Does a reverse mortgage ever make sense?

You’ve probably seen the ads with celebrities praising the benefits of reverse mortgages for cash-strapped seniors.

A recent one features actor Henry Winkler explaining how older Americans can tap into the equity of their homes to help meet expenses.

Does a reverse mortgage ensure financially Happy Days?

The truthful answer is that it depends, based upon the individual homeowners circumstances, needs and financial resources, said Steven A. Bogan of Glendenning Mortgage Corp. in Haddonfield, New Jersey. For example, a person that needs to pay for home health care professionals but does not have the income to absorb this expense could be an ideal candidate for a reverse mortgage.

But the need for cash is just one reason to look into a reverse mortgage. There are associated short- and long-term costs that should be considered in determining whether a reverse mortgage is the best option for you and your heirs.

Reverse mortgages explained

A reverse mortgage allows homeowners to access the equity in their homes without selling. To qualify, applicants must meet various criteria, including:

  • Be at least 62 years old.
  • The home must be their primary residence.
  • The applicant must have paid off most, or all, of their traditional mortgage (although, if there’s an outstanding balance on the conventional mortgage, a reverse mortgage may be used to pay that off.)

The attractive distinction of a reverse mortgage is that it that does not need to be immediately repaid by the borrower. Instead, the loan can be repaid when the borrower leaves the home and the house is sold. Although similar to a home equity line of credit, a reverse mortgage doesnt require any monthly payments to the lender — a plus for older people often on a tight budget.

Applicants can receive mortgage proceeds in a lump sum or in regular installments.

Reverse mortgages are available through private firms. Federally insured reverse mortgages, known as home equity conversion mortgages, are available through a Federal Housing Administration-approved lender.

The FHA has taken quite a few steps in the past few years to make reverse mortgage loans safer for borrowers, such as protection for surviving spouses, said Aaron LaRue of the website Mortgage Monks. They’ve also added a financial assessment to the loan product, which means the loans are harder to qualify for.

Reverse mortgage pluses

Among the other advantages of reverse mortgages is homeowners remain in their homes while retaining exclusive title and ownership. Moreover, because payments are considered a type of loan and not income, the proceeds are not subject to tax. Nor does a reverse mortgage impact Social Security or Medicare benefits.

Another advantage is the flexibility with which reverse mortgage proceeds may be used. For some borrowers, funds can serve as a financing supplement that may be applied to everyday expenses for retirees who may not have saved enough to maintain a desired lifestyle.

In other instances, reverse mortgage funds can be targeted toward a specific, one-time use, such as an unplanned medical expenses.

The biggest pro with a reverse mortgage is it can reduce your housing expenses and provide long-term monthly income, said LaRue. This might be the best — or only — option for retirees facing a major income gap or an unexpected major expense, like a medical bill.

The downsides

Like any other financial product, reverse mortgages are not free of caveats. For reverse mortgages, the main drawback is the expense, which includes lender fees, mortgage insurance (for federally insured loans) and closing costs. Factors impacting overall cost also include the age of the borrower and appraised value of the home.

For instance, a 64-year-old with a home valued at $300,000 can expect to pay more than $8,000 and even more in loan origination fees and upfront costs for a reverse mortgage that accesses the greatest amount of funds available.

They can be very expensive, primarily due to mortgage insurance costs, said Casey Fleming, author of The Loan Guide: How to Get the Best Possible Mortgage.

The National Reverse Mortgage Lenders Association has a reverse mortgage calculator here.

In fact, fees associated with reverse mortgages are more expensive than they used to be, thanks in part to The Reverse Mortgage Stabilization Act of 2013 — which Congress passed to reduce the number of homeowners unwittingly overextending themselves and becoming unable to pay property tax, hazard insurance and other essential obligations. The higher fees help cover the costs the federal government was paying insurance claims to lenders whose borrowers defaulted.

The legislation cut back the amount of equity homeowners could tap into by roughly 15 percent — in most cases borrowers are eligible to withdraw up to 60 percent of their home’s equity.

Although a reverse mortgage doesnt require immediate repayment by the borrower, interest rates do apply when the loan is eventually paid back. In many cases, reverse mortgages are subject to variable interest rates. Since rates are currently in the 3 to 4 percent range, many feel the only place rates can trend is up, costing reverse mortgage holders more the longer they use and wait to repay the proceeds.

