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Lisa Hronek Mortgage & Loans
Reverse Mortgages…Are These Good Lending Tools??
What is a reverse mortgage? A reverse mortgage is a unique loan that enables homeowners to convert a portion of the equity in their homes into tax-free cash without having to sell the home, give up title, or take on a new monthly mortgage payment. If you are a homeowner age 62 or older and have paid off your mortgage or have only a small mortgage balance remaining, and are currently living in the home, you are eligible to participate in Federal Housing Administration’s (FHA’s) reverse mortgage program. The FHA is a branch of the U.S. Department of Housing and Urban Development, (HUD). The only reverse mortgage insured by the U.S. Federal Government is called a Home Equity Conversion Mortgage (HECM), and is available through an FHA approved lender.
Since 1990, there have been nearly 700,000 HECM loans created, (Source: HUD). As you would expect the three highest annual totals were between 2007-2009. That time period, of course, was when the U.S. economy experienced its worst economic contraction since the early 1980’s with unemployment reaching double digits. Individuals were distressed, in need of relief and reverse mortgages may have helped a lot of seniors in dire times. In my eyes, it’s an excellent financial tool to help seniors stay in their home, and increase their standard of living. It’s a shame not everyone is so complementary of reverse mortgages. Like anything else, it has its fair share of both advocates and critics…
The biggest negative of reverse mortgages is high closing costs. The senior must pay origination fees that are about double what they are for conventional mortgages and mortgage insurance. And the interest rates are adjustable, (which means rates can be raised at periodic intervals according to the prevailing interest rates in the market). Another potential negative to think about is, what about seniors who depend on Medicaid or other state or federal programs? It’s important to consider if reverse mortgage payments will affect their eligibility…
How do reverse mortgages come to an end? Reverse mortgages come to an end in one of three ways. You can elect to pay it back; you can sell your home and pay it off; or when you die, the home is sold and the loan is paid off. Unlike conventional loans, you don’t owe anything until you die or sell the home. As with conventional loans there are fees and interest expenses which must be paid and which typically are rolled into the amount you receive.
Now, here is the $64 question: How do the adult children of these seniors feel about reverse mortgages? Some like it and feel it’s helped their parents live a fuller life in their retirement years. Of course, some don’t and feel like the equity in their parents’ home is their money. I jumped on a number of chats & forums in order to obtain some actual Voice of the Customer (VOC) on this very subject. And here are some of the things that were said:
- “I don’t like the idea, individually. There are other ways to get additional income minus giving the family house to a bank.”
- “I think it’s a good concept and families just thinking about them should pay a lawyer a few hundred bucks to just review the language.”
- “I would be vastly upset if my parents did this. They aren’t poor by any means, and I don’t want them to be spending up “my” inheritance on themselves.”
- “My parents reverse mortgage gave them the ability to continue living independently in their own home, which made my husband and I very pleased.”
My parents worked their entire lives to ensure that we had clothes on our back, food on our plates and a roof over our heads. Personally, I think that if my mom & step-dad want to use a reverse mortgage to help them out instead of leaving their home to us kids, I’m all for it and will even help with the set-up and closing costs. They deserve to use their money/funds however they choose. They’ve definitely earned the right!
Thanks & please let me know your thoughts or comments…
Chicago Mortgage Lenders Exchanging Loan Papers for Walking Papers
Just when you thought the light at the end of the economic tunnel was beginning to shine, The Chicago Tribune identified another symptom of the mortgage bubble and a weakened economy: bank walkaways.
Personally, I’ll admit that I had never heard that term before. It’s easy enough to discern the meaning, but just in case you haven’t had your coffee yet: a bank walkaway occurs when a mortgage servicer abandons the foreclosure process. This usually happens when the bank determines they will not recoup the cost of foreclosure, in addition to maintaining and marketing the property after the process. They can literally, walk away. While this may help companies keep bad debt off the books, it’s creating another problem – a surplus of abandoned properties.
Abandoned properties are a sign that our economic troubles are still alive and kicking. And it may get worse before it gets better. Rick Sharga with RealityTrac Inc predicts that 2011 will be a peak year for foreclosures, estimating over a million homes will be repossessed by lenders. Readers, my beloved home state of Illinois is ninth on the top ten list of states with the highest foreclosure rates. Considering that Chicago is the most densely populated city in the state – my neighbors are in trouble.
When banks walk away, it’s not always clear who is responsible for the upkeep and security of a vacant property. Sometimes, even the city needs to step in and demolish homes if they’ve fallen into complete disrepair. Then it becomes the taxpayer’s responsibility.
