How Does A Reverse Mortgage Work?

Q: I am retired. I've lived in my current home for 17 years, but want to downsize into a smaller, less expensive home. A friend told me that a reverse mortgage can be used to help me buy a new home. How would that work? A: A reverse mortgage called the Home Equity Conversion Mortgage can be used to borrow against your current home's equity to buy or make a down payment on another primary home. How much you can borrow varies, depending on your age, the value of your home and interest rates. You will, of course, have to make up any difference between the proceeds of this mortgage and the sales price and closing costs of the home you want to buy. But if these costs are less than the proceeds, you pocket the difference. HECMs are insured by the Federal Housing Administration. The loan requires that you pay a mortgage insurance premium that's the lesser of 2% of your home's value or the HECM mortgage limit for your area, as well as a monthly fee that's .5% of your mortgage balance. (A new option called the "HECM Saver" introduced this week lowers the upfront fee but raises the monthly fee for borrowers who are willing to receive 10% to 18% less than they would under a standard HECM.) But that fee protects your heirs, as I'll explain later. HECMs have an advantage over many other types of purchase loans in that borrowers at all income levels qualify. But there are some caveats: You must be at least 62 years old; occupy your current home as a principal residence and either own a home free-and-clear or have only a small remaining mortgage balance. You can't be delinquent on any federal loan, and you must agree to speak with a HECM counselor. If you meet these qualifications, your house will be appraised by the lender. The total amount you'll be able to borrow will be limited to the lower of its appraised value, or the program's mortgage limit of $625,500. You'll then pay an origination fee that varies depending on the appraised value of the home, but won't exceed $6,000, plus customary closing costs, which includes the cost of the appraisal. These costs can be rolled into your loan (although this will reduce the amount of the HECM proceeds available to you), or they can be added to your cash down payment. Then you sell your old home and move into your new one. You will not have to make any more house payments on your new home as long as it remains your primary residence. When you eventually move or die, the home is sold and the lender collects the principal and interest you owe. If the house sells for more than is owed, your heirs get the difference. However, if the home sells for less than the amount owed, the mortgage insurance premium you paid guarantees that the FHA will pay the difference, so your heirs aren't stuck with a big bill. Article by JUNE FLETCHER Courtesy of WSJ

5 Benefits of a Second Home in a Retirement Plan

A second home is a luxury that many people dream about. Owning a second home can also provide practical benefits. For baby boomers who are considering downsizing, relocating, or a split-living arrangement in retirement, purchasing a second home before you retire can make sense. Here are five potential benefits: Build equity in an alternative investment. Home values have fallen, even in vacation home markets. This presents opportunities for second home bargain hunters. When home values rebound, homes in high demand locations, such as lakefront property, should appreciate quickly. Also, depending on how you use your second home, some of the capital gain when you sell it may be tax-free. Test a retirement destination. Maybe you are a city dweller fantasizing about retirement in a rural or active adult community. Perhaps you are tired of yard work and think condo living is for you. Purchasing a second home gives you a chance to test drive your fantasy over a period of years, not days, and before you make a final relocation decision. Create family bonds before downsizing. A tricky part of retirement downsizing is navigating the loss of emotional attachment to a long-time family home. If you purchase a second home as part of a plan to live there when you retire, you can begin building family memories and attachment to that home. This will make the eventual downsizing and relocation event much less traumatic for everyone. Reduce work life stress. If you choose a second home that is easily drivable from your primary home, you now own an instant stress-buster. You can spend weekends there on a whim, which provides an immediate vacation experience. Just knowing you have that option can make even the worst work weeks more tolerable and perhaps keep you on the job longer. Provide a true family legacy. Part of retirement planning includes deciding if you want to leave something for your children. Inherited money is nice, but could be soon spent and forgotten. A second home in a special location can be part of a shared family bonding experience, including those eventual grandchildren who visit. These family bonds can transform that second home into a family legacy that you leave behind instead of cash. That is our hope and plan for our second home. A second home should not be a budget-buster. But if you are in a financial position to handle it, consider these and other benefits of owning a second home as part of your overall retirement planning. Article courtesy of Mark Patterson

