Your Future is Now

      The farmer knows he must become adept at one of two things:  Planting in the spring or begging in the fall.  It’s time for planting….

 

Oftentimes when I meet with clients, I hear statements like: “I don’t need the money right now; but when I do need it, I’ll get in touch with you.”   Today, I’ll attempt to show you how faulty this line of reasoning is, and how to make your home’s equity work for you now to take care of your future.      As you are hopefully aware, the HECM Adjustable Rate Mortgage (ARM) allows the borrower to elect to place their funds in a Credit Line or Line of Credit, from which the borrower can withdraw funds as needed.   Interest only accrues on the balance of funds that have been withdrawn, and it thus operates much like a Home Equity Line of Credit. Of course, with the Reverse Mortgage Credit Line, you are not obligated to make monthly payments.      Now for the huge difference: the Reverse Mortgage Credit Line grows in size as time goes by.   That’s right, I said it: the unused balance of your Credit Line becomes larger each month.  Your unused balance is not gaining interest, so you’re not going to be taxed, but it will grow just as if the bank was paying you interest.      If you look at a typical Reverse Mortgage Loan Comparison (which any lender will show you), you’ll see a figure called the Credit Line Growth Rate.   At this moment in time, the Growth Rate will be your Interest Rate plus 1.25%.  On the Reverse Mortgage Loan Comparison I created today, the Interest Rate is 4.475% and the Credit Line Growth Rate is 5.725%.   I know I’m putting some of you to sleep with these numbers, but stay with me now; this is where it gets interesting.      Our borrower, Mr. Sample, closes his Reverse Mortgage Loan at the age of 64.  He told me he is not retiring for another ten years so he doesn’t need the funds right now.  He places his funds ($230,000) in the Credit Line Account which has a Growth Rate of 5.725%.  At the end of the first year, his available Credit Line balance has grown to $243,167.50.  Not too shabby, but since the Growth Rate compounds, it grows faster and faster each month.  At the end of 10 years, the available balance has grown to a whopping $401,332.84, and all Mr. Sample had to do was make a decision for his future without waiting until he was up against the wall.

Good decisions are generally made when we’re not under pressure.  Do yourself and your family a favor and think about improving your future today.

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Home Values Rising

All right Baby Boomers, buckle up your seat belts, the home equity roller coaster is about to roll. After some years of static or even declining home values in some areas, the trend is definitely headed upward.  In the metropolitan area which includes northern New Jersey, New York City, Westchester, Long Island and southern Connecticut, it’s been reported that home prices have appreciated as high as 12% in some locales.  In addition, predictions are for increases in the 5-6% range for the coming twelve months.  Most of these increases are fueled by continued low interest rates, a shortage of housing merchandise, and even some stability in the job market.

Nationwide, Senior’s home equity has soared to over $6 trillion dollars with an increase of $164.9 billion dollars in the last quarter of 2015. I don’t know about you, but I still can’t wrap my brain around those numbers – but they do show home values rising…and that can only be good.

So, what does this mean for you and me? Too many Boomers got caught up in the refinance craze in the early 2000’s and galloped toward retirement with a fat mortgage payment to handle.  Perfect clients to consider a Reverse Mortgage;  however, over the past few years, we estimate one in five people who contacted us to research a Reverse Mortgage, didn’t qualify due to a shortage of equity in the their home.  Therein is the good news of this essay:  if you were told that a Reverse Mortgage wouldn’t work for you before; the time may now be right to hit the restart button and find the smooth path to enjoyable retirement years.  Give us a call and discover The. Golden. Years.

It pays to get old….

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Misleading the Public

Since I began specializing in the field of Reverse Mortgages (after 34 years in the world of forward or traditional mortgages), it has been my habit to read everything I see on the subject of Reverse Mortgages.  The Reverse Mortgage is such a different animal from the forward mortgage that I acquired more than a few gray hairs trying to make the transition from traditional mortgaging to learning to think in reverse.

