Dennis' Mortgage Blog

Question of the week:  My parents heard someone at their church talking about a reverse mortgage and are interested, I have heard bad things about them, what are your thoughts on reverse mortgage?

Answer:  Every year I receive more questions regarding reverse mortgages than I did the year before, I am not sure if that is because they are becoming more popular with more national media or because my client base is aging—probably both!

I believe reverse mortgages are a great financial tool for many home owners, and maybe not so great for other home owners who are eligible for a reverse mortgage.  Like regular mortgages or other financial instruments, there is no answer regarding reverse mortgages that fit everyone.  Depending on the financial situation, long term objectives and needs of the home owner a reverse mortgage could be the best option to meet their needs and objectives.

A few points about reverse mortgages:

• Home owners must be at least 62 years old, if one homeowner is younger than 62 contact your reverse mortgage specialist
• There is no income qualifying for a reverse mortgage since there are no monthly payments
• There is no credit qualifying for a reverse mortgage
• Because there is no credit qualifying a senior in default on a mortgage who has enough equity to qualify for a reverse mortgage can get out of default with a new reverse mortgage
• There are no monthly mortgage payments with a reverse mortgage
• To qualify for a reverse mortgage you must have equity, how much depends on the age of the borrower(s), the county where the property is located and the interest rate.  Generally the older the home owner the less equity that is needed
• A reverse mortgage can be used to purchase a new home, ideal for seniors who want to down size but my not have enough equity in current home to purchase a new home with all cash nor enough income from retirement to qualify for a mortgage
• A reverse mortgage does not need to be repaid until the home is sold or all home owners on the mortgage no longer live in the home
• A reverse mortgage can be used to purchase a new home after a short-sale, conditions apply consult a reverse mortgage specialist

How a reverse mortgage works:

• Using a formula that accounts for borrower’s age, property value, where property is located and interest rate a reverse mortgage specialist will determine the maximum amount available for a reverse mortgage.  Let’s assume this amount to be $250,000.
• If there is a mortgage currently on the property it must be paid off as part of the transaction.  If there is a $125,000 balance then the reverse mortgage pays off the $125,000 and the home owner has $125,000 still available.  If there is no mortgage balance then the full $250,000 is available
• The available balance can be accessed in three ways, or a combination of two or all three:
• Take a full lump sum when the reverse mortgage funds, pay off existing mortgage, purchase new home, pay off debts, put money in the bank
• Have funds available as an equity line to be drawn upon when needed
• Take a monthly payment similar to an annuity

• Rather than making payments interest accrues and adds to the loan balance every month based on the outstanding balance of funds accessed through lump sum payment, equity line and/or annuity payment. 

Some of the bad sentiments regarding reverse mortgages are hangovers from the past before the industry was regulated.  Prior reverse mortgage documents from some lenders would allow lenders to seize homes from heirs, instituted almost usury rates of interest and otherwise were of no benefit to the seniors. Today this is not the case.  If the home owners passes away while still living in the home the heirs get the home and generally have up to six months, or longer in some circumstances, to pay off the reverse mortgage through refinance, cash payment or selling the home.  If the balance on the reverse mortgage is greater than the value of the home the heirs and estate are not liable for the balance due above the value of the home unless they decide they want to keep the home.

Reverse mortgages are an excellent tool to allow seniors on fixed incomes to remain in their homes, use equity they have to repair the home, pay for medical care, estate plan with gifts to avoid taxes or help children purchase homes.  Reverse mortgages have flexibility and can be designed to suit the needs and objectives of those eligible.

What do I think of reverse mortgages? For many seniors a reverse mortgage can be the most important financial instrument they have.

Stratis Financial no longer originates and funds reverse mortgages as our conduits for the product have exited the wholesale lending industry.  Because of this my information on reverse mortgages is not a sales or marketing pitch for you or your parents to contact me for a reverse mortgage.  I encourage anyone interested to meet with a qualified professional who specializes in reverse mortgages for more information and their specific needs.  If you want a referral please contact me.

Have a question for me?  Ask me!

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This week’s blog postings:

Home Price Double Dip?  National home prices are out and they point to a double-dip in housing.

Rates Hit Six Month Low  Economic data on Wednesday pushed mortgages to levels not seen since December.

It’s become a chorus.  How many songs are there where you know the chorus and sing along but then sort of hum, semi-sing, mangle the lyrics to the rest?  This has become an analogy for economic data, with the chorus being “Where are the jobs, is anyone hiring, when will they stop firing…” (okay I’m not a songwriter)  After an unexpectedly disappointing report from payroll company ADP on Wednesday (see link above), today the Labor Department announced that non-farm payrolls increased by 54,000 in May, far below the expectations of around 160,000 additional jobs.  To add more concern to the anemic employment picture, the Department lowered the total job gains for the prior two months by 39,000 jobs.  The unemployment rate for May increased to 9.1%.

As I wrote in my post on Wednesday, since February 2009 when the American Recovery and Reinvestment Act (or the “Stimulus Package”) was passed the federal government has pumped over $3 trillion in deficit spending into the economy and the Fed has added an additional $3 trillion.  None of this money appears to be working on helping the economy recover, all it seems to have done is pump up stock values and keep interest rates low.  Time for a new plan before several trillion more is dumped into an economy that is non-responsive to government cash and is looking for private market growth.  I obviously benefit from low interest rates, however I would trade for higher rates if it meant our economy was undergoing sustained and prolonged economic growth.

Rates for Friday June 3, 2011: Mortgage Backed Securities have been on a roll with closing prices being higher than the day before’s close eleven out of the past seventeen trading days (remember for MBS higher prices mean lower rates), assuming trading closes today near where it sits currently.  Big corrections on Wednesday and after opening today have dampened some of the week over week gains, but the market is still trending down instead of up. With economic news as dismal as it has been there is no impetus for rates to start to climb over a long term.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS*

30 year conforming                               4.322%             Down 0.053%

30 year high-balance conforming           4.625%             Down 0.125%

30 year FHA                                         4.160%             Down 0.030%

30 year FHA jumbo                              4.221%             Down 0.033%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. 

*With new Fed regulations in place cost increase has been added to weekly rate quote.  Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment with an impound account for taxes and insurance and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

This weekend the Long Beach Ballet Academy is performing “Sleeping Beauty” at the Carpenter Performing Arts Center.  For those in Southern California who enjoy the “Nutcracker” production at the Long Beach Performing Arts Theater, and now the Civic Auditorium in Pasadena, “Sleeping Beauty” is produced and performed by the same compay, Long Beach Ballet.

Tickets are still available (http://www.longbeachballet.com/SB2011.htm).  We’ll be there Sunday watching our Blaire dance with her fellow Garland Dancers, or Flower Dancers, perform in their scene, along with the rest of the show.  If you are looking for some quality entertainment this weekend and not in the mood for “Hangover 2” or another pirate or panda movie, check out Long Beach Ballet’s excellent performance this weekend.  The music and dancing are fantastic.

Have a great week,

Dennis