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Mortgage Rates Will Drop Further In Coming Weeks

Mortgage interest rates are falling, but they’ll drop even more in the coming weeks, giving some 18 million homeowners an opportunity to save money by refinancing.

Key interest rates dropped sharply in the early days of the pandemic, but mortgages rates did not follow in pace. The spread between 30-year fixed-rate mortgages and the yield on 10-year treasury bonds usually runs between 1.5 and 2.0 percentage points. That spread rose, though, hitting a peak of 2.71 percentage points in April. Since then, mortgage rates have come down well below three percent (as of August 6, 2020), bringing the spread down to 2.33 percentage points. That’s good news for today’s borrowers, even though the spread remains above long-term norms.

To see how much further mortgage rates will drop, we need to understand why the spread rose so high. This is the crucial question, because the 10-year treasury yield is very likely to remain low in the near future. As of this writing it is just 0.55%.

Most mortgages except jumbos are originated by a bank or mortgage company, then sold to a federal agency, usually Fannie Mae or Freddie Mac. The agency guarantees repayment of the loans and bundles them into securities sold to institutional investors. In recent years the Federal Reserve has been buying many of these mortgage-backed securities.

The huge volume of refinances—up 84% from a year ago, according to a Mortgage Bankers Association report—was a bit much for the market to digest. Investors hesitated to buy all of the supply, causing interest rates on wholesale bundles of mortgages to rise.

Compounding this was a rise in retail spreads. The local bank or mortgage company that makes the loan will resell that loan to an agency, pocketing a spread. This is just like your neighborhood grocery store buying bread wholesale and selling at retail prices to consumers. When mortgages rates dropped, millions of savvy homeowners tried to refinance—all at once. The mortgage originators had trouble scaling up. Some were hesitant to hire new employees, and even those who hired had to train the new workers during the Covid-19 pandemic.

Mortgage originators take some risk. Although they will sell the mortgages, so a default down the road isn’t a big problem, there’s always a chance that something goes wrong between making the loan and reselling it. Originators may also find that mortgage rates have changed from when they made their commitment to the borrower. And the longer the mortgage process takes, the greater the risk. With huge increases in volume, processing times were sure to lengthen. Mortgage originators pushed up their spreads both to compensate for their higher risk and because they couldn’t handle all the volume coming at them.

Spreads have fallen in recent weeks, helping homebuyers as well as refinancing homeowners. Banks and mortgage companies have succeeded in gearing up their operations for higher volumes and are now willing to accept lower profit margins to fill their pipelines. They should be able to work through the backlog of would-be customers. But remember that as they bring mortgage rates down, more people will step up to refi. Black Knight recently reported, “As of July 23, with the 30-year rate at 3.01%, there were still 15.6M refinance candidates that met broad-based underwriting criteria, which included being current on their mortgage, having a credit score of 720 or higher, and having at least 20% equity in their homes. These refinance candidates could also reduce their 30-year interest rate by at least 0.75% through a refinance, with an average savings of $289 per month and an aggregate savings of more than $4.5B per month if each of those homeowners were to refinance their mortgage.”

They had estimated 18 million refi candidates earlier when mortgage rates were lower, so potential demand is very sensitive to interest rates. That means the decline in mortgage rates will be gradual. Every little decline in mortgage rates will bring more homeowners to refinance.

How far will they drop? The spread between 30-year fixed rate mortgages and 10-year treasuries is now 2.33, and it should come down to at least 2.00. However, treasury rates are pretty low and could easily rise again by 5 or 10 hundredths of a percent. The latest mortgage rate reported by Freddie Mac as of this writing is 2.88%. That could easily drop to 2.65%. A more significant drop is possible. The spread is often as low as 1.5 percentage points, which could pull the mortgage rate down close to 2.0%.

Someone is sure to ask just exactly when to refinance, or at what rate to pull the trigger. Wait for 2.65% or hold out for 2.05? There’s no sure answer. A good strategy is to get in the ballpark, do the deal, and not regret having missed the very best possible rate.

Jumbo mortgage rates have dropped a lot in the last month, probably thanks to better economic news. Most jumbos are held by banks because they are not guaranteed by Fannie Mae or Freddie Mac. The lender worries about credit risk: will the recession prevent the borrower from being able to make payments. Conventional mortgages are risk-free so long as they conform to agency guidelines, but that’s not the case for Jumbos. Look for jumbo rates to decline gradually as the economic outlook improves.

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Mortgage rates today, August 7, 2020, plus lock recommendations

Forecast plus what’s driving mortgage rates today

Average mortgage rates inched lower again yesterday. So they’re as close as it’s possible to be to the fresh all-time low set on Tuesday without actually matching it. FHA loans today start at 2.25% (3.226% APR) for a 30-year, fixed-rate mortgage.

It would be no surprise if these rates were to continue to inch up and down within a narrow range until politicians cobble together a coronavirus relief package — or until there’s some decisively good or bad news over COVID-19. But it’s just possible some other news story (China?) could gain traction and create some momentum. Stronger-than-expected job numbers this morning gave markets only a brief boost.

ProgramRateAPR*Change
Conventional 30 yr Fixed3.1883.188+0.44%
Conventional 15 yr Fixed3.0633.063+0.44%
Conventional 5 yr ARM53.514Unchanged
30 year fixed FHA2.253.226Unchanged
15 year fixed FHA2.253.191Unchanged
5 year ARM FHA2.753.346Unchanged
30 year fixed VA2.252.421Unchanged
15 year fixed VA2.252.571Unchanged
5 year ARM VA2.52.433-0.13%
Your rate might be different. Click here for a personalized rate quote. See our rate assumptions here.

• COVID-19 mortgage updates: Mortgage lenders are changing rates and rules due to COVID-19. To see the latest on how coronavirus could impact your home loan

Market data affecting (or not) today’s mortgage rates

Are mortgage rates again aligning more closely with the markets they traditionally follow? It’s certainly an inconsistent relationship, confused by behind-the-scenes interventions by the Federal Reserve. That is currently buying mortgage bonds and so invisibly influencing rates.

But, if you still want to take your cue from markets, things are looking OK for mortgage rates today. Why? This morning’s employment data were better than expected and pepped up investors, — but only briefly.

The numbers

Here’s the state of play this morning at about 9:50 a.m. (ET). The data, compared with 11 a.m. yesterday, were:

  • The yield on 10-year Treasurys edged up to 0.53% from 0.51%. (Bad for mortgage rates.) More than any other market, mortgage rates normally tend to follow these particular Treasury bond yields, though less so recently
  • Major stock indexes were modestly lower. (Good for mortgage rates.) When investors are buying shares they’re often selling bonds, which pushes prices of those down and increases yields and mortgage rates. The opposite happens when indexes are lower
  • Oil prices decreased to $41.45 a barrel from $42.26 (Good for mortgage rates* because energy prices play a large role in creating inflation and also point to future economic activity.)
  • Gold prices fell to $2,059 from $2,071 an ounce. (Bad for mortgage rates*.) In general, it’s better for rates when gold rises, and worse when gold falls. Gold tends to rise when investors worry about the economy. And worried investors tend to push rates lower.
  •  CNN Business Fear & Greed index edged lower to 71 from 73 out of a possible 100 points. (Good for mortgage rates.) “Greedy” investors push bond prices down (and interest rates up) as they leave the bond market and move into stocks, while “fearful” investors do the opposite. So lower readings are better than higher ones

A change of a few dollars on gold prices or a matter of cents on oil ones is a fraction of 1%. So we only count meaningful differences as good or bad for mortgage rates.

Rate lock advice

My recommendation reflects the success so far of the Fed’s actions in keeping rates uberlow. I personally suggest:

  • LOCK if closing in 7 days
  • LOCK if closing in 15 days
  • FLOAT if closing in 30 days
  • FLOAT if closing in 45 days
  • FLOAT if closing in 60 days

But it’s entirely your decision. And you might wish to lock anyway on days when rates are at or near all-time lows.

The Fed may end up pushing down rates even further over the coming weeks, though that’s far from certain. And, separately, continuing bad news about COVID-19 could have a similar effect through markets. (Read on for specialist economists’ forecasts.) But you can expect bad patches when they rise.

