Home equity

Home sweet home? Now is the time to leverage your home equity, says Thrivent, by Staff Report, Alexandria Echo Press

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Given the economic turbulence of the past several years, the greatest asset that many Americans have is their home. With interest rates still near historical lows, now might be the time to tap into your home equity to help consolidate debt, embark on a home improvement project, start an emergency savings fund or even help pay for college.

Home equity loans and home equity lines of credit (HELOCs) are two of the most common ways for homeowners to borrow money by leveraging the equity they have in their home. Each offers its own unique benefits and both can offer considerable tax benefits, according to Thrivent Financial Bank.

The first step in determining which home equity product is right for you is to answer one simple question: How will I use the money?

“Many people are aware that now might be a good time to borrow against the equity in their home,” said Jill Aleshire, executive vice president of Thrivent Financial Bank. “However, slowing down and taking a closer look at how to best use that equity is the best thing you can do to start the process. “

Thrivent Financial Bank offers the following tips to help you decide if tapping your home equity is the right choice for you.

Appreciating assets

Home equity loans and HELOCS are meant to improve your long-term financial well-being, so think about how best to use the equity toward assets that will increase in value (appreciating assets). Ask yourself, “Will this earn value in the long run?” A college education or a home improvement project can be justified as appreciating investments if they result in a higher lifetime income or property value.

Emergency reserve savings

Home equity loans and lines of credit can be a good option if you are in need of protection against job loss, medical emergencies or home and vehicle repair.

First-time debt consolidation

One of the most common uses for home equity loans and lines of credit is debt consolidation. Because the interest paid may be tax-deductible and the interest rates can be lower than many creditors’ rates, some homeowners borrow against the value of their home to pay off debt.

Needs, not wants

Using your hard-earned equity for extraneous purchases is not a good use of your loan. If you don’t need the funds now, consider waiting to take out a home equity loan until you have a specific need. Borrowing once against the equity in your home can be a great way to strengthen your finances if used wisely, but be careful not to make a habit of borrowing. Limiting your loan spending to needs, not wants, is a good way to keep yourself in check.

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Debate on Reverse-Mortgage Risks Heats Up, by Maya Jackson Randall, WSJ.com

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A report by Consumers Union and other advocacy groups has ignited a debate about whether reverse mortgages are too risky for house-rich seniors in need of extra cash, just as the nation’s new consumer agency is starting to examine the issue.

The groups are urging the new Consumer Financial Protection Bureau to boost oversight of the complex loans and to move to fight scams and deceptive marketing. Other groups, however, defend reverse mortgages.

The call for increased oversight comes as the market for reverse mortgages is poised for expansion as the baby-boom generation retires. Meanwhile, lenders are aggressively marketing reverse mortgages, tapping celebrities such as actor and former U.S. Sen. Fred Thompson as spokesmen and holding seminars at senior centers to sell the loans.

Most reverse mortgages are made under the Home Equity Conversion Mortgage program, begun in 1988 and administered by the Department of Housing and Urban Development. A borrower must be at least 62 years old and have paid off all or most of the mortgage. Instead of a monthly mortgage payment, the borrower receives payments as a lump sum, monthly cash advances or line of credit. When the homeowner dies, moves or sells the house, the loan must be repaid.

The consumer advocates say seniors should use reverse mortgages—which allow older Americans to tap into the equity in their home—only as a last resort because fees can be high and the loans could affect eligibility for government-assistance programs such as Medicaid. Also, if borrowers deplete home equity, they won’t have much to pass on to heirs and could have a harder time funding long-term care, the groups warn.

Advocates also worry that if more isn’t done to help vulnerable consumers understand the risks, the expanding reverse-mortgage market could melt down just like the subprime-mortgage market did ahead of the financial crisis.

“The public, policy makers and legislators should be aware that this time, yesterday’s subprime lenders are now preying on a growing elderly population who are trying to remain financially independent in their own homes during a depressed economy,” says the report from Consumers Union, the California Advocates for Nursing Home Reform and the Council on Aging Silicon Valley released last week.

Defending reverse mortgages, groups such as RetireSafe and the National Reverse Mortgage Lenders Association say the report fails to acknowledge recent pro-consumer changes.

“I think they’re rattling the cages here without having much concrete to offer or any evidence to back up their allegations that there are widespread problems,” said Peter Bell, president of the NRMLA.

Meanwhile, the Government Accountability Office, Congress’s investigative arm, has found examples of potentially misleading claims in loan-marketing materials. Also, the Federal Bureau of Investigation warned in a March 2009 bulletin that loan officers and real-estate agents have exploited reverse mortgages to defraud senior citizens.

Congress directed the new Consumer Financial Protection Bureau to study reverse mortgages. According to a bureau official who works closely on mortgage-related issues, the bureau is beginning to examine reverse mortgages and plans to build on the Federal Reserve’s and GAO’s efforts to improve disclosures and prevent misleading advertising.

The advocacy groups say reverse mortgages are reasonable for some seniors in foreclosure who don’t plan to move into assisted living and for low-income seniors who lack other retirement assets, don’t qualify for lower-cost alternatives and can’t meet their current mortgage obligation.

But most seniors should consider alternatives, the groups say.

Still, Barbara Stucki, a vice president at the National Council on Aging, expects homes to become more popular sources of income for retirees, given that fewer Americans have defined-benefit pensions and more Americans are living longer after retirement.

“Today’s retirement realities are daunting, and when you combine that with the economic challenges, people are going to be tapping the equity in their homes,” she said. “We want to make sure that options like reverse mortgages are viable and properly regulated.”