There are two major cons, and they’re intertwined. The first is the fact that you could end up with no home equity, which means you may not have anything to leave to your family once you’re gone, said LaRue. Also, if you choose to receive monthly distributions, you are signing up for an adjustable interest rate. The lifetime caps on these mortgages can be quite high.

Is it right for you?

The federal department of Housing and Urban Development has a website through which consumers can locate a reverse mortgage counselor.

As with all financial tools, it is not for everyone, and we always encourage our clients to consult their financial adviser, tax professional and their family, said reverse mortgage specialist Mehran Aram.

Among the questions to evaluate is how long the homeowners plan to stay in their home.

They should be pretty sure that they plan to stay in their home for the very long term, hopefully for the rest of their lives, said Portland, Oregon, financial planner Glen Clemans. Because the upfront costs are so much higher than a traditional mortgage, (reverse mortgages) generally dont make sense as a short-term solution.

Consider as well the impact of how much money you may be able to leave your heirs. The more you use from your home’s equity, the less that remains for your loved ones.

Jeff Wuorio lives in southern Maine, where he covers personal finance and entrepreneurship. He may be reached at jwuorio@yahoo.com, and his website is at jeffwuorio.com.

Mortgage consultant charged with defrauding clients

SALEM, Ore. (KOIN) — A Salem mortgage consultant is facing multiple charges after authorities say he defrauded several of his clients out of thousands of dollars.

Oscar Tejada-Sandoval, 48, has been charged with theft in the first degree, aggravated theft in the first degree, aggravated identity theft and forgery in the first degree.

Salem Police detectives working alongside the Oregon Division of Financial Regulation completed a joint investigation of the mortgage consultant following multiple victims’ complaints to banks and law enforcement.

Authorities say Tejada-Sandoval modified victims’ mortgages so that he received their payments and, instead of paying the mortgages as promised, kept the money for himself. He is also accused of using victims’ financial information to pay off his personal debts, as well as forging a check from a client to himself.

Eight individual victims and two financial institutions have been identified in the case so far, with losses in excess of $63,000. Two of the victims have since lost their homes to foreclosure since the theft occurred.

Victims have been identified from McMinnville, Beaverton, Woodburn, Eugene and Salem. Thus far, all of the victims identified are of Hispanic descent.

Investigators have expressed concern Tejada-Sandoval may have victimized others in the area. If you or someone you know may have had questionable business dealings with him, you’re asked to contact the Oregon State Division of Financial Regulations.

This Is the Last Time to Get a Low-Rate Mortgage—Again

The average rate on a 30-year fixed mortgage fell to 3.59% last week, according to Freddie Mac. Thats a new low for 2016 and the lowest rate for mortgages since February last year.

Such a low rate will no doubt encourage more homeowners to refinance, giving a boon to mortgage lenders facing an uncertain housing market. But there are several reasons to doubt an upcoming refinance boomlet could turn into a full-fledged boom.

These rates are low, but theyve been low for a while.

Early last year, rates unexpectedly fell sharply, hitting 3.59% on Feb. 5 before rising, according to Freddie. That led more than 1.2 million borrowers to refinance in the first half of the year, according to Black Knight Financial Services.

Could that happen again? Sure, but it seems unlikely. A rate of 3.59% seemed shockingly small the first time rates dipped so low after the crisis, but now borrowers might find them downright quaint. Consider: Between 2012 and the end of 2015, Freddie reported the average mortgage rate 209 times. In 40 of those reports, or about a fifth, rates were lower than they are now.

When rates fell this low in February 2015, the Federal Housing Administration had just cut the insurance fees it charges on low-down-payment loans by half a percentage point. That gave borrowers a bigger incentive to refinance, and without it, many fewer borrowers would have likely bothered. That kind of catalyst isnt there this time.

Mortgage rates dip to annual low: Will they stick?

When the Federal Reserve raised its interest rates late last year, most mortgage rate prognosticators saw it as a sure sign that home-loan rates would finally rise meaningfully. In fact, just the opposite has happened. The average rate on the popular 30-year fixed loan is now at its lowest level of the year and could potentially head lower into new record territory.

Its impossible to know how timing will play out, but I definitely see the ingredients in place for new all-time lows sometime soon, said Matthew Graham, chief operating officer of Mortgage News Daily. It actually concerns me how convinced I am that this will happen eventually.

