350,000, versus $250,000 for those with regular reverse mortgages.

Still, there are downsides to Saver loans. The loan amount is smaller than that of a traditional reverse mortgage. And some lenders charge slightly higher interest rates on Savers, in part because of uncertainty over investors’ interest in buying them. MetLife Bank, for example, charges 5.25% for a fixed-rate Saver, versus 5% for a standard reverse mortgage.

While “it may be appropriate to pay a higher interest rate to get a lower upfront fee,” Ms. Stucki says, such a move could backfire if a borrower plans to keep the loan for a long time.

Before talking to lenders, homeowners should consult a reverse-mortgage counselor approved by the U.S. Department of Housing and Urban Development, which oversees the federally insured reverse mortgages that account for some 99% of the market. For more information, call 800-569-4287 or go to www.hud.gov.

—Email: familyvalue@wsj.com via online.wsj.com

The appeal of buying before selling is that you know where you’ll be living next and you may avoid having to move to an interim rental, which is frequently the case if you sell your home before buying a new one.

An often insurmountable hurdle to buying your next home before selling the current one is today’s rigorous mortgage qualification requirements. Most homeowners can’t qualify.

However, if you’re an all-cash buyer and don’t need to jump through hoops for a mortgage lender, buying first makes sense, particularly if you have no intention of selling your current home. Some buyers in this position keep the current home as an investment and rent it out.

It is a good time for some homeowners to make a trade-up move, if they can manage it financially and are buying for the long run. Interest rates and home prices are low. Due to economic uncertainty, some buyers are taking a wait-and-see attitude. This can mean less competition in desirable areas where it’s often hard to buy without a lot of competition.

To get approved for a mortgage on the new home, you will need to qualify to carry two mortgage payments as well as pay property taxes and homeowners insurance — called PITI (principal, interest, taxes and insurance) — for both properties. The ratio of all your overall debt to PITI on homes you own, credit cards, car payments, etc., can’t exceed 45 percent of your gross income. This is referred to as your back-end ratio. You must have excellent credit.

Some lenders — for instance, Freddie Mac lenders loan up to $729,750 — will give you credit from income earned on your current home if you rent it to a tenant. You must have at least 30 percent equity in your current home based on an appraisal that will include a rent survey. You’ll need to provide the lender with a copy of a signed lease agreement and a copy of a cleared deposit check or check for the first month’s rent payment. If you meet these criteria, you can use 75 percent of the rental income to qualify for the mortgage on the new home.

HOUSE HUNTING TIP: Homeowners who have the wherewithal to qualify to buy before selling should consider if it’s prudent to own two homes rather than one. Let’s say your goal is to sell your current home and use the proceeds from the sale to pay down the mortgage balance on the new home. You won’t know how much you’ll net from that sale until it closes. If prices dip between the time you buy the new home and sell the current one, you could end up netting less than anticipated. Be conservative in assessing the market value of your current home.

Rents have declined and vacancies increased in recent years. The rental market appears to be stabilizing in some areas. However, if you decide to rent rather than sell your current home, you could be faced with unexpected vacancies if tenants lose their jobs. If the rental market is soft, you may have to lower the rent to attract a tenant. The income stream could drop below your carrying costs.

Many buyers who can qualify to buy before selling aren’t able to make a large down payment on the new home without tapping the equity in their current home. Some buyers will use an equity line of credit to access more cash for a down payment. If you’re trying to buy in a high-demand, low-inventory market where multiple offers are common, you may not be competitive with a 10 or 20 percent cash down payment.

THE CLOSING: Cash is king. Most sellers will go with a buyer with who is putting more than 30 percent down even if it means accepting a slightly lower price.

Dian Hymer, a real estate broker with more than 30 years’ experience, is a nationally syndicated real estate columnist and author of “House Hunting: The Take-Along Workbook for Home Buyers” and “Starting Out, The Complete Home Buyer’s Guide.”

via inman.com

In purchasing a residential property, the assistance of an expert mortgage broker and the proper lending institution can help you reach the best decision for your housing needs.  But to say that the process will not be any complicated is an overstatement.  In fact, even in the presence of a seasoned professional that can present to you the appropriate options and the lucrative financing alternatives, something can go wrong.  What you can do is to start from the basics and make sure that you have the right qualifications to make your undertaking smooth sailing and properly taken care of.

In this accord, you have to consider the basic qualities that can provide you with a better chance of getting approved by the financing company.

1.      Credit history.  Obtaining a residential mortgage facility involves collateral which means that the lender needs to have a fallback in case of nonpayment.  Because the sum of money involved in these transactions is higher compared to other facilities, the lender will delve deep into your credit history to make sure that you can afford the monthly payments and ensure that you can handle your finances well.  Because your credit history is an aspect that will surely be looked into by the financing companies, you have to keep it within the acceptable level in order that you will be considered properly.

2.      Capacity to pay.  Your source of income is also a determinant that will affect your transaction with a lending institution.  You need to provide a verifiable proof of income to these financing companies to determine that you will get the most advantageous deal when it comes to a residential mortgage facility.

3.      Collateral.  Because part of the standard practice in a home loan is the offering of valuable collateral, you have to identify that the property you will be choosing is within your payment capabilities.

Because there are also a variety of reasons why you are trying to avail a residential mortgage facility, you have to disclose a description as to where the proceeds will be allotted in the processing of your application. 

An extensive examination of the basic factors as well as the use of the amount to be borrowed can provide you with higher chances of approval from a financing company.