As importantly, the coronavirus has created massive uncertainty — and disruption that seems capable of defying in the short term all human efforts, including perhaps the Fed’s. So locking or floating is a gamble either way.

Important notes on today’s mortgage rates

Freddie Mac’s weekly rates
Don’t be surprised if Freddie’s Thursday rate reports and ours rarely coincide. To start with, the two are measuring different things: weekly and daily averages.

But also, Freddie tends to collect data on only Mondays and Tuesdays each week. And, by publication day, they’re often already out of date. So you can rely on Freddie’s accuracy over time, but not necessarily each day or week.

The rate you’ll actually get
Naturally, few buying or refinancing will actually qualify for the lowest rates you’ll see bandied around in some media and lender ads. Those are typically available only to people with stellar credit scores, big down payments and robust finances (“top-tier borrowers,” in industry jargon). And, even then, the state in which you’re buying can affect your rate.

Still, prior to locking, everyone buying or refinancing typically stands to lose when rates rise or gain when they fall.

When movements are very small, many lenders don’t bother changing their rate cards. Instead, you might find you have to pay a little more or less on closing in compensation.

The future
Overall, we still think it possible that the Federal Reserve’s going to drive rates even lower over time. And, last Wednesday, the organization confirmed that it planned to continue this policy for as long as proves necessary. At a news conference, Fed chair Jay Powell promised:

We are committed to using our full range of tools to support our economy in this challenging environment.
However, there was a lot going on here, even before the green shoots of economic recovery began to emerge. There’s even more now. And, as we’ve already seen, the Fed can only influence some of the forces that affect mortgage rates some of the time. So nothing is assured.

Read “For once, the Fed DOES affect mortgage rates. Here’s why” to explore the essential details of that organization’s current, temporary role in the mortgage market.

Higher rates to deter demand
We may soon see a repeat of a phenomenon that occurred earlier this year. That’s when lenders’ offices are so overwhelmed by demand for mortgages and refinances that they can’t cope.

In its latest figures, for week ending July 24, the Mortgage Bankers Association calculated, “The Refinance Index decreased 0.4 percent from the previous week and was 121 percent higher than the same week one year ago.” Processing more than double the applications seen in more normal times must be a huge challenge.

To try to deter some of the excess demand, lenders may artificially inflate the rates they offer. It’s the only way they can stop their people from drowning in paperwork.

And neither markets nor the Fed can influence how this part of the pricing mechanism affects mortgage rates.

What economists expect for mortgage rates

Mortgage rates forecasts for 2020

The only function of economic forecasting is to make astrology look respectable. — John Kenneth Galbraith, Harvard economist

Galbraith made a telling point about economists’ forecasts. But there’s nothing wrong with taking them into account, appropriately seasoned with a pinch of salt. After all, who else are we going to ask when making financial plans?

Fannie Mae, Freddie Mac and the MBA each has a team of economists dedicated to monitoring and forecasting what will happen to the economy, the housing sector and mortgage rates.

The numbers
And here are their latest forecasts for the average rate for a 30-year, fixed-rate mortgage during each quarter (Q1, Q2 …) in 2020. Fannie updated its forecasts on July 14 and the MBA refreshed its the following day. Freddie’s, which is now a quarterly report, was published in mid-June.

ForecasterQ1Q2Q3Q4
Fannie Mae3.5%3.2%3.0%3.0%
Freddie Mac3.5%3.4%3.3%3.3%
MBA3.5%3.2%3.2%3.3%

So none of the forecasters is expecting a quarterly average below the 3.0% mark this year. Of course, that doesn’t exclude daily or weekly averages below that level during any quarter. After all, quarterly averages can include some quite sharp differences between highs and lows.

Both Fannie and the MBA were a bit more optimistic about rates in their July (monthly) forecasts. And that’s leaving Freddie’s June (quarterly) one looking stale.

What should you conclude from all this? That nobody’s sure about much but that wild optimism about the direction of mortgage rates might be misplaced.

Further ahead
The gap between forecasts is real and widens the further ahead forecasters look. So Fannie’s now expecting that rate to average 2.9% through the first half of next year and then inch down to 2.8% for the second half.

Meanwhile, Freddie’s anticipating 3.2% throughout that year. And the MBA thinks it will be back up to 3.4% for the first half of 2021 and 3.5% for the second. Indeed, the MBA reckons it will average 3.7% during 2022. You pays yer money …

Still, all these forecasts show significantly lower rates this year and next than in 2019, when that particular one averaged 3.94%, according to Freddie Mac’s archives.

And never forget that last year had the fourth-lowest mortgage rates since records began. Better yet, this year may well deliver an all-time annual low — barring shocking news. Of course, shocking news is a low bar in 2020.

Mortgages tougher to get

The mortgage market is currently very messy. And some lenders are offering appreciably lower rates than others. When you’re borrowing big sums, such differences can add up to several thousands of dollars over a few years — more on larger loans and over longer periods.

Worse, many have been putting restrictions on their loans. So you might have found it harder to find a cash-out refinance, a loan for an investment property, a jumbo loan — or any mortgage at all if your credit score is damaged.

All this makes it even more important than usual that you shop widely for your mortgage and compare quotes from multiple lenders.

Economic worries

Mortgage rates traditionally improve (move lower) the worse the economic outlook. So where the economy is now and where it might go are relevant to rate watchers.

The Fed’s thoughts
But many were sobered by the Federal Reserve’s worrying forecasts for economic growth and employment on June 10. And those concerns were reinforced on July 1 when the minutes of the last meeting of its policy committee (the Federal Open Market Committee or FOMC) were published. Those showed continuing concerns, including expectations of:

Rising business failures
Depressed consumer spending well into 2021
The real possibility of a double-dip downturn, which could undermine a recovery in employment
Last Wednesday, following its July meeting of the FOMC, the Fed stood behind its cautious forecasts. And it noted in a statement, “The path of the economy will depend significantly on the course of the virus.” And Fed chair Jay Powell reinforced that message at his follow-up news conference that day.

It’s almost as if he’s worried that too many investors aren’t taking the pandemic’s dangers and unpredictability seriously enough.

Politics a growing issue
Last Friday, a program that saw a federal unemployment benefit of $600 a week expired. And politicians are still squabbling over its replacement.

There may be sound ideological and long-term economic reasons for discontinuing the benefit. But, in the short term, that might have impacts on millions, including those who don’t directly receive it.

Most obviously, landlords may not receive their rents and have to go to the expense of evicting tenants and finding new ones, while being unable to pay their own mortgages. And lenders (those who provide credit cards, personal loans, auto loans, student loans and so on, as well as mortgages) could see defaults, repossessions and foreclosures soar across broad population groups.

As importantly, some economists warn that letting the federal benefit lapse risks hitting consumer spending, something that could quickly affect the wider economy. Monday’s Financial Times had a headline, “US economy in peril as unemployment payments expire.”

Consumers key to US economy
Think The Financial Times is exaggerating? Maybe. But the US economy relies on consumer spending for its growth.

According to the Federal Reserve Bank of St. Louis, personal consumption expenditures contributed 67.1% of total gross domestic product in the second quarter of 2020. You might think that removing the additional federal unemployment benefit is likely to hit that hard.

So, even leaving aside the human misery, political paralysis could prove costly for the economy. On Wednesday morning, investors were buoyed by speculation that a deal between the parties on Capitol Hill was getting close, according to CNBC. But that confidence proved misplaced.

Meanwhile, a small-business relief program is set to expire tomorrow.

COVID-19 still a huge threat
That pandemic is the single biggest influence on markets at the moment. And, finally, there may be a hint of good news in the figures. Since last Friday, The New York Times has been reporting that the change in the number of new infections over the previous 14 days is now negative: -16% yesterday. Of course, the actual numbers are still appalling, and 57,128 Americans were newly diagnosed yesterday. But that figure’s been consistently over 60,000 until recently.

Sadly, deaths remain at horrific levels. Yesterday the number was 1,036. And the 14-day change for deaths was +19%. We can only hope that these will soon plateau, as new infections already are. Total reported COVID-19 deaths in the US reached 160,000 for the first time in the last few hours.

But, in a White House virus briefing on July 21, President Donald Trump warned:

It will probably, unfortunately, get worse before it gets better. Something I don’t like saying about things, but that’s the way it is.