10 Reasons to Buy a Home

Enough with the doom and gloom about homeownership. Sure, maybe there's more pain to come in the housing market. But when Time magazine starts running covers that declare "Owning a home may no longer make economic sense," it's time to say: Enough is enough. This is what "capitulation" looks like. Everyone has given up. The Sept. 6 cover of Time magazine: This is what capitulation looks like. After all, at the peak of the bubble five years ago, Time had a different take. "Home Sweet Home," declared its cover then, as it celebrated the boom and asked: "Will your house make you rich?" The June 13, 2005 cover of Time. But it's not enough just to be contrarian. So here are 10 reasons why it's good to buy a home. 1. You can get a good deal. Especially if you play hardball. This is a buyer's market. Most of the other buyers have now vanished, as the tax credits on purchases have just expired. We're four to five years into the biggest housing bust in modern history. And prices have come down a long way– about 30% from their peak, according to Standard & Poor's Case-Shiller Index, which tracks home prices in 20 big cities. Yes, it's mixed. New York is only down 20%. Arizona has halved. Will prices fall further? Sure, they could. You'll never catch the bottom. It doesn't really matter so much in the long haul. Where is fair value? Fund manager Jeremy Grantham at GMO, who predicted the bust with remarkable accuracy, said two years ago that home prices needed to fall another 17% to reach fair value in relation to household incomes. Case-Shiller since then: Down 18%. 2. Mortgages are cheap. You can get a 30-year loan for around 4.3%. What's not to like? These are the lowest rates on record. As recently as two years ago they were about 6.3%. That drop slashes your monthly repayment by a fifth. If inflation picks up, you won't see these mortgage rates again in your lifetime. And if we get deflation, and rates fall further, you can refi. 3. You'll save on taxes. You can deduct the mortgage interest from your income taxes. You can deduct your real estate taxes. And you'll get a tax break on capital gains–if any–when you sell. Sure, you'll need to do your math. You'll only get the income tax break if you itemize your deductions, and many people may be better off taking the standard deduction instead. The breaks are more valuable the more you earn, and the bigger your mortgage. But many people will find that these tax breaks mean owning costs them less, often a lot less, than renting. 4. It'll be yours. You can have the kitchen and bathrooms you want. You can move the walls, build an extension–zoning permitted–or paint everything bright orange. Few landlords are so indulgent; for renters, these types of changes are often impossible. You'll feel better about your own place if you own it than if you rent. Many years ago, when I was working for a political campaign in England, I toured a working-class northern town. Mrs. Thatcher had just begun selling off public housing to the tenants. "You can tell the ones that have been bought," said my local guide. "They've painted the front door. It's the first thing people do when they buy." It was a small sign that said something big. 5. You'll get a better home. In many parts of the country it can be really hard to find a good rental. All the best places are sold as condos. Money talks. Once again, this is a case by case issue: In Miami right now there are so many vacant luxury condos that owners will rent them out for a fraction of the cost of owning. But few places are so favored. Generally speaking, if you want the best home in the best neighborhood, you're better off buying. 6. It offers some inflation protection. No, it's not perfect. But studies by Professor Karl "Chip" Case (of Case-Shiller), and others, suggest that over the long-term housing has tended to beat inflation by a couple of percentage points a year. That's valuable inflation insurance, especially if you're young and raising a family and thinking about the next 30 or 40 years. In the recent past, inflation-protected government bonds, or TIPS, offered an easier form of inflation insurance. But yields there have plummeted of late. That also makes homeownership look a little better by contrast. 7. It's risk capital. No, your home isn't the stock market and you shouldn't view it as the way to get rich. But if the economy does surprise us all and start booming, sooner or later real estate prices will head up again, too. One lesson from the last few years is that stocks are incredibly hard for most normal people to own in large quantities–for practical as well as psychological reasons. Equity in a home is another way of linking part of your portfolio to the long-term growth of the economy–if it happens–and still managing to sleep at night. 8. It's forced savings. If you can rent an apartment for $2,000 month instead of buying one for $2,400 a month, renting may make sense. But will you save that $400 for your future? A lot of people won't. Most, I dare say. Once again, you have to do your math, but the part of your mortgage payment that goes to principal repayment isn't a cost. You're just paying yourself by building equity. As a forced monthly saving, it's a good discipline. 9. There is a lot to choose from. There is a glut of homes in most of the country. The National Association of Realtors puts the current inventory at around 4 million homes. That's below last year's peak, but well above typical levels, and enough for about a year's worth of sales. More keeping coming onto the market, too, as the banks slowly unload their inventory of unsold properties. That means great choice, as well as great prices. 10. Sooner or later, the market will clear. Demand and supply will meet. The population is forecast to grow by more than 100 million people over the next 40 years. That means maybe 40 million new households looking for homes. Meanwhile, this housing glut will work itself out. Many of the homes will be bought. But many more will simply be destroyed–either deliberately, or by inaction. This is already happening. Even two years ago, when I toured the housing slump in western Florida, I saw bankrupt condo developments that were fast becoming derelict. And, finally, a lot of the "glut" simply won't matter: It's concentrated in a few areas, like Florida and Nevada. Unless you live there, the glut won't have any long-term impact on housing supply in your town. Article Courtesy of Brett Arends WSJ

