Will we see 4 percent mortgage rates?

EDMOND — Just this week there has been considerable buzz that the Fed will release $1.2 trillion in new money and use that money to purchase government bonds as well as mortgage-backed securities. I don’t know too many people who are thrilled that the government is printing money faster than Congress can figure out ways to spend it. And I know even fewer people who can accurately predict how such an infusion of cash ultimately will play out in our current real estate market.

The possible scenarios play out like this year’s Oscars. Some good, some bad, some mediocre and maybe one or two really good ones; but all of that depends on your perspectives of what’s best for the economy. I can promise you one thing, those of us in the business of financing homes will be busy answering one question, “What do you think home mortgage interest rates are going to do?”

By infusing this cash into bonds and mortgage-backed securities, the Fed intends to drive home mortgage rates lower and stimulate purchase activity in the nationwide glut of available home inventory. For hard-hit areas like Phoenix, Las Vegas, California and Florida this could provide just enough stimulus to not only stop the bleeding but also reverse the negative equity trend faced by these markets.

For our local area, the potential benefits of this housing stimulus could make for a brisk spring and summer home buying/refinancing season. The OKC metro area has not seen the same decline in property values. Most areas of the metro have seen home values remain steady or slightly improved during the past year. At the same time we have seen our available home inventory grow while potential home buyers take longer than usual to think over their options before making buying offers.

Low residential interest rates can be a powerful motivator for qualified home buyers to finally make the purchase decision they have been putting off. But all is not roses and Russell Stover’s. Lending guidelines have tightened significantly and buyers will have a bit of education awaiting them.

The only 100 percent financing options that remain are for veterans eligible for V.A. benefits and Rural Development Housing loans through the U.S. Department of Agriculture. Both of these financing options have specific borrower guidelines so consult your mortgage provider carefully to make certain you understand all restrictions.

F.H.A. home mortgages now require a minimum down payment of 3.5 percent plus closing costs. However, these costs can be provided as a gift from a qualifying relative. Again your mortgage provider will gladly review all of these conditions with you.

There will be a lot of talk about F.H.A. Streamline Refinances. If you already have an F.H.A. mortgage on your primary residence, you can more than likely take advantage of this refinancing option to lower your interest rate while saving quite a bit on your closing costs.

If your current home loan is a V.A., you also have a streamline refinance option. It is called the Interest Rate Reduction Refinance Loan and it is a great way for qualifying veterans to realize considerable savings on their monthly mortgage payments. This refinancing option also has lower closing costs associated with the process. There are, however, several conditions that must be met in order to qualify. Mostly the conditions are relative to the value of the home and the timeliness of past mortgage payments.

I shouldn’t forget to mention that should interest rates fall, this also will make Reverse Mortgages more attractive for seniors older than the age of 62. There are a great many myths circulating about Reverse Mortgages. But for many senior home owners a Reverse Mortgage can be a safe and secure way to supplement the income that has been lost in our current economy.

Will we see 4 percent rates? No one knows for sure. If you hear low rates advertised carefully read the fine print to make sure you’re not paying exorbitant fees that could potentially negate any anticipated benefit. To rob a phrase from classical literature, these could be the best of times in the midst of the worst of times. The wise person gathers information, thinks and prays about it, seeks counsel and then makes the best possible decision.

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Senior citizen & need a loan? Reverse mortgage

Can banks refuse to give loans to senior citizens? What are other options if banks reject? We find answers to your questions. We also find alternatives for you.

I am 72 years of age. I am a Government retiree earning a pension of around Rs 16,000 per month. My wife and I live in a three-bed room flat, which is jointly owned by us, and there is no encumbrance. Our flat is worth over Rs 40 lakh.

I approached my bank for a loan of Rs 16 lakh against the property. They refused to give me a loan and didn’t give me a straight answer either.

Is there any policy guideline from the Reserve Bank of India or the Government that states that banks cannot give loans to senior citizens even if the loan is fully protected by the collateral security offered?

You have approached your bank for a secure loan with your home as collateral. Nevertheless, banks cannot offer you a loan against your property unless your regular income is equivalent to the repayment capacity for the loan you seek.

Your repayment capacity

The loan is given as a certain percentage of the property's market value, usually, around 40 per cent to 60 per cent.

That is:

You are eligible for: Rs 16 lakh loan amount (40 per cent of 40 lakh)

Maximum loan tenure a bank will provide: 15 years.

