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Friday, April 20, 2007

Drawing down equity on home frees assets, carries downside risk
By Tim Simmers, Business Writer
Article Last Updated: 04/20/2007 06:09:41 AM PDT

BEFORE GETTING a reverse mortgage, Jo Ann Miller and her husband, Carl, were living modestly on Social Security and carefully watching their spending. They had no pensions to fall back on and weren't able to save much while they were working. But they had equity in their San Mateo townhouse. Since the Millers obtained a reverse mortgage, which allows them to draw money from the equity in their home, they feel like they have some breathing room to live better. With the extra money, they bought a hybrid car they wanted in order to help the environment, and they're extremely excited about a monthlong vacation they're taking this summer to Australia. "We were down to a pretty low amount of annual income," said Jo Ann Miller, 65, who spent much of her working years as a secretary. "We're not into a lot of materialistic things. We just wanted a way to cut our costs and travel." For most senior homeowners, the equity in their home is their primary asset. For some, that equity is what they'll pass on to their children. Others, however, see the equity as their money in the bank.
Reverse mortgages allow people 62 or older to draw down the equity on their homes. They can take set monthly payments of $1,000 or $1,500, or whatever they deem necessary, or a lump sum. A lot depends on the specific loan, and not all reverse mortgages are the same, counselors say. There are both critics and advocates of the loans, which often carry high closing costs.
But with a population living longer and baby boomers turning 60 by the thousands each day, reverse mortgages are becoming a fast-growing trend. It's a way of supplementing retirement, paying for steep medical costs or in-house care, or simply cutting costs and traveling, as was the case with Jo Ann Miller. She now has access to a large chunk of money (about $100,000) from the equity in her townhouse that's valued at about $550,000. She and her husband have three children among them, but the children aren't dependent on a big inheritance, she added.
So they went ahead with the reverse mortgage to live a little better.

Closing costs
The only stickler, Jo Ann Miller said, was the $17,500 in closing costs. "That's kind of expensive," she said. That appears to be the going rate for closing costs, so be aware of that if you're considering a reverse mortgage. Still, for many people, such as widows who never dealt with family finances, or seniors who are running out of money and need access to cash, the reverse mortgage can make sense. "Sometimes it's done for need and sometimes for choice," said Judy Schwartz, co-owner of Reverse Mortgages Only in San Carlos. "You give people the choice to access equity on their home, but you do build a debt on the property." As a purveyor of such loans, Schwartz tries to understand "what the family's needs are." She stresses that ownership of the property does not change hands, and the title of the property remains with the homeowners. The formula for determining how much you can draw from your house is based on the fair market value of your home, your age and amount of equity in the home.
The younger you are, the less money you have access to. In government loans of the kind obtained through the Federal Housing Administration/U.S. Department of Housing and Urban Development (HUD), there's a lending limit of $362,790. The interest rate is based on the one-year Treasury bill, plus 1 percentage point (currently 6.01 percent). Counseling is mandatory for seniors getting these loans through the government. That way they know going in about varying interest rates and high closing costs, which people sometimes don't notice because it comes out of the equity of their home.

No free money
For many people taking a reverse mortgage, a key consideration is that by the time a child or heir is to inherit the house, the debt could be too high to pay off, forcing a sale of the property.
"There's no such thing as free money," said Cherisse Baptiste, a reverse mortgage counselor for Echo Housing in Hayward. "People have to understand what's involved." Besides high closing costs and the impact on children or heirs, Baptiste stressed that you also need to make sure you know what the interest rate is that compounds daily on what you owe, and that reverse mortgages involve a rising debt that eventually must be paid out of your equity.
That often means selling the home to pay off the debt, or your heirs selling it after you pass away. "What is left over for your heirs might not be as much as you expected because of higher interest rates and closing costs," Baptiste said.