A Brief Guide to Common Mortgage Types

One of the first questions you are bound to ask yourself when you want to buy a home is, Which mortgage is right for me?

Basically, purchase and refinance loans are divided into fixed-rate or adjustable-rate mortgages. Once you decide on either fixed or adjustable, you will also need to consider the loan term.

Heres a brief guide to the different mortgage types available in todays market.  

Fixed-rate mortgage
Long-term fixed-rate mortgages are the staple of the American mortgage market. With a fixed rate and a fixed monthly payment, these loans provide the most stable and predictable cost of homeownership. This makes fixed-rate mortgages popular for homebuyers (and refinancers), especially at times when interest rates are low.

The most common term for a fixed-rate mortgage is 30 years, but shorter terms of 20, 15, and even 10 years are also available. A shorter term means a higher monthly payment but much lower overall interest costs. Because a higher monthly payment limits the amount of mortgage a given income can support, most homebuyers decide to spread their monthly payments out over a 30-year term.

Some mortgage lenders will allow you to customize your mortgage term to be whatever length you want it to be by adjusting the monthly payments. You can also customize your loan term yourself with regular prepayments.

Adjustable-rate mortgage (ARM)
ARMs carry risks that fixed-rate loans do not, because your monthly payments can rise and fall. ARMs are useful for some borrowers — even first-time borrowers — but they require some additional understanding and diligence on the part of the consumer. There are knowable risks, and some can be managed with a little planning. To get a better understanding of adjustable-rate mortgages and how they work, read HSH.coms guide on adjustable-rate mortgages.

Traditional ARMs
Traditional ARMs trade long-term stability for regular changes in your interest rate and monthly payment. This can work to your advantage or disadvantage.

Traditional ARMs have interest rates that adjust every year, every three years, or every five years. You may hear these referred to as 1/1, 3/3, or 5/5 ARMs. These refer to how frequently the rate changes and how long the new rate remains. For example, initial interest rate in a 5/5 ARM is fixed for the first five years. After that, the interest rate resets to a new rate every five years until the loan reaches the end of its 30-year term.

Traditional ARMs are usually offered at a lower initial rate than fixed-rate mortgages and usually have repayment terms of 30 years. Depending upon where interest rates are, high or low, these products may offer you a chance to get a lower rate today, enjoy that for a few years and then get an even lower rate in the future. Of course, the reverse is true, and you could end up with a higher rate, making your mortgage less affordable in the future.

Note: Not all lenders offer these products. Traditional ARMs are more favorable to homebuyers when interest rates are fairly high, since they offer the chance at lower rates in the future.

Hybrid ARMs
Almost a best of both worlds product, Hybrid ARMs offer initial fixed interest rate periods of three, five, seven or 10 years; after that, they most frequently turn into a 1-year ARM, where the interest rate will change every year thereafter.

Like traditional ARMs, these are usually available at lower rates than fixed-rate mortgages and have total repayment terms of 30 years. Because they have a variety of fixed-rate periods, Hybrid ARMs offer borrowers a lower initial interest rate and a fixed-rate mortgage that fits their expected time frame.

That said, these products carry risks since a low fixed rate (for a few years) could come to an end in the middle of a higher-rate climate, and monthly payments can jump. Because of this, Hybrid ARMs are best for borrowers who are very certain about how long they plan on remaining in the home, or those who have the wherewithal to manage any payment increase in the future.

FHA
Although often discussed as though it is one, FHA isnt a mortgage. It stands for the Federal Housing Administration, a government entity which essentially runs an insurance pool supported by fees that FHA mortgage borrowers pay. This insurance pool virtually eliminates the risk of loss to a lender, so FHA-backed loans can be offered to riskier borrowers, especially those with lower credit scores and smaller down payments.

FHA backs both fixed- and adjustable-rate mortgage products. Popular among first-time homebuyers, the 30-year fixed-rate FHA-backed loan is available at rates even lower than more traditional conforming mortgages, even in cases where borrowers have weak credit.

While down payment requirements of as little as 3.5% make them especially attractive, borrowers must pay an upfront and annual premium to fund the insurance pool noted above.

To learn more about FHA mortgages, read Advantages of FHA mortgages in 2016.

VA
VA home loans are mortgages guaranteed by the US Department of Veterans Affairs (VA). These loans, issues by private lenders, are offered to eligible servicemembers and their families at lower rates and at more favorable terms.