It is no small wonder then that so many of the articles I read by self-styled experts are rife with mistakes, errors, inaccuracies, and in some cases are outright misleading.  I believe this is largely due to a lack of knowledge, though that is hardly an excuse – journalists, columnists and reporters should do the research to get their facts straight.  Occasionally, the misleading starts with the title to the article, and that’s the worst kind because even someone just scanning the pages of the publication can become misinformed with the next flip of the page.  Such was the case when I read the weekend edition of Newsday, a daily newspaper covering Long Island and New York City.  In the Saturday Part 2 section, which has articles devoted to the Senior lifestyle, there was an article entitled: “Reverse Mortgage Foreclosures.”  Now, if I were just flipping through the pages, I would be left with a negative feeling about Reverse Mortgages.  In fact, a friend of mine alerted me to the article via an early morning email to clue me in to some bad press.  Even worse, the same column on the newspaper’s online version was entitled: “Reverse Mortgages Carry Foreclosure Risks.”

After reading the column, it was obvious that the writer was referring to people with Reverse Mortgages who had not paid their property taxes and/or their homeowners’ insurance.  They were thus at risk of losing their homes, but not due to a Reverse Mortgage – due to non-payment of their real estate taxes.  There are countless homeowners around the country today with no mortgage at all who default on their property taxes and are at risk of losing their homes.  During this ungodly recession, there have been more defaults, bankruptcies and foreclosures of every sort and this will probably continue until the economy improves.  As a result, both the Dept. of Housing and Urban Development (HUD), and the lenders who hold these Reverse Mortgages, along with interested groups such as the National Reverse Mortgage Lenders Association (NRMLA) and the National Council On Aging (NCOA) are hard at work to find a solution for Senior homeowners who find themselves in this predicament.  There are some excellent ideas being discussed to offset this problem, but let’s be clear, these potential defaults are not a result of homeowners having a Reverse Mortgage on their homes.

I’ll keep you posted as the solutions to this problem are enacted.

Finally, it pays to get old.

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Equity For The Kids

Since the end of World War II, the members of the Greatest Generation have been consumed with the hope and desire that their children would have a better life than they had.  Much of that is a result of living through the Great Depression and the war years.  If you listen to your parents and grandparents who survived those times, you’ll hear them talk about “getting by” with less, and not having any extra money or extra anything else for that matter.  Sacrifice was a part of their lives, and even when times became better, they lived in a frugal manner in order that their children would have more.  I can even remember my grandmother still saving balls of string in the 1970’s.

So, it is understandable when considering a Reverse Mortgage (which we know will increase in size over the years as the interest accrues) why our parents hesitate.  They look at one side of the equation and see that if the mortgage balance increases over time, then the equity must decrease, thus leaving less inheritance for the children.  If there were no such thing as appreciation, they would be correct.  Fortunately, appreciation is alive and well, albeit hibernating in the early part of 2011, but alive nonetheless.

A quick look at some recent history is in order here.  I am using figures for the New York Real Estate market derived from the House Price Index (HPI) which is “designed to capture changes in the value of single-family homes in the U.S.” and is published by the Federal Housing Finance Agency (FHFA).  In the last 20 years, New York homes have appreciated by a total of 111% including 4 years where values went down.  This gives us an average of 5.55% per year.  If we look at only the past 10 years, area homes have appreciated by a total of 68%, for an average of 6.80% per year.

Now, without going into so much detail that your hair will start to hurt, let’s look a basic example of a Reverse Mortgage borrower.  John and Mary Smith take a Reverse Mortgage on their $400,000 home at the age of 67.  Their initial loan balance (on the Reverse Mortgage) is $259,200, leaving them equity of $140,800.  Using a conservative appreciation rate of only 5%, at the end of 10 years, their equity has increased to $165,199 even after computing the interest accrual on the mortgage balance.  Going out to 20 years, their equity is $148,722 after factoring in the interest accrual – still higher than the day they started, even with the interest accruing.

The bottom line is that John and Mary lived a much better life during the years after they closed on their Reverse Mortgage, and were still able to leave their children with a great inheritance.  Something to think about.

Finally, it pays to get old.

(Cross-posted at Senior Security)

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Equity Over There, Or Equity Right Here

The subject of equity is a part of virtually every conversation about Reverse Mortgages – at least the ones of which I have been a part.  Most people have an idea of what equity actually is; in that it is something of value expressed as a dollar figure.  As it relates to a discussion of a Reverse Mortgage, most potential borrowers think of the equity in their home as the difference between the home’s market value and the balance due on any mortgages and liens.  In other words, the dollar amount that could be converted into cash if the home were sold.  In this way of thinking, they are one hundred percent correct.