Getting advice
Eleanor Curry, 79, a retired communications specialist, said the key to getting a successful reverse mortgage is working with the right advisers. "You have to have people you can trust, and they have to make it very clear what you're doing," said Curry, who took a lump sum from her San Carlos home. She praised her advisers, Judy Schwartz and her partner John Edwards at Reverse Mortgages Only. "I'm awestruck," said Curry, about the reverse mortgage she just obtained. Curry and her husband, Richmond, have eight children, 23 grandchildren and 15 great-grandchildren, "but they are well taken care of and aren't dependent on an inheritance," she said. "It's our money, and we can do whatever we dreamed about now, like traveling, repairing the house, going back to school," she said. "I'm completely relaxed now."
Still, critics of the loans warn seniors, especially older ones, of the high "front-end costs" of the loans, and point out that there are alternatives. Those might be home-equity lines of credit, taking in roommates or selling the house and moving to get access to money.
Seeing a counselor about alternatives is advised. "The basic problem from a consumer's perspective is that unless you are in your late 60s and in good health, it is a very poor investment because all the costs are front-loaded," said Niall McCarthy, an attorney and partner at Cotchett, Pitre & McCarthy in Burlingame.


Winning refunds
The group has done multiple class-action lawsuits against reverse mortgage lenders and was able to refund millions of dollars to senior citizens. However, advocates of the loans say the market has matured, and they say reverse mortgages are good for certain people.
"Reverse mortgages can make a great deal of sense, as long as the fees are reasonable," said Allen Cymrot, investment adviser and founder of http://www.netgainrealestate.com, a Mountain View-based Web site for income property investors. "(Reverse mortgages) serve a need, but they're not for everybody. You've got to understand what you're getting into."

Wednesday, April 18, 2007

Quicken Loans
4 Reasons to Refinance Your Adjustable Rate Mortgage Mar 30, 2007, 1:46 pm PDT
News provided by Quicken Loans
How do you know whether you should refinance out of your adjustable rate mortgage (ARM)? Before you decide, it should be clear what your purpose for refinancing is so that you can be sure your mortgage is still meeting your financial needs.
There are several reasons people need to refinance their adjustable rate mortgage:
Lowering your interest rate and monthly payment
Consolidating to eliminate high-interest debt
Switching from an adjustable to a fixed interest rate
Getting cash out of your home equity
1. Lowering Your Rate and Payment
Many people refinance their ARM to lower their interest rate. It may be that you got your ARM at a higher rate than what is currently available. If you refinanced to a lower interest rate, you would subsequently be lowering your monthly mortgage payment and possibly saving yourself some money.
2. Consolidating Debt
Consolidating high-interest credit card debt is another good reason to refinance your ARM. If you have a lot of credit card debt that you want to get rid of, it's a smart idea to use your mortgage to do it-the interest on your credit cards is most likely higher than the interest rate you could get on a mortgage. Plus, mortgage interest is tax-deductible* whereas credit card interest is not. That can be a great advantage and could save you more money.
3. Getting a Fixed Rate Mortgage
When you consider refinancing your ARM, you have to consider the current mortgage environment. Are rates going up or down? Right now, short-term rates have remained at a constant level. But that could change at any time.
You also have to know whether the rate on your ARM is about to adjust. If it is, it could go up. Or you may have been in a situation where you needed a short-term mortgage, but now are ready to move to a long-term mortgage.
If you're averse to your rate (and payment) changing, you may want to move from an ARM to a fixed-rate mortgage. A fixed-rate mortgage will guarantee that your rate and payment won't fluctuate for up to 30 years.
4. Getting Cash Out
Refinancing can be more than just getting a fixed rate or lowering your payment. Getting cash from your home equity is another big reason to refinance. You may need to make some improvements on your home like adding a bathroom or updating your kitchen. Or you may need money to start the business of your dreams.
There are many reasons you might refinance out of your adjustable rate mortgage. The best thing to do is to speak to an experienced home loan expert. Ask a lot of questions so that they can find the right mortgage that fits your needs.
*As always, please consult your tax advisor.
This article is reprinted by permission from Quicken Loans © 2007 Quicken Loans Inc. All rights reserved.