To determine if you are eligible and to learn more about these mortgages, visit our VA home loans page.

Jumbo
Also not a kind of loan, a jumbo mortgage refers specifically to the size of the loan being borrowed. Fannie Mae and Freddie Mac have limits on the size of mortgages they can buy from lenders; in most areas this cap is $417,000 (up to $625,500 in certain high-cost markets). Jumbo mortgages come in fixed and adjustable (traditional and hybrid) varieties.

This article originally appeared on hsh.com.

Mortgage rates for Tuesday, April 12

Mortgage rates are mixed today. The average rate on 30-year fixed mortgages inched up, the average 5/1 adjustable-rate mortgage fell and the average 15-year fixed rate stayed the same.

But overall, those looking to purchase a home will find that its a great time to be in the market.

Tips to Save Money by Refinancing Your Mortgage

With mortgage rates hitting historic lows in recent years, refinancing has become a popular option for homeowners. The benefits of refinancing include lower monthly payments, locked-in low rates and extra cash available every month for purposes ranging from home repairs to paying down consumer debt.

The decision can be complicated for homeowners, so NerdWallet asked Forrest Baumhover — a financial advisor with Westchase Financial Planning in Tampa, Florida, and a member of NerdWallet’s Ask an Advisor network — about key factors homeowners should consider when deciding whether to refinance.

Besides lower monthly payments, what is another potential benefit of refinancing?

One advantage is potentially lowering your loan-to-equity ratio and not having to pay private mortgage insurance. If your down payment when you bought your home was less than 20% of the purchase price, chances are you had to buy PMI, the annual cost of which is generally 0.5% to 1% of the loan amount. For a $300,000 house, that could mean up to $3,000 per year.

After owning your home for a few years, building up equity and changing your loan-to-equity ratio, you may be able to refinance at a lower interest rate and without the PMI. Assuming a 1% PMI savings on a $300,000 home, you could apply that extra $250 per month to your mortgage payment and pay off your loan seven years early. If you took that same amount of money and invested it at 8% annually, you’d have more than $367,000 saved by the time you paid off your mortgage.

gt;gt; MORE: Should you refinance? Use this calculator to find out

What are some tips for people planning to refinance?

Make sure you have a plan for the savings you’ll see every month. Whether it’s investing, paying down your mortgage or something else, make sure the savings doesn’t get wasted on “stuff.”

If you do refinance, the company usually grants a grace period before the new mortgage payments begin. This grace period can be a month or more, so take advantage of that month’s mortgage payment you don’t have to make. Some good options include paying down a credit card or making a needed home repair you’ve been putting off.

gt;gt; MORE: See today’s mortgage rates

What are the potential disadvantages of refinancing?

The thing to watch out for is excessive closing costs, which are a risk every time you look to refinance a mortgage. It’s important to know how long you plan to stay in the home — if you plan to move within two years, for example, the fees might not warrant the savings from PMI or from lower monthly payments. Make sure to do the math and calculate how many months of mortgage savings you’d need to make it worthwhile.

Forrest Baumhover is a financial advisor with Westchase Financial Planning in Tampa, Florida.

Gundlach Recommends Mortgage Bonds Rather Than Corporate Debt

Jeffrey Gundlach,chief investment officer of DoubleLine Capital, said mortgage-backed securities are trading cheap relative to corporate bonds and a better bet because of the elevated risk of defaults in high-yield debt.

“This would be a good time to be selling corporate bonds and buying mortgage-related bonds,” Gundlach told investors during a webcast Tuesday.

Mortgage-bond funds have lagged behind other sectors of the debt market this year. Gundlach’s $58 billion DoubleLine Total Return Bond Fund, which had more than 80 percent of its assets in mortgage-related securities as of Feb. 29, has returned about 2 percent in 2016, compared with a 3.4 percent gain by the Barclays US Aggregate Bond Index, the main benchmark for the broader bond market.

Bank of America Merrill Lynch pulls business in-house from mortgage outsourcer

Bank of America Merrill Lynch is planning to pull a significant chunk of its mortgage business in-house from outsourced mortgage solutions provider PHH Corporation, PHH announced Monday.