And yet, it’s not all doom and gloom. The forecast is still cloudy with a chance of foreclosure, but some lenders, Wells Fargo and Bank of America in particular, are working with the city on how to best to deal with abandoned properties. It’s in everyone’s best interest to keep current on their mortgage, but when that just can’t happen, banks shouldn’t be abandoning the neighborhoods either.
Readers, would you be more likely to procure a mortgage with a lender with a demonstrated commitment to the city and neighborhood in which you live?
ARMs Are Making a Comeback
A recent article in the Mortgage & Loan sector on Comperemedia’s website found that jumbo mortgage lending is making a comeback. I recently found another article on CNNMoney.com reporting on the comeback of adjustable rate mortgages (ARMs). Aren’t these the lending products that caused our economy to tank? In fact, according to CNNMoney, 70% of all mortgages issued during the so called real estate “bubble” were ARMs. By 2009, after that bubble burst, ARMs dropped to only 3% of the market. Now, ARMs make up closer to 5% of the market and Freddie Mac is predicting as high as 10% by December. Going through the home-buying process right now myself, I can honestly say I was slightly afraid of these unpredictable ARMs. But, I was curious nonetheless, and I found some legitimate reasons why these scary sounding products are slowly making a comeback.
The general fear about a mortgage rate that can fluctuate is the unpredictability. One of the biggest causes of the credit crisis was the sudden increase in rates which resulted in monthly mortgage payments that homeowners could no longer afford, so I understand the lingering doubts that current buyers may have. With a little bit of research, I’m starting to understand why these products can actually be a money-saving option. Currently, a 30-year fixed rate mortgage is hovering around 5%, which will stay constant for the life of the loan, resulting in consistent and predictable monthly payments. An ARM, on the other hand, can offer a lower rate for a limited period of time, after which it can vary according to the market rate. The most common ARM loan on the market today is the 5/1 ARM, which means that the initial interest rate applies for the first five years of the loan, after which the interest will adjust annually depending on the market. Currently, ARM loans are being offered at an astoundingly low rate of 3.5%. According to CCNMoney, “on a $200,000 mortgage, the monthly ARM payment at 3.5% would be $898 compared with $1,074 for a 30-year, fixed rate loan at 5%.” Clearly this can be a bargain, but it totally depends on how long you plan to own the house. The longer you hold on to an ARM loan, the more “unpredictable” years you will have. For buyers who think they only want to own for 5-7 years, an ARM can save a lot of money over that time; however, if buyers intend to stay longer than 7 years, it’s probably safer to go with a more consistent and predictable, fixed-rate loan.
I don’t think ARMs will ever reach the volumes they did back in 2007, but I do think that they are worthwhile products for borrowers who do their research and use them wisely, and I can see why they are becoming popular once again.
Rapid refund loans from H&R Block ground to a halt
Unfortunately, I regret to bring (some of you) bad tidings for the New Year. If you’ve ever taken advantage of a rapid refund loan from H&R Block, the Grinch (or, the Office of Comptroller of the Currency [OCC]) has stepped in and ordered that refund anticipation loans (or RALs), backed by HSBC, be taken off the menu at the tax preparer.
Personally, I love tax time. But I’m not an accountant. I fill out my forms early so there’s a quicker turnaround for my refund. While I wait for that direct deposit, I’ll spend hours thinking about how to use it. Will I be responsible and pay bills or maybe put some extra money into my nest egg? Or, will I take a trip, or go shopping? I usually find some balance between treating myself to something pretty and putting some away for a rainy day. I’ve become accustomed to seeing the Rapid Refund commercials from H&R Block on TV, but often wondered is there really a need to be issued a refund, in the form of a loan, on the same day?
Typically, I am all in favor of instant gratification. However, this just seems a bit too instant. Why pay a ton of fees when you don’t have to? Last year, I used a free online service to do my taxes. My refund was issued in 72 hours. As in, 72 hours later, it was deposited into my checking account. It was a beautiful thing. And, I didn’t have to pay a ton of fees. In 2009, consumers who took advantage of RALs paid $738 million in fees. That’s a LOT of money.
So, the OCC has ordered H&R Block to stop issuing these loans in conjunction with HSBC Bank. However, H&R Block can continue to issue refund anticipation checks (funded through its own much smaller bank). Also, the OCC hasn’t prevented other tax preparers from issuing these refund anticipation loans. So why one, but not the others? I can understand trying to prevent a seemingly predatory lending tactic from taking advantage of the consumer – but shouldn’t that school of thought be applied to all tax preparers who offer RALs? As tax season gears up, only time and TV commercials will tell what changes are in store for this space.