Monday, April 09, 2007

This refi will make me poorer Apr 09, 2007, 5:00 am PDT

Consumer groups believe that lenders should be held liable if they place borrowers in home mortgages that aren't suitable for them. In prior articles in this series, I concluded that a suitability standard was not an effective way to prevent borrowers from being stuck with the wrong type of mortgage, or with a mortgage they could not afford.
This article looks at suitability in connection with another problem: refinances that are not in the borrower's interest. Many borrowers who write me about refinancing are about to close on deals that would make them poorer, but they don't realize it. I also receive mail from borrowers who realize they made a mistake when they refinanced earlier, asking how to undo the mistake or whether they have any recourse.
The problem of refinances that involve no benefit to the borrower is associated with aggressive merchandising by mortgage brokers and loan officers (who I call "loan providers"). They drum up refinance business among borrowers who otherwise might never have given it a thought.
Interest-only mortgages and option ARMs are their tools of choice. The first line of their pitch is often some variant of "Mrs Jones, how would you like to reduce your payment from $1,200 to $600?"
Proponents of a suitability standard would make loan providers responsible for assuring that a refinance provides a net tangible benefit to the borrower. The "net" is critically important. All or virtually all refinanced mortgages provide some benefit; otherwise, borrowers wouldn't do them.
Under a suitability rule, the loan provider must determine whether or not the benefit outweighs the cost. This responsibility, however, is beyond their competence. This becomes evident when we look at the different reasons borrowers refinance.
Cost-Reduction: If the purpose of the refinance is to reduce the borrower's cost, the new interest rate or mortgage insurance premium must be lower than the existing one. Ordinarily, however, the borrower must incur an upfront cost.
For there to be a net benefit, therefore, the borrower must have the mortgage long enough for the monthly cost reductions to exceed the upfront costs of the refinance. Only the borrower has any idea of how long the mortgage may last.
Raising Cash: Suppose the purpose of the refinance is to raise cash. The tangible benefit of the cash is clear, but the cost may be very high.
I recently reviewed a cash-out refinance in which the borrower paid about $12,000 in refinance costs and a quarter-percent rise in rate on a loan of $150,000, in order to raise $4,500 in cash. Was there a net benefit?
There is no objective way for the loan provider to answer the question. While the price was very high, maybe the borrower needed the cash to pay for life-saving medicine for his children?
It could be argued that whether or not there is a net benefit also should depend on whether the borrower could raise the cash elsewhere at a lower cost. It is neither fair nor feasible, however, to make loan providers responsible for assessing their customers' options.
Reduce Payment: If the purpose of the refinance is to reduce the mortgage payment, this almost always comes at the cost of a reduction in future wealth. Whether there is a net benefit depends in good part on how critical it is to the borrower to lower the payment. Perhaps the alternative to a payment reduction is default. Only the borrower knows.
Convert ARM into FRM: Suppose the purpose of the refinance is to convert rate uncertainty on an existing adjustable-rate mortgage into rate certainty on an fixed-rate mortgage. The borrowers making the switch are willing to pay a higher rate now in exchange for future rate certainty. Whether there is a net benefit depends in part on the value the borrower attaches to future rate certainty. Once again, loan providers are in no position to substitute their judgment for the borrower's.
In sum, regardless of why borrowers refinance, the question of whether they receive a net benefit from it is for borrowers alone to answer. Loan providers do not have the information needed to second-guess them.
On the other hand, borrowers often make their decisions on the basis of incomplete and sometimes misleading information. Instead of requiring lenders to assume responsibility for borrowers' decisions, let's make them responsible for providing borrowers with the information they need to make better decisions. I will discuss this idea further in a future column.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

Sunday, April 08, 2007

Mortgage Applications Fall Despite Low Rates Apr 04, 2007, 11:34 am PDT
News provided by Quicken Loans
The Mortgage Bankers Association today announced that applications for mortgage loans fell 3.2 percent last week compared to the previous week.
The report stated that the Purchase Index increased 2 percent while the Refinance Index dropped 4.5 percent from the previous week.
Quicken Loans Chief Economist Bob Walters says despite this week's setback, he expects to see the potential for strengthening in the market.
"Despite long-term rates remaining near historic lows, the real estate market is still struggling to find its footing," Walters said. "With the recent turmoil in the mortgage industry, it is not a complete surprise to see some weariness from home buyers. However, as long-term rates remain near their historic lows, and the market continues to normalize, I expect to see some strengthening in mortgage applications in the coming weeks."
This article is reprinted by permission from Quicken Loans © 2007 Quicken Loans Inc. All rights reserved.