The change in strategy comes after the bank renewed its contract with PHH for the business in question at the start of the year, HousingWire reported. The business affected includes the origination of new applications for certain mortgage loans for Merrill Lynch Home Loans. The transition of the business to the banks internal operations is effective April 25.

Merrill Lynchs total loan closing volume accounted for approximately 26 percent of PHHs overall volume in 2015. PHH estimated that on an annualized basis, the change could represent a reduction of approximately 20 percent of Merrill Lynchs 2015 loan closing dollar volume with the company or approximately 5 percent of PHHs total 2015 loan closing dollar volume.

Merrill Lynch also informed PHH that it intends to insource it subservicing portfolio no later than Dec. 31, which is the contract expiration date for that business. Merrill Lynchs subservicing accounted for approximately $40 billion in unpaid principal balance, or 32 percent of PHHs subservicing portfolio and 18 percent of its total servicing portfolio.

It was unclear what accommodations Merrill Lynch has made to internal operations or staffing levels to be able to manage the business that it is taking in house. A spokesperson for the bank could not be reached for comment.

Shares of PHH, based in Mount Laurel, New Jersey, plummeted Monday after the company withdrew its earnings guidance for the year as a result of the loss of business. Shares of PHH fell more than 17 percent in late afternoon trading to $10.28 Monday. The company had said in March that it was reviewing its strategy as a result of changing industry and regulatory dynamics impacting our business, Philadelphia Business Journal reported.

Separately, PHH announced that Morgan Stanley Private Bank, which represents 20 percent of PHHs 2015 loan closing dollar volume, has extended its origination services contract through Oct. 31, 2017.

For more:
– read the HousingWire article
– read the Philadelphia Business Journal article
– read the National Mortgage News article

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Mortgage Credit Access Reverses Course

Credit availability in the mortgage industry increased slightly in the fourth quarter, reversing a long-time downward trend over the last four quarters.

The Urban Institute s Housing Finance Policy Center’s latest credit availability index (HCAI) shows that mortgage credit availability rose to 5.6 in the fourth quarter of 2015, up from 4.9 in the previous quarter.

According to the Institute, the HCAI measures the percentage of home purchase loans that are likely to default, or go unpaid for more than 90 days past their due date.

A lower HCAI indicates that lenders are unwilling to tolerate defaults and are imposing tighter lending standards, making it harder to get a loan. the report said. A higher HCAI indicates that lenders are willing to tolerate defaults and are taking more risks, making it easier to get a loan.

According to the report, mortgage credit availability among Fannie Mae and Freddie Mac has been at the highest level over the past four quarters since its low in 2010 and reversing course in the second quarter of 2011. From the second quarter of 2011 to the fourth quarter of 2015, the total risk taken by the GSE channel increased 50 percent, from 1.4 percent to 2.1 percent.

Urban Institute stated that both the government channel (Federal Housing Administration, the Department of Veterans Affairs, and the Department of Agriculture Rural Development program) and portfolio and private-label securities channel remain close to or at the record low on the amount of default risk taken by the two markets.

Significant space remains to safely expand the credit box. If the current default risk was doubled across all channels, risk would still be well within the precrisis standard of 12.5 percent from 2001 to 2003 for the whole mortgage market, Urban Institute said.

Recent reports have shown a different picture of mortgage credit access among lenders. Fewer mortgage lenders are reporting that they are loosening credit standards, and many do not expect credit to become more accessible over the next few months.

The share of mortgage lenders reporting easing credit standards over the prior three months fell for the second straight quarter, according to Fannie Mae’s first quarter 2016 Mortgage Lender Sentiment Survey conducted in February. In addition, the survey also found that the share of lenders that expect credit standards to ease over the next three months decreased from last quarter for all mortgage types.

Fannie Mae reported that 13 percent of lenders surveyed noted that credit standards eased over the last three months in the first quarter of 2016, down from 17 percent in the previous quarter. Over the next three months, 13 percent of lenders said credit standards will ease, down from 18 percent last quarter. Five percent of lenders said that credit tightened over the last three months, up from 4 percent last quarter. Only 7 percent of lenders said credit will tighten over the next three months, the same as last quarter.

Doug Duncan, SVP and Chief Economist at Fannie Mae, explained, Lender expectations for easing over the next three months have also moderated. Many lenders also indicate a likely increase in the sales of mortgage servicing rights, possibly to compensate for these countervailing pressures on profits and to take advantage of current favorable pricing in the market.”