The industry itself doesn’t seem opposed to new regulation.

“We understand that the demographics are in our favor. The market will grow, and the need will grow because people need to fund longevity, but it will only grow if consumers feel the products are fair and the people who offer them are trustworthy,” said Mr. Bell of the National Reverse Mortgage Lenders Association. “If the regulatory regime helps get us there, that’s great.”

Write to Maya Jackson Randall at Maya.Jackson-Randall@dowjones.com

The Art of the ReFi, by Jason Hillard, Home Loan Ninjas Blog

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I was asked by Portland Realtor Fred Stewart recently if I wanted to write an article on refinancing for his blog, Oregon Real Estate Round Table. This became a challenge that I was not expecting.

I set out to see what the competition is “blogging” about the topic of refinancing. What I found is more of the same: advertisements disguising themselves as blog posts. I guess I should keep in mind that my blood pressure usually skyrockets when I read other mortgage blogs.

So let me walk you through how/why to refinance in the current mortgage environment. The first step is admission, and is perhaps the hardest thing to come to grips with:

You do not own your home.

If you have a home loan, then the bank owns your home. You own the equity. You may not have equity. You may just own a mortgage. This idea may sound counter-intuitive, but once you accept it and move on, your view on refinancing may change. You should now be thinking, “how can I leverage the portion of my home’s worth that I actually own?”

If you’re still having trouble, consider this. You are thinking about your “home”. I am talking about your “house”, and the debt instrument against it, which is owned by a bank. Separate your emotions from this exercise.

Now, I am a firm believer in the concept of Mortgage Planning, which has at its core a very simple concept:

Untapped equity does you no good.

Let me give you an example. If you own $60,000 in home equity, well then let’s start by saying that you are in much better shape than most. However, if you choose to leave that equity in the “untapped ether”, it is nothing more than the theoretical result of a process that you may or may not engage in. In other words, if you are not selling your home in the next 3 years, who cares how much equity you have? Who knows what your home will be worth in 3 years?

Now let’s take it one step further: what if you lose your job? What if you could really use that $60,000 while you look for a new job? Well, good luck qualifying for a refinance without any income. It won’t happen. So, having $60,000 in untapped equity, which is the percentage of the house you ACTUALLY own, is completely useless. Had you taken that equity out when it was readily available, you would have a $60,000 slush fund for a rainy day.

This method of managing equity requires restraint and discipline, but you can see that it illustrates the outdated concept of homeownership. We are all for people “owning” homes, but you have to understand that while you may be a home “owner”, the bank actually owns the lion’s share of the four walls that comprise your house.

So, when I hear some mortgage agent saying “rates are at historic lows” and “now is a great opportunity”, my stomach does a backflip. We agree, rates are low. But that is an awfully generic statement. And yes, now is a great opportunity, but for who? The fact is that when it comes to refinancing, the circumstances which need to be considered are highly individualized. What if you can’t get the “lowest rate” because of credit score?

Well, maybe you shouldn’t be so hung up on the rate.

Well, now what in the world would I say that for? Let’s break it down. Say you have a rate of 5.5% on your current mortgage and $40,000 in equity available (“equity available” in this case refers to the portion of your equity which you could actually pull out by refinancing, not the total amount of equity). You also happen to have about $800 a month in credit card payments.

You call up a mortgage professional to inquire about a refinance. Your credit score and LTV (loan-to-value) conspire against you though. The rate you would qualify for is less than .375 lower than your current rate. You ask yourself, “why would I pay $6000 in closing costs for what is essentially the same rate I have now?”

The answer is that by doing so, you have leveraged your available equity to save something like $600 a month on your total monthly “out-go”. This is the equivalent of getting a $600/mo raise in your salary. Also, you have transferred all of the interest from your credit cards to your mortgage, which is tax deductible. This saves you more money. The lesson: don’t get so hung up on the rate. Focus on the outcome.

Time for disclosure: I have avoided using “exact numbers” and precise monthly payments because that requires all kinds of math and figures, which people hate reading and would only serve to muddy the point. You can get exact numbers for your situation by contacting us, or any other mortgage professional.

Let’s review one more situation; one which is much more common for the current market. You have a pretty good rate from a couple years ago, but don’t want to miss out on this “historic opportunity” because it’s all you have heard on the radio for the last 2 years. Of course, since your last refinance was a couple of years ago, you probably don’t have a lot of available equity. So you aren’t looking for any cash out, just a simple rate & term refinance.

Let’s say that your loan amount is such that lowering your rate about .75% on a new refinance only saves you about $120 a month. The old school mentality says “why pay $6275 in closing costs to only save $120 a month?”

After all, that would mean that it would take 52.29 months to pay off your refinancing costs. ($6275/$120 = 52.29)

You’re probably thinking you are losing $6275 in future earnings, which seems like a lot to trade for $120 a month now. However, what if you don’t sell your home? What if the value drops further, and that $6275 isn’t there in the future? What if your salary gets cut at your job? The $6275 is theoretical. The $120 a month savings is tangible. You need to frame the question this way:

Which is more valuable to me? The tangible savings now, or the possibility of return in the future?

We are not recommending you tap yourself out just to save a few bucks every month. That’s the point. The answer to this question should be as unique as the person asking it.

However, you do need to start thinking about your mortgage in this way. It’s a brave new world, and it is likely here to stay.

http://www.homeloanninjas.com/2010/09/23/mortgageblog-the-art-of-the-refi/