Monthly EMI: Rs 18,000

Your monthly EMI is more than 100 per cent of your current income of Rs 16,000 per month.

Result: Banks do not offer loans, where your EMI exceeds 50 per cent of your monthly income. Hence a loan against property (LAP) may not be possible.

What are my options?

1. Pledge a part of the value of your property instead of pledging the entire property.

You’ll procure a much lesser loan amount but it will not exceed 50 per cent of your current income.

2. Pledge investments, like shares, securities, fixed deposits, insurance policies, provident fund account etc, as collateral and obtain a loan against them.

For instance, you can obtain a loan against the surrender value of your life insurance policy from the insurance company or from a bank or obtain a loan from your provident fund account if you have had an employee provident fund account for more than 5 years.

3. Check the possibility of special loan schemes for pensioners

Several public sector unit banks offer special loan schemes against the pension amount you avail on a monthly basis. They might give a loan that does not exceed x times your pension amount with significantly lower interest rates compared to regular rack rates.

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LendingTree.com Helps Consumers Find Reverse Mortgage Lenders

LendingTree launches reverse mortgage service for interested senior homeowners looking to speak with lenders who can help them consider using the equity they have built in their home.

Charlotte, NC (PRWEB) February 27, 2009 -- If you're over 62 and a homeowner you have a unique opportunity to get significant, spendable value from your home, even if you still hold an existing mortgage. Recently, LendingTree launched a reverse mortgage service for interested senior homeowners looking to talk with lenders who can help them consider using the equity they have built in their home.

Senior homeowners have spent years, often decades, building up equity in their homes. An increasingly common practice of homeowners over the age of 62 is to obtain a reverse mortgage (also known as a HECM, a home equity conversion mortgage) which gives qualified senior homeowners a proven solution to help fund their retirement needs. In addition, and importantly to most independent seniors, a reverse mortgage allows them to live in their home as long as they wish.

Reverse mortgages may be a good option to consider for some, but before moving forward, it's important to fully understand how they work. The following helpful advice comes from the LendingTree Smart Borrower Center.

* Reverse mortgage candidates must be at least 62 years of age, have significant equity in their property, and be looking for a reverse mortgage on their primary residence only.


* Anyone who intends to apply for a reverse mortgage is required by law to complete a 45-minute counseling session with a HUD (Housing and Urban Development) approved counselor*.


* The sum from a reverse mortgage can be paid to you in a couple of different ways; all at once in a single lump sum of cash; as a regular monthly loan advance or as a credit line that lets you decide how much cash to use and when to use it; or you may have the option to choose a combination of any of these payment plans.


* The amount of cash you can get from your home's equity is determined by a number of factors including your age, your home's value and location, and current interest rates.


* Reverse mortgages may have tax consequences, could affect eligibility for assistance under Federal and State programs, and may have an impact on the estate and heirs of the homeowner.


Keith Moore, Senior Vice President of Emerging Businesses for LendingTree.com said, "One of the defining characteristics of LendingTree is our dedication to helping consumers. With baby boomers nearing and entering retirement age, a larger population than ever before is now eligible for reverse mortgages and LendingTree, as always, is here to help. LendingTree is exactly the resource for consumers looking to obtain all types of home, car, and education loans - and we're pleased to expand our offerings to benefit senior homeowners."

For more information about reverse mortgages, visit the LendingTree Smart Borrower Center.

About LendingTree, LLC:
LendingTree, LLC is the nation's leading online lending exchange, providing a marketplace that connects consumers with multiple lenders that compete for their business. Since inception, LendingTree has facilitated more than 25 million loan requests and $185 billion in closed loan transactions. LendingTree provides access to lenders offering mortgage home loans, mortgage refinance loans, home equity loans/lines of credit, auto loans, personal loans and credit cards via http://www.lendingtree.com/www.lendingtree.com and 800-555-TREE.

Launched in 1998 with headquarters in Charlotte, N.C., LendingTree also owns and operates LendingTree Loans sm, GetSmart.com, and HomeLoanCenter.com. LendingTree, LLC is a subsidiary of Tree.com, Inc. (NASDAQ: TREE).

* Call HUD to find a local counselor at: 1.800.569.4287

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Reverse mortgages free up cash for the house-broke

You are really going to like the new Annual Information Forms (AIF) that publicly traded companies are issuing. They take difficult business models and break them down into plain English.