Non-pandemic news
Although COVID-19 news dominates both generally and in markets, there’s still room for other fears. And concerns over trade and foreign relations with China are currently elevated.

As The Financial Times suggested on July 24:

Tensions between the world’s two superpowers have risen to their most dangerous level in decades as the coronavirus pandemic rages through the US and Beijing cracks down on Hong Kong’s autonomy.

And that was before more recent tensions arose. Those include the president playing hardball over Tik-Tok and WeChat.

Domestic threat
Most important economic data have recently been looking good. But you need to see them in their wider context.

First, they follow disastrous lows. You expect record gains after record losses.

And, secondly, the pandemic is far from over, with some states still recording frightening numbers of new cases and deaths.

So, while good news is more than welcome, it can mask the devastation wreaked on the economy by COVID-19.

Worries
Some concerns that remain valid include:

  1. We’re currently officially in recession
  2. Unemployment is expected to remain elevated for the foreseeable future — Yesterday’s new claims for unemployment insurance came in at 1.19 million, appreciably better than the previous week’s 1.43 million. But it was the 20th consecutive week during which new claims have topped the million mark. And all these would have been unthinkably high numbers at the start of the year
  3. The first official estimate of gross domestic product during the second quarter showed an annualized contraction of 32.9%. When you look at the second quarter in isolation (not annualized), the fall in economic output was about 9.5% in those three months
  4. On June 1, the Congressional Budget Office reduced its expectations of US growth over the period between 2020 and 2030. Compared with its forecast in January, the CBO now expects America to miss out on $7.9 trillion in growth over that decade
  5. As International Monetary Fund (IMF) Chief Economist Gita Gopinath put it a while ago: “We are definitely not out of the woods. This is a crisis like no other and will have a recovery like no other.”

Third quarter GDP
Need cheering up after all that? The Federal Reserve Bank of Atlanta‘s GDPnow reading suggests we might see growth in the third quarter of 20.3%, according to an Aug. 5 update.

But, again, that’s an annualized rate. So it has to be compared with the 32.9% lost in the second quarter. And there’s still time for the economy to fall back if more lockdowns are needed or federal benefits remain withdrawn.

Still, we might be looking at a light at the end of this pitch-dark tunnel.

Markets seem untethered from reality

And yet, in spite of all the above, on June 30, US stock markets celebrated the end of their best quarter for more than a decade — by some measures since 1987. Various record highs have been reached since.

Many economists are warning that stock markets may be underestimating both the long-term economic impact of the pandemic and its unpredictability. And some fear that we’re currently in a bubble that can only bring more pain when it bursts. ING Chief International Economist James Knightley was quoted by CNN Business over the weekend thus:

With virus fears on the rise, jobs being lost and incomes squeezed, we feel the recovery could be much bumpier than markets seemingly do, and think we are in for some data disappointment over the next couple of months.

Economic reports this week

There are a few important economic reports this week. Today brings by far the most significant: the official, monthly, employment situation report.

But there are a couple of others that sometimes catch investors’ eyes. Those come from the Institute for Supply Management (ISM) and measure the mood of professionals in that specialism. That provides a usually reliable indication of the economic direction of the manufacturing (Monday) and services (Wednesday) sectors. The neutral point for these is 50%. The higher above that, the better.

This week’s other reports rarely move either markets or mortgage rates far.

Forecasts matter

More normally, any economic report can move markets, as long as it contains news that’s shockingly good or devastatingly bad — providing that news is unexpected.

That’s because markets tend to price in analysts’ consensus forecasts (below, we use those reported by MarketWatch) in advance of the publication of reports. So it’s usually the difference between the actual reported numbers and the forecast that has the greatest effect.

And that means even an extreme difference between actuals for the previous reporting period and this one can have little immediate impact, providing that difference is expected and has been factored in ahead.

This week’s calendar

This week’s calendar of important, domestic economic reports comprises:

  • Monday: July ISM manufacturing index (actual 54.2%; forecast 53.6%) and June construction spending (actual -0.7%; forecast +0.5%)
  • Tuesday: Nothing
  • Wednesday: July ISM nonmanufacturing (services) index (actual 58.1%; forecast 55.0%). Plus ADP employment report (actual 167,000 new private-sector jobs; no forecast)
  • Thursday: Weekly new jobless claims to August 1 (actual 1.19 million new claims for unemployment insurance; forecast 1.40 million)
  • Friday: July employment situation report, comprising nonfarm payrolls (actual 1.76 million jobs added; forecast 1.68 million), unemployment rate (actual 10.2%; forecast 10.6%) and average hourly earnings (actual +0.2%; forecast -0.5%)

It’s been all about employment this week.

Rate lock recommendation

The basis for my suggestion
Other than on exceptionally good days, I suggest that you lock if you’re less than 15 days from closing. But we’re looking at a personal judgment on a risk assessment here: Do the dangers outweigh the possible rewards?

At the moment, the Fed mostly seems on top of things (though rises since its interventions began have highlighted the limits of its power). And I think it likely it will remain so, at least over the medium term.

But that doesn’t mean there won’t be upsets along the way. It’s perfectly possible that we’ll see periods of rises in mortgage rates, not all of which will be manageable by the Fed.

That’s why I’m suggesting a 15-day cutoff. In my view, that optimizes your chances of riding any rises while taking advantage of falls. But it really is just a personal view.

Only you can decide
And, of course, financially conservative borrowers might want to lock immediately, almost regardless of when they’re due to close. After all, current mortgage rates are at or near record lows and a great deal is assured.

On the other hand, risk-takers might prefer to bide their time and take a chance on future falls. But only you can decide on the level of risk with which you’re personally comfortable.

If you are still floating, do remain vigilant right up until you lock. Make sure your lender is ready to act as soon as you push the button. And continue to watch mortgage rates closely.

When to lock anyway
You may wish to lock your loan anyway if you are buying a home and have a higher debt-to-income ratio than most. Indeed, you should be more inclined to lock because any rises in rates could kill your mortgage approval. If you’re refinancing, that’s less critical and you may be able to gamble and float.

If your closing is weeks or months away, the decision to lock or float becomes complicated. Obviously, if you know rates are rising, you want to lock in as soon as possible. However, the longer your lock, the higher your upfront costs. On the flip side, if a higher rate would wipe out your mortgage approval, you’ll probably want to lock in even if it costs more.

If you’re still floating, stay in close contact with your lender.

Closing help

At one time, we were been providing information in this daily article about the extra help borrowers can get during the pandemic as they head toward closing.

You can still access all that information and more in a new, stand-alone article:

What causes rates to rise and fall?

In normal times (so not now), mortgage interest rates depend a great deal on the expectations of investors. Good economic news tends to be bad for interest rates because an active economy raises concerns about inflation. Inflation causes fixed-income investments like bonds to lose value, and that causes their yields (another way of saying interest rates) to increase.

For example, suppose that two years ago, you bought a $1,000 bond paying 5% interest ($50) each year. (This is called its “coupon rate” or “par rate” because you paid $1,000 for a $1,000 bond, and because its interest rate equals the rate stated on the bond — in this case, 5%).

  • Your interest rate: $50 annual interest / $1,000 = 5.0%

When rates rise

However, when the economy heats up, the potential for inflation makes bonds less appealing. With fewer people wanting to buy bonds, their prices decrease, and then interest rates go up.

Imagine that you have your $1,000 bond, but you can’t sell it for $1,000 because unemployment has dropped and stock prices are soaring. You end up getting $700. The buyer gets the same $50 a year in interest, but the yield looks like this:

  • $50 annual interest / $700 = 7.1%

The buyer’s interest rate is now slightly more than 7%. Interest rates and yields are not mysterious. You calculate them with simple math.

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BBB Tips: Do your homework before applying for a reverse mortgage

Reverse mortgages are widely advertised to seniors as a popular way to access the equity of their home, which may be attractive to consumers seeking a quick source for cash during the COVID-19 pandemic and resulting economic slump. Homeowners should fully understand all the costs, terms and conditions before applying for a reverse mortgage.

A reverse mortgage allows homeowners to convert part of the equity in a home to cash without having to sell the property. The cash may be paid to you in installments or a lump sum, so typically you don’t need to pay anything back if you live in your house.

Due to the attractiveness of these loans, senior citizens should be on guard against being charged excessive upfront fees for services that are generally available free of charge or at a very low cost through the Department of Housing and Urban Development.