We often hear the comment that as time passes, the Reverse Mortgage will “eat into the equity of my home.”  This is less true than it may seem on the surface.  While the Reverse Mortgage will increase in size due to the accrual of interest and mortgage insurance, thereby displacing some of the equity as it exists at that moment, there are other forces acting on the valuation of the homeowners’ equity at the same time.  In the realm of real estate finances, a snapshot in time does not tell the complete story.  The valuation of real estate is on a time continuum; that is, it varies [mostly] up and [occasionally] down due to market conditions.  Thus we need to step back a bit and look at the whole forest rather than one tree.  While it may be true that on the day your Reverse Mortgage monthly statement arrives in the mail, your equity has diminished by one month’s worth of interest; your home is most likely travelling on its path to increased value – and as it goes on this route, your equity increases.

Finally, as we look at the word equity in the dictionary, there are other words with similar meanings.  It now becomes easy to see that Equity = Capital = Wealth, and we can then visualize another concept – something I call Pocket Equity.  Before you close on your Reverse Mortgage, many of you will still be paying monthly payments on your mortgage(s), Home Equity Loans, and maybe a few credit cards.  So, it follows that the equity that was in your pocket (or bank accounts) diminished with each month’s payments, and was now in possession of your creditors.  While you are concerned with the equity in your home, you are reducing your Pocket Equity and probably not living the lifestyle your deserve.  After closing on the Reverse Mortgage, you can still watch your home’s equity move up with the increased value of the real estate, and at the same time, watch and feel the increased equity in your pocket without having to make those monthly payments.

Finally, it pays to get old.

(Cross-posted at Senior Security)

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A Storm Brewing? Perhaps Not…

For the past few months, we’ve been hearing a rumbling in the distance about the possibility of “credit underwriting” for Reverse Mortgages.  With dark clouds approaching and faint cracks of thunder, the Reverse Mortgage industry braced for a downpour that could prevent some borrowers from qualifying for the very products which have rescued seniors, in the past, from financial disaster including saving them from foreclosure.  The word now from the Federal Housing Administration is that they are working on something called “financial assessment” rather than “credit underwriting” according to an article in Reverse Mortgage Daily.

“We are focusing our efforts on the ability [of borrowers] to repay recurring costs,” said Vicki Bott, deputy assistant secretary for single-family housing with the Federal Housing Administration.  Apparently, lenders will be charged with determining that the borrowers have sufficient income to pay their property taxes and homeowner’s insurance along with normal living expenses. 

The rules are being written, and according to Ms. Bott: “The goal will be to ensure that any senior does have the ability to pay the property charges so they will not be in a position to default.”  Thus, it seems the focus will be on debt vs. income – which has not been included in the approval process heretofore.  A report by the Office of Inspector General last year found a growing number of loans in default for non-payment of taxes and/or insurance; which remains the responsibility of the homeowner after the closing of the Reverse Mortgage.

Lenders remain concerned about what form this new rule will take; at least until they’ve had a chance to review it.  Let us hope that it will be to the benefit of all parties.

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More About Retirement

The weather here on Long Island was almost spring-like yesterday, so I went to the park and walked around for the first time in months.  I came upon two elderly gentlemen sitting on a bench overlooking the lake.  One of the men said to his friend that his wife asked him this morning what he was going to do today.  He replied: “Nothing.”  She said, “That’s what you did yesterday.”  He answered: “Yup, but I didn’t finish.”

Okay, okay, that didn’t really happen, but some of us look forward to retirement so we can do nothing if that’s what we decide to do on a given day.  Most of us would go batty if we had to live the rest of our lives doing nothing, but doing something usually requires some money.  Those of you who have one of those incredible union pensions I’ve been reading about the last few weeks might want to go back to packing for your late winter trip to a warmer clime.  For the rest of us, let’s talk about a few retirement ideas.

I’m not an expert retirement planner (believe me) and I have made a few wrong turns in my financial life.  One problem was that I was never going to get old.  Wrong.  Second problem was some of that IRA money was needed for a juicy investment.  Bad choice.  Then, my 401k shrunk to a 201k back in 2008.  Yikes.  I’m in my early 60’s and the retirement piggy bank looks like that picture above.  Now what?