5 Things To Know About Home Owners Insurance

Many insurers have been raising rates to make up for losses they suffered during the financial crisis, industry experts say. At the same time, insurers are competing hard for new customers, which means some of them are cutting better deals for new policy holders than for existing ones, says Deeia Beck, executive director of the Office of Public Insurance Counsel, a state consumer agency in Texas. 1. Loyalty is overrated When your annual renewal statement lands in your mailbox, check InsWeb.com and NetQuote.com to see if you can snag a better deal elsewhere. Consider moving your auto policy too; bundling home and auto coverage with the same insurer can cut your total premiums by 5% to 15%. 2. You may have too much coverage It's common for policies to contain inflation-protection provisions that automatically increase your coverage amount. "In most years, that's a good thing," says Scott Richardson, director of the South Carolina Department of Insurance. Now that construction costs have fallen? Not so much. For now, pass on inflation protection and adjust your coverage amount to a more realistic figure. Lowering replacement value from, say, $300,000 to $250,000 might shave 10% off your premium. 3. A bad rep can cost you Just as lenders check your credit history before figuring out what rate to charge you, insurers tap into national databases such as the Comprehensive Loss Underwriting Exchange (CLUE) to see what claims you've filed in the past. Those records can be full of errors, warns Doug Heller, executive director of Consumer Watchdog, an insurance advocacy group. Check your insurance report for mistakes at choicetrust.com; it's free if you've been denied coverage ($19.50 otherwise). 4. Small claims can cost you, too Go with the highest deductible you can afford and bank the savings to cover the cost of minor repairs. Filing a claim for every broken window or leaky pipe can drive up your premiums by 10% to 15%, says Don Griffin, a vice president at Property Casualty Insurers Association of America. (Some experts say that even inquiring about making a claim can raise a red flag.) Increasing your deductible from, say, $500 to $1,000 can lower your annual premium by as much as 25%, according to the Insurance Information Institute. 5. A home's history matters In the market for a new house? It may seem unfair, but claims associated with the property before you buy it can result in your paying more than you would otherwise. "Certain locations [such as those vulnerable to flooding] may be more prone to claims," explains Kiran Rasaretnam, CFO of InsWeb. To get info on past claims, ask for a copy of the seller's CLUE disclosure report (see No. 3). Yes, you're stuck with the history of the house you buy, but you can use what you find to negotiate a lower price with the seller. Article By Sarah Max, courtesy of CNN Photo by David McNew / Getty Images

5 Tips To Get The Best Price When Selling Your Property

For whatever reason, if you have to sell your property as soon as possible, don't panic! It's easy to be overwhelmed but the best way forward is to set out a plan for selling and work through it step by step. Don't be deterred if the word on the street is that 'it's a bad time to sell'; just keep the following tips in mind and selling your property quickly, and for a good price, will be achievable. There are five common mistakes that homeowners make when wanting to sell their place quickly. I am going to tell you the mistakes then give you some advice about how to overcome the error. The five most common critical mistakes: 1. Constantly reducing the price, little by little When prospective buyers see a price dropping regularly it spells ‘desperation.’ Before you list your property do your own research to find out its value. Check out what the prices are of similar places in the area. The most inspected places on the market are those that are the cheapest and also the newest listed. By placing your property at the top of the list in both categories you will have yours sold in no time at all. 2. Hiring the Real Estate agent charging the least commission To get the quick results that you are after it is essential that you hire a top real estate agent. Ask your friends, family and colleagues who they would suggest and who they have used. If you can employ a professional agent who can negotiate you another $15,000 on your selling price for $3,000 more commission, you are better off than using an agent who will ‘give your place away.’ Look for an agent who you can communicate with, who is prepared to go that extra mile for you, who has drive, commitment and will guide you through the selling process at a comfortable pace. 3. Waiting for the market to improve Waiting does not ensure a better selling price. There are hundreds of home owners who do not need to sell quickly and they will be coming on the market each and every day. You will always have competitors so if you have to sell do it now and do it with care and conviction. Who says the market is going to better in the next year or two anyway? 4. Listing your property before you have staged it One of the absolute worst mistakes is to present your place to buyers when it has not been cleaned and spruced up for sale. It is called ‘staging your place’ and can make an enormous difference to the amount you get offered. Clean out the junk – sell it or store it. Touch up any areas in the property that are showing wear and tear and get the garden regenerated, especially in the front. Potential buyers are there to look at your place and how their family could live in it, not at your belongings, so have as few personal belongings around as you need to have to live in reasonable comfort while it is on the market. Tidy the bedrooms and get rid of any excess furniture so that all the rooms look larger. 5. Consider every offer A common mistake for owners, especially those needing the highest possible sale price, is to turn down the first offer. In selling there is a saying that ‘the first offer is the best offer’ and if you talk to a salesperson in any job where price gets negotiated, they will tell you that the statement is true in the majority of cases. You will get a lot of lookers in the first couple of weeks and if you are still on the market after that the number will drop quite dramatically. If an offer comes in during the first week or two, sellers are tempted to turn it down thinking the inspection rate will stay the same, but of course it does not. So, seriously consider every offer, especially the first. Every investment you make in property requires your best attention. Large sums are made and lost through selling property, so learn how to avoid the above listed common mistakes Article by Reece Coleman