Reverse mortgages also may come with some significant strings. Consumers should understand that because they’re deferring repayment of the reverse mortgage until they move out of their home or die, the amount they owe will grow substantially over time. Interest charges are added to the loan each day it’s held, so it’s possible the reverse mortgage may grow to equal the value of the home. People who take out reverse mortgages also are still responsible for property taxes, insurance and maintenance costs.

Some ads say heirs can inherit the home, but remember, to keep it, they must pay off the reverse mortgage loan along with possible fees and charges that can add up.

Those who need cash might consider getting a less costly home equity line of credit and check into programs that help defer or lower taxes and utility bills.

Tips to consider before applying for a reverse mortgage:

• Know the basic requirements. To apply for a reverse mortgage, a senior must be 62 years or older and have equity in the home. The home must be the primary residence and remain in good condition. A Home Equity Conversion Mortgage (HECM) is the only federal government-insured reverse mortgage, and the loan process can’t be initiated until the senior receives counseling from an HECM counselor. Factors such as your age, the type of product, the value of your house and how much you owe on your house all contribute to the amount you may borrow.

• Consult an HECM counselor. An HECM counselor will help answer questions regarding eligibility, financial implications and other alternatives. The Fair Housing Association (FHA) does not recommend using any service charging a fee for referring a borrower to an FHA lender, as FHA provides all the information free of charge, and HECM housing counselors are available free or at a low cost. For a list of approved counseling agencies, click here or call 800-569-4287.

• Involve heirs in the decision. Since a reverse mortgage affects the assets of the borrower in case of death, involving heirs will avoid future misunderstandings.

• Make sure a reverse mortgage suits your needs. Determine whether it is practical to keep the home long enough to make the reverse mortgage economical. Consider future health care needs as well as safety and ease of use of the home.

• Consider all the costs associated with obtaining a reverse mortgage. Be prepared to pay for some of the fees involved in the processing of a reverse mortgage loan, which can include an origination fee, closing costs, a mortgage insurance premium, a servicing fee, and the interest rate.

• Understand the repayment terms. A reverse mortgage loan must be repaid in full when the owner dies or sells the home. Other conditions that affect loan repayment include failure to pay property taxes or hazard insurance, allowing the property to deteriorate, and if the borrower permanently moves, has a new primary residence, or fails to live in the home for 12 consecutive months.

For a full list of reverse mortgage requirements, contact the U.S. Department of Housing and Urban Development.

Report any scams to Better Business Bureau Scam Tracker, and find trustworthy reverse mortgage lenders at bbb.org.

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Humboldt County DHHS: Rental, mortgage relief available to qualifying individuals

HUMBOLDT COUNTY, Calif. — Money to pay for missed rent or mortgage payments is available to qualifying county residents who have fallen behind because of COVID-19 pandemic-related income loss, according to the Humboldt County Department of Health and Human Services (DHHS).

The Humboldt County Eviction Prevention Program is available to income-qualifying households that have prior rent or mortgage owed since March, on a first-come, first-served basis, officials said.

Administered by the DHHS, each qualifying household can receive up to $5,000 which will be paid directly to the landlord or lender, according to officials. The DHHS said the program is being funded through the federal Coronavirus Aid, Relief, and Economic Security Act (CARES) Act, which is providing funding to state, local, and tribal governments to help ease the financial effects of the pandemic on local jurisdictions, businesses, and individuals.

“This pandemic has been difficult for everyone and facing eviction because you have experienced a loss or reduction in employment can have devastating effects. We’re pleased to be able to offer this program to help individuals and families stay in their homes as we all navigate these uncharted waters,” DHHS Director Connie Beck said.

Households within Eureka city limits that meet income requirements for the city’s COVID-19 Assistance Fund will be referred to the city to apply for assistance, officials said.

The program will run through Dec. 30, or until all funding has been distributed, according to the DHHS. Applications will be accepted starting Monday, Aug. 10.

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Cavaliers’ Dan Gilbert now second-richest owner in sports after Rocket Mortgage IPO

Shares for Rocket Mortgage, the company co-founded by Cleveland Cavaliers owner Dan Gilbert back in 1985, increased by 19% on Thursday, the first day of trading in New York.

This represents the first time we have been able to fully understand the net worth of Mr. Gilbert. It’s long been anticipated that Gilbert had a net worth in the tens of billions, making him one of the richest owners in professional sports.

That’s now official. Thursday’ IPO led to a valuation of Rocket at $40 billion. Per Bloomberg, that’s higher than Ford Motor Co. Gilbert is said to own 73% of the company.

Bloomberg’s index also puts Gilbert’s net worth at a resounding $34 billion, second to only Los Angeles Clippers owner and former Microsoft CEO Steve Ballmer ($72.6 billion).

It’s an absolutely astonishing figure in that this makes Gilbert the 28th-richest man in the world, ahead of the likes of casino big wig Sheldon Adelson, who has been attempting to get into the sports world. His relationship with the NFL’s Las Vegas Raiders hit a snag immediately ahead of them relocating from Oakland.

From a pure sports perspective, this news is unlikely to endear Gilbert to an increasingly skeptical Cavaliers fan base following the departure of LeBron James ahead of the 2018-19 season.

Cleveland is said to have the sixth highest-payroll in the NBA right now. Though, the team is looking to sell off veteran assets such as All-Star big man Kevin Love. With his net worth, there’s no reason to believe that Gilbert can’t continually go over the luxury tax in order to help create a perennial contender in Cleveland.

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Virtual Commercial/Multifamily Technology Officer Roundtable 2020

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MBA hosts a peer group for finance professionals from commercial / multifamily real estate finance firms. The group meets in person twice per year and stays in touch throughout the year via conference calls and webinars. If you would like to join or have any questions email [email protected]

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Like Reverse Mortgages, Alternative Equity Tapping Faces Educational Hurdles

A reverse mortgage allows senior citizens to access the equity they’ve built up in their homes in order to access additional cash to accomplish certain goals. Whether that’s making ends meet during their post-working years, to finance a home improvement project, to pay for some kind of care or to tap a more stable resource in a down stock market, the reverse mortgage can provide a necessary degree of flexibility for those who can qualify for it.

That fact is key, though: not everyone who seeks out a reverse mortgage can qualify for one, whether you’re talking about an FHA-sponsored Home Equity Conversion Mortgage (HECM) or the increasingly expansive suite of private reverse mortgages being made available by lenders. For those who may be either unable or perhaps unwilling to engage in a reverse mortgage transaction, alternative equity tapping companies can present a viable alternative in the form of products like sale leasebacks or shared equity investments.

However, similarly to the kinds of hurdles faced by reverse mortgage companies that often have to deal with rampant misunderstanding of the product category, alternative equity tapping products are largely an even deeper niche than reverse mortgages and come with their own levels of misunderstanding.

Similar hurdles to understanding

For shared equity investment company Point, product education accounts for a major investment and aligns with one of the company’s core values of transparency. This is according to Michaela Gifford, business operations lead at Point.

“We require homeowners to have a comprehensive understanding of what Home Equity Investments (HEI) are and their associated costs,” Gifford tells RMD. “Although HEIs are new to some homeowners, it’s a very intuitive class of product. Fractions are one of the earliest tools we all learn in elementary school math so fractional sharing of home equity and appreciation is easy for homeowners to grasp.”

For senior clientele who are generally already familiar with reverse mortgages, the fractional sharing arrangement of Point’s HEI product provides an “easy-to-comprehend alternative to complicated negative amortization tables,” Gifford says.

QuantmRE, which also offers a shared equity investment product, tends to focus on offering an alternative to debt-based lending in its appeals to clients. This helps to facilitate greater understanding according to Matthew Sullivan, founder and CEO of QuantmRE.

“In each case where the homeowner is looking to unlock equity, they are looking for a cash sum that they can use for a specific purpose – for example, paying down high cost credit cards, remodelling their home etc,” Sullivan says. “In our case, we are offering an alternative, equity-based solution that gives the same outcome that the homeowner wants from a loan – i.e a cash lump sum. Our challenge is to explain how it is possible for us to provide this lump sum without the additional burden that comes with a debt-based product.”