I checked the lottery numbers this morning, and – sigh – I’ll be at work tomorrow morning.  The Geico radio advertisement just informed me there is no money tree and no pot of gold at the end of the rainbow.  Social Security should be there in a couple of years when I turn 66, but that’s not nearly enough monthly income on which to retire.  As some of you have already guessed, I’m thinking: HECM Reverse Mortgage with Tenure Payments for Life.  Tax free monthly payments wired into your bank account for the rest of your life – no matter what!  You can’t outlive these payments – as long as you continue to reside in your home, those tenure payments from the bank will arrive in your account on the same day every month.  The interest rate on this Reverse Mortgage right now is around 2.5% and you only owe the interest on the amount of principal you’ve actually received.  And, you keep the ownership of your home with no monthly payments to the bank.

I know, you want to know how much you are eligible to receive right?  I’ve thought of that too, and I have a free, Reverse Mortgage calculator here, available for you to use.  Just enter some simple information and see how much closer to retirement you can be.  As for me, I’m going for a walk in the park with a big weight off my shoulders.

Finally, it pays to get old.

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Another Survey – Retirement Problems

As is often the case, the survey tells us what we already know – many people around the country have little or no retirement savings.  It’s even worse among Baby Boomers who are at or near retirement age; fully 25% of those surveyed indicate they have nothing saved for retirement, according to a survey recently conducted by The Harris Poll.  In many cases, they had to liquidate savings to pay expenses during this recession, or to survive months of  unemployment. 

Younger adults, of course, have time to try to reconstitute their 401k’s and their IRA accounts; but the Boomers face fewer choices.  One option which many have resigned themselves to pursue is simply to continue working.  Unlike the Federal government, when we run out of money, we can’t just print more of it and keep spending.  No, we must keep working, and cut our spending as much as possible…or find other sources of income – legal sources, of course. 

As you may have guessed, one of the solutions of which I am a proponent is the HECM Reverse Mortgage.  If you own your home and are still buried under heavy mortgage payments, a Reverse Mortgage can provide relief by paying off the existing mortgage freeing up money for food, clothing, heating bills, etc.  If you own your home and have no mortgage, you might consider a Reverse Mortgage set up to pay you a fixed amount of money each month for as long as you continue to live in the home.  Hopefully, along with your Social Security, this will provide the comfortable lifestyle you have earned.  As always, feel free to ask questions in the comment section….

(Hat tip: Pat Whitlock)

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Rates on the Rise

The Bond Market took a radical turn for the worse this past week, which dramatically upset the Reverse Mortgage applecart.  Lenders were scrambling all week as investors unloaded U.S. Treasuries and gold in favor of commodities such as wheat and oil.  A sell-off of Treasuries moves the price down, which has the opposite effect on the rate, so rates rise.  This has been happening gradually as I wrote here two weeks ago, but this was a large move in the last few days.  Normally, worldwide problems such as we have been witnessing in Egypt, will drive money into Bonds and gold as safe investments, but with the rising prices of food and oil, these commodities became the money magnets.  Couple this with the Fed’s insistance on printing money, and we had the perfect storm descending on interest rates.

This has a double edged effect on the Reverse Mortgage markets.  As with any sort of loan, a higher rate makes the loan more expensive in the long term.  The double whammy for Reverse Mortgages is that higher rates will reduce the principal amount one can borrow.  For many Reverse borrowers, this will not affect their decision to go ahead with their loan, but for those who need all the money they can get to satisfy an existing mortgage, this can have a negative effect on their decision.

Hopefully, the markets will settle down now that the Middle East seems to be quieting, but I do think overall we’re going to be in a rising interest rate market for awhile.   If you are on the verge of deciding to go with a Reverse Mortgage, I would advise doing it sooner rather than later – but only if it’s right for you.  Never let fear enter into any decision.

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Monday Morning Tidbits

Somebody at Bank of America must be practicing to run for political office.  A few months ago the word from BofA was: “We’re committed to our Reverse Mortgage business.”  This past Friday, BofA announced: “We’re closing our Reverse Mortgage division to concentrate on our forward mortgages.”  Sounds like a future Senator to me….just saying.

According to the Congressional Budget Office, Social Security will begin to run deficits this year – five years sooner than expected; and will continue to run in the red until something is done to fix it.  When Social Security was running a surplus, those in power found it easy to put off the tough choices that needed to be made, and continued to borrow from Social Security funds to pay for bridges to no-where.  Now, the policymakers have painted themselves into a corner.  Let’s see what they do now….just saying.

Reviewing the latest analysis of the Case-Shiller index, it appears that home prices may be stabilizing.  By the end of this year, it’s expected that prices will stabilize in 75% of the market, and in 100% of the market by the end of 2012  .  Let us hope….just saying.

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