When facing major challenges for product education, the biggest issues that QuantmRE stems from their being confused for a lending entity because of the explanations surrounding a lack of interest, monthly payments and debt. The company also encounters assertions about the cost of engaging in such an arrangement, and suspicion from seniors that it’s some kind of scheme to take away their homes.

“These types of reactions are understandable because the product is relatively new and solves such a huge problem for so many homeowners,” Sullivan says. “In order to combat these initial (misguided) assumptions, it is important that all of our communications with potential customers are entirely open and transparent. My view is that all of the companies in this sector (QuantmRE, Unison, Point, Noah, Hometap) are working towards the same objective. I believe all of the companies in this sector understand the importance of building trust with potential customers at every stage of the process.”

Comparison with reverse mortgages

When it comes to comparing the ubiquity of alternative equity tapping products, the alternative products have a noted advantage due to its relative simplicity in comparison with reverse mortgage products. This is according to Jarred Kessler, CEO and co-founder of sale leaseback company EasyKnock.

“I think [a sale leaseback] is a much easier product to understand,” Kessler tells RMD. “We’re buying your home, you pay us this rent, and this is what you get at the end. So it’s not as complicated, it’s pretty straightforward to understand. But, the brand awareness and the trust factor is more challenging because people may have not heard about it before.”

Still, EasyKnock has previously engaged with the reverse mortgage industry in the past to facilitate solutions for borrowers who may not qualify for that product, and that acceptance has only increased due to current events, Kessler says.

“We’ve seen an accelerated acceptance of our product,” Kessler says. “[We’ve even seen] reverse mortgage loan officers expressing interest in finding more arrows in the quiver to sell, because either they can’t sell the reverse mortgage, or more people need other options.”

In Point’s case, comparison with a reverse mortgage to facilitate more understanding isn’t described as a key element since it has a counseling apparatus to ensure optimal understanding of the arrangement by clients. It’s during this counseling process that reverse mortgages may come up as an alternative option for them.

“To ensure older customers have a thorough understanding of our product’s financial implications, we require that our customers aged 62 and over either a) complete a one-hour financial counseling session with an independent non-profit HUD-certified financial counselor, or b) have their heirs, as interested parties, review and consent to the HEI agreement,” Gifford says. “During the financial consultation, options other than a HEI which may be available to customers are discussed, including reverse mortgages, other housing, social services, health and financial options.”

The ability to compare and contrast different options is generally helpful for clients in making a decision, Gifford shares.

“Customers 62 and over definitely value the ability to compare products as there may be a lack of familiarity with Point’s HEI and there may be false assumptions made of solutions like reverse mortgages,” she says. “It’s best for everyone if we strive to find the best solutions rather than just promote the product we happen to offer.”

At QuantmRE, sometimes prospective borrowers assume on their own that the shared equity investment it offers is itself a reverse mortgage, Sullivan explains.

“With many of our potential customers, we have seen that there is a natural assumption that our home equity agreements are some form of reverse mortgage as there are no monthly payments,” Sullivan says. “With regards to the comparison with reverse mortgages, we do try and explain at the beginning of the sales process that our agreements are not a loan, they are not a line of credit and they are not a reverse mortgage.”

Brand awareness

Even in comparison with reverse mortgages, shared equity investments and sale leaseback products are not nearly as well known as the concept of reverse mortgages. This presents a unique difficulty for alternative equity tapping companies to overcome that is decidedly different from the general perception of reverse mortgages in the public.

“For us, the biggest challenge is around awareness,” says Jeffrey Glass, CEO of Hometap. “We offer something that hasn’t really existed (at least not at scale) for homeowners. It can be very confusing for homeowners to understand the difference between an equity investment in one’s home versus something like a home equity loan.”

Reverse mortgages don’t often come up in Hometap’s educational processes, since most of its clients are exploring an alternative to other kinds of home-based solutions, Glass shares.

“Reverse mortgages do not come up often in our conversations, since most of our homeowners are considering us in comparison to cash out refinances, HELOCs and other second mortgage products,” he says.

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Reverse Mortgage: Should You Use Your Home Equity To Get More Retirement Income?

Many Boomers today are facing an unpleasant future. Their golden years were supposed to be fun, relaxing and carefree, but now reality has set in, and they find themselves financially unprepared. Many didn’t save enough during their working years because they planned to sell their homes and live off the equity by moving to more affordable locales. The problem is that two-thirds of the average retiree’s net worth is in the form of home equity at a time when more are wanting to retire at home rather than selling and moving to Florida, Arizona or other warm climates.

Many may be tempted to explore the reverse mortgage option as a way to increase their retirement income. Doing so means the elimination of a mortgage payment, assuming payments are still being made, and the ability to receive a portion of your homes equity. Reverse mortgage recipients are then able to use the money for anything. Some may choose to blow it on a new car or motorhome, while others may wisely use it to supplement their income in retirement. Still, others may need it to pay for medical care or costly home repairs.

For divorcing couples, a reverse mortgage may allow one spouse to stay in the home while giving the other spouse funds to find a new home. A “for purchase” reverse mortgage option is also available for those interested in purchasing another retirement home. Essentially using the home equity to fund the purchase of a new home. Keep in mind that the loan will come due when the last surviving borrower either passes away, sells the home or leaves the home for more than 12 months due to illness.

How much you will be able to borrow with a reverse mortgage will depend on your age (or the age of the younger spouse), the value of your home and current mortgage rates. Assuming a five-percent interest rate, a 62-year-old borrower could potentially qualify for an initial payout of about 52% of the home’s value. This is capped by the Federal Housing Administration limit of $636,150.

There are sometimes substantial up-front costs to obtain a reverse mortgage so you will likely want to plan on staying in your home for several years to help offset those costs. If you don’t spend the money you’ve pulled out you can prepay the loan balance without penalty whenever you like. This sounds easier to do than it probably will be in reality. Few people take reverse mortgages who don’t need the money. If they wanted to pay back the full amount taken, without selling the property, most wouldn’t have the substantial assets needed to do it.

There are a variety of reverse mortgage payout options. Which one is best for you will depend on your financial needs and goals. During the first two years, you can borrow the maximum amount for which you have qualified. A line of credit will offer the most flexibility. You can tap into this on an as needed basis or keep it in reserve in case money is needed for expenses.

For borrowers who need income now, you can choose fixed monthly payments. This can be in tandem with an additional line of credit. There are three ways you can take these fixed reverse mortgage payments.

Reverse Mortgage Term Payment– provides a fixed monthly payment for a certain period of time. If you take the term payments, you will not receive any payments beyond the term. This could be a good option for older seniors who needed extra money for in home care.

Reverse Mortgage Tenure Payment- provides a fixed monthly payment. Amounts will be based on your age assuming a life expectancy of 100. Payments will remain in force until the borrower dies, sells or leaves the home for another reason. Payments will continue even if your loan balance grows beyond the total value of your home.

Modified Tenure Payment and Modified Term Payments- These types of reverse mortgages combine either payment type mentioned above with a line of credit. You will have the benefit of a guaranteed base income combined with the benefit of access to a growing line of credit.

Lump Sum Reverse Mortgage– When used properly, this can be the best option for some retirees. On the other hand, when used badly this can turn into a disaster. Because this is a one and done deal, if you take the lump sum and spend it, you are essentially out of options. You will be out of money. At that point, the only option would be to sell your home if you need further funds to live.

Only choose this option if you are comfortable handling large chunks of money, using it for specific large expenses (that you can afford) like long-term-care insurance, a needed home renovation or paying the taxes on a Roth IRA conversion. Taking the lump sum without a spending plan will not likely end well.

Terms Vary – Shop Around

Before pursuing a reverse mortgage, discuss it with your financial planner and tax professional. You’ll want to have a plan for how to use the money and how it will fit into your overall retirement plan. Make sure your financial planner is working as a fiduciary and not earning a commission for selling you the reverse mortgage. Put more plainly, you want to make sure you are getting unbiased advice.

A lender can help give you the basic information about what amounts you may qualify for with a reverse mortgage. Keep in mind that you may receive different terms, rates and amounts from different lenders.

Ideally, you’ll want to get at least three quotes. Make sure each proposed reverse mortgage shows a selection of margins and also illustrates how your choices affect the up-front cost and net payouts. The Federal Housing Administration (FHA) allows lenders to charge an origination fee equal to the greater of $2,500 or 2% of your home’s value (on the first $200,000 of value), plus one percent of the amount over $200,000, with a cap of $4,000 for homes valued between $200,000 and $400,000. The cap increases to $6,000 for home worth more than $400,000. Lenders are allowed to charge less, of course.

You will also likely be responsible for a range of other fees for third-party services.  These include services such as an appraisal, title search, insurance and inspection which can easily run another $2,500 or more. Costs will vary by location and value of property and you’ll be able to pay up-front costs from the loan proceeds or pay them out of pocket.

Generally, lenders charge a fixed interest rate on lump-sum payouts whereas most other types of payouts come with a variable interest rate. Typically, you will see rates tied to an underlying index such as the LIBOR plus a margin, which can often range from 2.5% to 4%. Most often the higher the margin the lower the original fee. You may also be able to negotiate a credit against the closing costs in return for a higher margin.

Loan officers are sometimes paid by the amount that you initially borrow. This could lead them to recommend taking more money sooner or pushing the lump sum option even when a tenure payment may be more beneficial to you. This is when the fiduciary financial planner comes in to help you pick the best option for your specific needs.

Your Responsibilities with a Reverse Mortgage

The terms of the reverse mortgage will require you to maintain the home. You will still be responsible for paying property taxes, which for many is a major portion of their “mortgage payment.” Homeowner’s insurance, homeowner’s dues or condo dues will still be your responsibility as well. Not complying with these requirements will mean you run the risk of defaulting on your reverse mortgage. If lenders assume you won’t be able to handle these costs, they will set aside funds from your payout, in an escrow account, to pay those bills on your behalf.

Having the reverse mortgage in the name of one spouse can cause some additional challenges down the road. Once the borrow leaves the home, due to death or another reason, the lender must ask an eligible non-borrowing spouse or committed partner to stay in the home. This can leave survivors in a financial crunch as they will need to continue to maintain the home and pay required expenses. But, they will no longer be able to take money out of the reverse mortgage.

The good news is you can’t owe more than the value of your home when it is sold to repay the reverse mortgage. Once you have passed, if your home sells for more than you owe, your heirs will be allowed to keep any leftover equity. If your heirs should want to purchase the home back from the reverse mortgage company when you pass, they can potentially refinance the reverse mortgage or repay the outstanding debt or 95% of the home’s appraised value, whichever is less.

What you need to know to get a Reverse Mortgage

There are eligibility requirements to obtain a reverse mortgage. Borrowers must be at least 62 years old, be named on the title of the home and reside there at least half the year. Your qualified payout amount will depend on your age, as well as the current interest rates and the appraised value of your home. Currently, the maximum payout is $636,150 but some lenders will offer larger “jumbo” reverse mortgages. Generally, the younger you are, the lower the payout will be relative to your home’s value.

You must also receive financial counseling to ensure that you can meet your obligations as a reverse mortgage borrower. To find a housing counselor certified by the Department of Housing and Urban Development (HUD) call 800-569-4289.  Sessions will normally run $125 to $250 and can be done in person or over the phone.

If you still have a mortgage, you will need to pay it off from the reverse mortgage loan or other sources. You won’t be allowed to withdraw more than 60% of your principal limit in the first year. The only exception to this is if you needed more to pay off existing mortgage debt or make repairs that are being required by the reverse mortgage lender. Reverse mortgages are insured by the FHA, and at closing, you will have to pay an initial FHA mortgage insurance premium equal to 0.5% of the appraised value of the home assuming you take less than 60% of the value in the first year. Keep in mind that insurance premiums jump to 2.5% if you take more than that 60% number.

While no principal or interest payments will be due while you are still alive and living in the home, you will be accruing annual mortgage premiums at a rate of 1.25% per year. This is based on the amount you borrow and interest charges will accrue on any outstanding balance. You may think these things do not matter but, if you talk to anyone who has tried to get out of their reverse mortgage, all the little details are extremely important.

Reverse mortgages are sometimes marketed as a solution to all of a senior’s money problems. They may also sound like a way to more fully enjoy retirement. However, they can be complicated and hard to understand. The fees and interest can eat up a substantial portion of a homeowner’s equity. For many older adults, there are better solutions to financial struggles.

A real estate attorney that I know, who shall remain nameless, stated “99% of people who think they want a reverse mortgage shouldn’t get one. It’s a very rare occasion when these are right for the person.” With that in mind, think long and hard before signing on the dotted line. Explore your other potential options and make an informed decision.

By David Rae, Forbes

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Reverse Mortgage Securities Total $7.1 Billion in 2013 to Date

Issuance of reverse mortgage securities

$7.1 billion was totaled for the first three quarters of 2013, so with 757 pools issued, according to mortgage information by New View Advisors. For the first nine months of 2013, there are now 11 active issuers of reverse mortgage securities, New View notes, with American Advisors Group (AAG) as the newest entrant.

Issuing 14 pools for nearly $288 million,

American Advisors Group represents 4.05% of total reverse mortgage securities issuance. AAG is currently No. 6 for dollar volume in the nine-month rankings compiled by New View.

RMS continues to reign as the No. 1 issuer, with a total of 179 pools for $2.3 billion issued year to date.

The company issued 57 pools for $589.7 million in the third quarter, raising its lead over No. 2 issuer Urban Financial, so Urban sold 44 pools for $495.2 million in the third quarter.

As of the third quarter of 2013, RMS accounts for 32.74% of all issuance and Urban represents 25.53%, respectively.

Live Well Financial, Generation Mortgage and Nationstar held their positions. As they were number three, four and five issuers, representing 13.80%, 9.64% and 6.23%.

While the number of reverse mortgage securities pools issued in the third quarter was nearly identical to the previous quarter, 257 compared to 256, dollar volume declined 13% to $2.2 billion.

This causes lower origination volume. The increase of smaller “tail” issuance occurring as servicing, and borrower draws and MIP. So, Home Equity Conversion Mortgages (HECMs), notes New View. So, “Despite the downward origination trend, ongoing tail issuance, negative amortization and existing new issuance continues to outweigh payoffs,” said Michael McCully, partner with New View. “This has a positive impact on liquidity in the sector.”

Of the third quarter issuance, $950 million, or 43%, was fixed rate. So, year to date, fixed rate reverse mortgage securities represent approximately 60%, or $4.2 billion, of total issuance.

In the first half of 2013, the figure was $3.3 billion, representing 67% of total issuance.

By Jason Oliva

February 13th, 2016.


 

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Retirement Just Got Harder: The FHA Sets New Limits on Reverse Mortgages

Reverse mortgage retirement is something everyone should be able to understand, including the new FHA limits on them.

Bad news for seniors:

Reverse mortgages just got much less attractive. Starting Sept. 30, new regulations will make it more difficult and more expensive to take advantage of the government’s reverse-mortgage program.

What is a reverse mortgage?

The concept is fairly self-explanatory. With a mortgage, you make monthly payments to a lender. So, with a reverse mortgage, you receive payments from a lender. The loan doesn’t have to be repaid until you die, sell the house, or establish another primary residence.

Reverse mortgages are available to people 62 or older. The money can be used as retirement income, to pay for medical bills, for home improvements, or even to pay off your current mortgage. You are converting part of your home equity into cash. As with any loan, you will pay interest on the amount borrowed.

New limitations

After two years with rates at historic lows, the Federal Housing Administration is attempting to mitigate insurance losses by imposing new restrictions on federally insured reverse mortgages.

Here are the changes taking effect this fall for reverse mortgage retirement:

  • First-year limit. A homeowner may now withdraw only up to 60% of the eligible sum during the first year. If, for example, a person receives a reverse mortgage of $300,000, only a withdrawal of $180,000 is possible in year one.
  • Smaller loans. Before the new rules, borrowers could take out as much as 61.9% of their home’s value — the limit depended on your age, your home value, and the interest rate. That same evaluation applies, but on average, borrowers will be able to take out about 15% less than they used to.
  • Fee changes. Previously, the upfront fee to take out a standard reverse mortgage was 2% of the property’s value. The upfront fee to take out a saver reverse mortgage — which limits you to a smaller amount you can borrow against your equity — was 0.01%. Now, the upfront fee will be 0.5% across the board. Folks who take out more than 60% of their home’s value will pay a 2.5% insurance premium.
  • Financial assessment. Lenders will now be required to analyze their borrowers’ ability to keep up with tax and insurance payments before issuing a reverse mortgage. So, lenders will look at income sources and credit history to determine the borrower’s creditworthiness. If a lender decides you may not be able to make your payments, you will be required to set aside money.

The changes are intended to make people more careful about how they fund their retirement.

So, the FHA wants borrowers to take out only what they need and what they can afford. The program strives to be less a safety net for financial emergencies and more a longer-term financial-planning tool. Of course, these changes present additional challenges to the already expensive process of retirement.

By Mike Anderson, NerdWallet, and The Motley Fool

February 10th, 2014. Reverse mortgage retirement

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5 Reverse Mortgage Tips

If you would like to be informed about reverse mortgage tips, this is the article for you.

If you’re in your 60s and own your home, chances are you’ve heard about reverse mortgages—or will soon. Reverse mortgages allow you to tap the equity in your home. But they have risks and can be costly. Here are five reverse mortgage tips to consider:

1. Weigh all your options.

Whether you need money to pay bills or just want some extra cash, a reverse mortgage should be a last resort. Other options include selling your house and downsizing, or renting while carefully investing the sale proceeds. You could also take out a home equity loan or line of credit. If credit cards are the problem, consider consolidating that debt. If paying real estate taxes or home maintenance costs are the problem, look into local government assistance programs that can help. But, you have many options. So ask your state agency on aging about less risky, lower-cost ways to address your needs.

2. Understand the risks, costs and fees.

Even though you won’t be making any interest payments as long as you live in your home, the interest rate matters. If you decide to move, you’ll have to pay back the reverse mortgage plus compounded interest. The same is true if you have to leave your home for more than 12 months. Ask about all costs and fees, including any prepayment penalties.

3. Recognize the full impact of your decision.

While you typically don’t have to pay taxes on the proceeds of a reverse mortgage, the income or lump sum you receive could affect your eligibility—or your spouse’s eligibility—for various state and federal benefits, including Medicaid. Depending on the state, a reverse mortgage may not enjoy the same home-equity protection that would otherwise apply if you have a health emergency and need to enter a nursing home that you can only pay for by liquidating assets. Finally, consider that a reverse mortgage is generally not the right choice for those who want to leave their homes to their heirs.

4. Get independent advice about reverse mortgage tips.

Reverse mortgages are such complicated transactions. The federal government requires borrowers to meet with HUD-approved counselors before getting a federally guaranteed loan. Confirm that any counselor recommended by your lender is truly independent. You can do this by asking whether he or she receives any funding from the lender or the mortgage industry.

While most loans are federally guaranteed, lenders also offer proprietary loans that are not. Even if you’re applying for a proprietary loan, it’s a good idea to get advice from a trusted financial adviser who has no interest in either the reverse mortgage or any investment you plan to make with the proceeds. In any event, before you agree to a reverse mortgage, consult with legal and tax professionals who know the consequences of reverse mortgages for residents of your state and who aren’t connected in any other way to the transaction or the lender.

5. Be skeptical of reverse mortgages as part of an investment strategy.

Be very skeptical if someone urges you to get a reverse mortgage to make an investment or purchase an insurance product or a security—particularly if they are promising high returns. In essence, they’re encouraging you to speculate with your home equity. You may need for more critical purposes down the road. If you can’t afford to get a low return or the loss of your home, you shouldn’t be investing with your home equity funds.

By Gerri Walsh

February 10th, 2014.

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How To Do a Reverse Mortgages

Reverse mortgages were originally designed so that seniors who own their homes or have considerable equity in their homes can free up cash for living expenses without selling their homes.

 

To qualify for a reverse mortgage, you must:

-Occupy the home as a principal residence for more than six months of the year.

-Be at least 62 years old.

-Pay off any debt against the home before obtaining the reverse mortgage. Or, use an immediate cash advance from the reverse mortgage to pay it off.

The amount that can be borrowed is based on your age, the equity in the home and the interest rate charged by the lender. You will retain title to your home and be responsible for taxes, repairs and maintenance. If you do not fulfill these responsibilities, the loan could become due and payable in full. The loan becomes due with interest when you sell your home, move, die or reach the end of the loan term.

There are three types of reverse mortgages:

-FHA-Insured

-Lender Insured

-Uninsured

With all three, interest on the loan amount adds to the principal balance each month. There will also be loan origination fees and closing costs with each. The loan is not taxable. When the loan term expires, you will either need to pay back the loan or sell your home and move.

Before you can close on a reverse mortgage you will be required to take counseling at the local office of the US Department of Housing and Urban Development (HUD) or a HUD approved housing counseling agency. This is a free service of HUD and it will give you a good education regarding the various types of reverse mortgages and whether a reverse mortgage is right for you.

A reverse mortgage can be a good choice but they are not right for everyone. You may wish to consult with your attorney and/or financial adviser to see if it makes sense for you.

By Dale Athanas

January 27th, 2014.

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2013- The Biggest Reverse Mortgage News Stories

1. FHA to Halt Fixed Rate Standard Reverse Mortgage Starting April 1on Jan. 30, 2013. So, the FHA said it would merge the Saver and Standard loan programs. This would eliminate the popular fixed-rate, standard reverse mortgage

Here are the top 10 most-read stories on RMD this year, according to traffic data compiled by our editorial team.

2. HUD Announces Major Changes to Reverse Mortgage Program on Sept. 3, 2013. The HUD spelled changes to the HECM program including new borrower requirements. This took effect on October 1, the same year.

3. HUD to Combine Existing Reverse Mortgage Products on Aug. 19, 2013. Prior to making reverse mortgage changes, HUD informed the industry it was considering them, following an actuarial review of FHA’s insurance fund that showed reverse mortgage loans led to an FHA shortfall in fiscal year 2012.

4. HUD Slashes Reverse Mortgage Principal Limit Factors on Sept. 4, 2013. Following the announcement of changes to the HECM program, HUD announced new reverse mortgage principal limit factors that went into effect October 1. New borrowers see about 15% less in proceeds as a result.

5. FHA Reverse Mortgage Changes Coming By Month’s End and FHA: New Reverse Mortgage Changes Coming in August—Jan 15 and July 31, 2013, lenders then tuned in to FHA’s announcements of upcoming changes throughout the year.

(From product changes to mergers and new business entrants, the reverse mortgage market has seen a wealth of news in 2013)

6. [Update] Walter Investment Management Buys Security One for Up to $31 Million on Jan. 2, 2013. Walter, which previously acquired RMS, purchased Security One in the first part of 2013, which ramped up its position in the market.

7. Former MetLife Execs Launch New Reverse Mortgage Start-Up on Feb. 24, 2013. Several former MetLife reverse mortgage executives announced a new startup, Reverse Mortgage Funding, that then later opened for business in August.

8. Nationstar Acquires Greenlight Financial for Up to $75 Million on May 7, 2013. Mortgage servicing giant Nationstar agreed to acquire Greenlight Financial as well as its reverse mortgage platform, for up to $75 million.

9. President Obama Signs Reverse Mortgage Reform Bill into Law on Aug. 9, 2013. President Obama signed into law the Reverse Mortgage Stabilization Act, authorizing the Secretary of HUD to establish additional requirements to improve the fiscal safety and soundness of the HECM program.

10. Court Rules Against HUD in Reverse Mortgage Non-Borrowing Spouse Suit—Oct. 1, 2013—In a lawsuit that has yet to be resolved, a court ruled against HUD in a suit filed by non-borrowing spouses of reverse mortgage borrowers. HUD has since appealed the ruling.

By Elizabeth Ecker

For more posts on related information

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Wife doesn’t need to fear a Reverse Mortgage

Reverse Mortgage

Let’s figure it out.

Question:

Dear Retirement Adviser,
Our home has had a reverse mortgage since 2008 when my husband turned 62 years old. We are retired and I’m now 62. I feel like I need to be added to the deed.

The mortgage lender says that it is not possible because they do not initiate these anymore and that we should refinance with another company. We talked with one company and were told it is not possible because our current interest rate is too low. Also, we would need to come up with an extra $15,000 at closing. We are both disabled and live on our Social Security checks. We have trouble paying the electricity bill.

It appears that if my husband dies I could become homeless. We are worried and don’t know what to do. Can you help?

Thank you,
— Maria Mortgage

Answer:

Dear Maria,
Your situation highlights a common problem with reverse mortgages, particularly for retired couples. At the time your husband got his reverse mortgage, the youngest person on the mortgage had to be at least 62.

It’s also timely because a federal court has recently ruled that a surviving spouse can’t be evicted from the home when there’s a reverse mortgage in place. That’s even if they are not listed on the mortgage.

AARP Foundation attorneys, acting for two surviving spouses, sued the Department of Housing and Urban Development over the issue. HUD regulates reverse mortgage loans. AARP held that HUD was in violation of federal law when it required surviving spouses not named on the reverse mortgage loan to either pay off the loan or face foreclosure when their spouse died.

So, you don’t need to refinance your reverse mortgage to protect your ability to live in the home, should your husband die first.

HUD is expected to release information in the near future that will spell out the implications of this court case. I hate to tell a person struggling to pay the electric bill that he or she should consult with a real estate attorney on the matter. But if you did, it could give you some peace of mind. It also would be a lot cheaper than getting a new reverse mortgage at a higher interest rate and paying $15,000 to close.

These regulations were revised in 2013 under the Reverse Mortgage Stabilization Act. Newer reverse mortgage loans issued since the law was implemented will include the spouse on the loan, thus formally protecting surviving spouses. Unfortunately, the changes are also expected to reduce the amount of money available to seniors from a reverse mortgage.

By Dr. Don Taylor, Ph.D., CFA, CFP, CASL

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Reverse mortgage strategy can open door to second home

A reverse mortgage is a financial agreement in which a homeowner relinquishes equity in their home in exchange for regular payments, typically to supplement retirement income.

A reverse mortgage is against a primary residence, yet the loan also works to help purchase a second home.

While the proceeds of a reverse mortgage typically help seniors to “age in place” by making their home more comfortable for their retirement years, there are no limitations on how reverse funds can be used.

One family sought to lower their monthly mortgage payment on their primary home so that they could afford the monthly payments on a recreational cabin. Instead of cashing other assets, paying the capital gain tax and plunking down the net amount as the cabin’s down payment, the couple took out a reverse mortgage, which accomplished the same goal.

“They wanted to keep their home but were concerned that their monthly obligations would prohibit them from qualifying for another mortgage on a second home,” said John Harding of Axia Home Loans Reverse Mortgage Division. “By refinancing their home with a reverse mortgage, it not only eliminated their mortgage payment but also provided the down payment funds for the cabin. Since there was no longer any monthly payment, it was easier for them to qualify for a mortgage on the cabin.”

Let’s take a look at the numbers:

Primary residence
Value: $600,000

Mortgage: $281,000

Mortgage payment: $2,114 (plus taxes and insurance)

Reverse Mortgage: $433,800

Net proceeds after paying off mortgage plus closing costs: $128,311

Cabin
Purchase price: $215,000

Down payment: $70,000

Funds needed to close: $77,000

Conventional loan: $145,000

Mortgage payment: $811 a month (plus taxes and insurance)

The strategy

The strategy will enable the Casey’s to live in  their home with no mortgage payments for the rest of their lives, or until they sell the house. It also reduces their monthly mortgage obligations from $2,114 to $811.

A reverse mortgage is a loan that enables homeowners 62 or older to borrow against the equity in their home. They can do so without having to sell the home, give up title or take on new monthly mortgage payments. One uses loan proceeds for any purpose, they take out as a lump sum, pay fixed monthly payments, establish a line of credit, or have a combination of those options.

The “expected interest rate” is a critical factor that determines how much equity an elderly homeowner is eligible to receive from a HECM.

Add a margin to the 10-year U.S. Constant Maturity Treasury rate to calculate it, which is published weekly by the Federal Reserve.

The reverse mortgage loan amount depends on the borrower’s age, current interest rates. In most cases, so does the location of the home. A reverse mortgage does not have to be repaid until the borrower moves out of the home permanently, and the repayment amount cannot exceed the value of the home.

Seniors can “outlive” the value of their home without being forced to move. The homeowner cannot be displaced and forced to sell the home to pay off the mortgage. Even if the principal balance grows to exceed the value of the property, this is so. If the value of the house is exceeding what is owed at the time of homeowner’s death, the rest goes to the estate.

A controversial topic has been the “trailing spouse” issue.

If the surviving spouse is not included on the reverse note, the surviving non-borrower spouse may not be able to pay off the loan balance or qualify for a HECM on their own to remain in the property.

The situation usually occurs when an older man marries a younger woman. The woman then chooses not to go on the reverse mortgage title. Since the age of the younger spouse dictates potential proceeds, her participation decreases the net amount.

Recently, HUD’s Office of Housing Counseling sent a notice to all HECM-approved counselors. This encourages them to take special precautionary measures when meeting with non-borrower spouses. So, they fully understand the future repercussions of not being on title to the HECM loan. The notice also recommended that counselors get a signed, individual written statement from a non-borrower spouse. This must acknowledging that he or she may have to leave the property upon the death of the borrower.

This reality is additionally important when a second home is involved. A reverse mortgage can be terrific, but if your name isn’t on the mortgage note, at least have somewhere to stay.

By Tom Kelly

November 30, 2013

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Retiring on the House: Reverse Mortgages for Baby Boomers

As baby boomers age, reverse mortgages expect to gain popularity as a means of covering living expenses. Hence, in the future, more homes passed on to children will come with a bill attached. (The balance due on these equity loans).

Federally insured reverse mortgages, officially issued as part of the Home Equity Conversion Mortgage program, are a way for homeowners 62 and older to borrow money using their home equity as collateral. One must pay the remaining proceeds balance on the mortgage, which frees homeowners from monthly payments. Interest and monthly insurance premiums are charged throughout the life of the loan. The total becomes due when the borrower dies (or permanently moves out of the home).

“A common misconception about reverse mortgages is that the lender takes an equity share in the house”. (Vivian Dye, a reverse-mortgage consultant at Atlantic Residential Mortgage in Westport, Conn). “It’s a relationship between the bank and the borrower,” she said, “and it’s the same kind of relationship as a regular loan.”

As the first lien holder on the property title, however, the lender must be repaid when the property changes hands. How the heirs handle repayment depends on how much equity is left in the home and whether they want to keep it.

Under federal regulations, after the last borrower named on the loan has died, the lender must provide up to 30 days for the heirs to decide on a repayment method.

“Heirs then have up to six months to sell or arrange financing”, said (Colin Cushman, the chief executive of Generation Mortgage). She is a reverse-mortgage originator and servicer based in Atlanta. But, he notes, as many as two 90-day extensions are allows the heirs to show they are actively trying to sell the property.

Should they wish to retain ownership, the heirs might choose to get a separate mortgage to refinance the home and pay off the reverse mortgage. Or, if there is enough equity in the home, they might choose to sell it and use the proceeds to pay off the loan.

The heirs will not be on the hook for any shortfall should the home fail to sell for enough to pay the loan in full. If the loan balance is exceeding the value of the home, the amount owed is limited to 95 percent of the appraised value.

Mr. Cushman offered an example: On a home with an appraised value of $100,000, a reverse mortgage balance of $120,000. In addition, the amount owed the lender would be $95,000. (No short sale approves for less than that amount.) Government-backed insurance on the loan would cover the $25,000 gap.

In such “underwater” situations, the heirs may instead choose a deed in lieu of foreclosure. In this case, they simply deed the property over to the lender.

Heirs should be aware that the ability to draw on the reverse mortgage ceases once the borrower dies. For that reason, Ms. Dye recommends that the family considers whether enough money is set aside for things like funeral expenses while funds are still accessible — that is, if the family discusses finances at all.

“Some people don’t even know their parents had a reverse mortgage,” said Vincent Liberti. (Estate planning and elder law lawyer in Hartford).

He frequently sees financially precarious people who haven’t planned for retirement take on a reverse mortgage as a last resort. This is in addition to those who go through the funds too quickly. It’s one of the last “tools” he recommends using.

But Mr. Cushman says his firm is trying to change such negative perceptions. With an app planning tool, “nu62,” it is shown how to use home equity strategically to meet long-term financial goals.

February 18th, 2014

By Lisa Prevost

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