When a company goes out to raise funds for a new stock issue or a debt financing, we will often get to read the prospectus. It’s full of detail and speciality terms and expressions, but the AIF isn’t. It discusses the business they are in, who their competitors are, why they make money, even who the directors are and how many shares they own. This week I want to review how a reverse mortgage works, so I thought a good place to start would be a review of a company called Home Equity. They are listed on the Toronto Stock Exchange and earn their cash flow from creating a reverse mortgage portfolio.

They just recently applied to become a bank, as this would give them access to even cheaper financing than they currently raise in the debt markets. Searching through their latest stack of financials, I came across the AIF, and that’s where I ran across this tidbit. Canada’s aging population creates an attractive environment for the reverse mortgage market.

Seniors will continue to be one of the fastest growing population groups in Canada. Statistics Canada estimates that by 2016 seniors will represent 17 per cent of the population. Based on data from a 2001 census, 1.71 million homes are owned by this age group, of which 85 per cent are reported to be debt-free, resulting in 1.45 million mortgage-free homes in Canada owned by persons age 65 or older.

At the current average national home value, and assuming an average loan to value of 30 per cent (I’ll explain that in a minute), and a 10 per cent market penetration, this market represents approximately $9 billion in potential reverse mortgage volume.

A reverse mortgage has all the terms and conditions of a regular mortgage, except a payment. Instead of paying the mortgage down, the payments you would normally make compound the debt up, so you owe more as time passes, not less.

Think of it from the lenders perspective. They want collateral and a very high likelihood that they will get back all their principal and interest. Unlike a traditional lender, a reverse lender doesn’t know when they will get paid back, just that they will.

Here’s a typical deal. Bob and Betty own a lakefront home in Vernon. When they bought it 50 years ago, the town folk thought they were nuts. Who wants to drive all the way out there on that pothole road, slip and slide out during the winter and have a big mortgage payment?

Well, you can guess what happened. The big mortgage payment is all paid off, the house and property are worth over $1 million, and the town folk are saying they all knew lakefront was a great buy. But for Bob and Betty, there was no extra for building up a big savings or investment account, and consequently they are real estate rich and cash flow poor.

They want to stay in the lakefront home for several more years, but with higher property taxes and less income what choice do they have?

It’s what we refer to as broke, but not poor. That’s where a reverse mortgage (or similar arrangement) can let them stay on.

The lender looks at the market value of $1 million and agrees to lend them $300,000. That’s known as the loan to value ratio, and in this case it’s 30 per cent.

Reverse mortgages typically have the ratio in this area, so that is very different from a typical mortgage in that most homes loans are in the 75 per cent to 90 per cent range, loan to value ratio, zone. The rate floats, usually 4.5 per cent over the t-bill rate, so around 6 per cent these days.

At that rate, after five years the homeowner would owe $400,000. Note how the mortgage is climbing up in value, which makes you wonder what the value of the real estate collateral is doing.

One interesting career for the mathematically inclined is that of an underwriter. You figure out what rate and terms you can lend at so that your credit rating will stay high. The flip side is an analyst at a credit rating agency who reviews your lending policies and criteria and gives you a credit rating.

That’s why this business of issuing reverses has evolved into the 30 per cent loan to value ratio range. It’s where the risk for the lender maintains the structure with a double AA rating.

The underwriter assumes the real estate values increase by the rate of inflation, so if the CPI is running at 2.5 per cent a year, then that $1 million property is projected to be worth around $1,131,000 after five years.

The mortgage value is up by $100,000, the value of the real estate by $131,000, with lots of room for error either way. So, for example, the net after selling the home and paying off the loan would be around $700,000, plus the value of the $300,000 income portfolio, so we’ll say $1 million net.

About 75 per cent of all reverse mortgages are paid out within the first 15 years of the loan so many reverse borrowers are using the loans to extend the time they can stay in their homes, using the funds borrowed for trips, property taxes, gifting, and new kitchens (where else can you lend money and watch your borrower increase your collateral value?).

There are alternatives that can create similar outcomes for those borrowers focusing on short-term solutions, as in how do we stay here just another five years? You could put up your home as collateral for a line of credit.

Let’s say you just want to have an extra $15,000 a year (which would be like earning 5 per cent after tax on that $300,000 loan).

So for the next five years you keep bumping up your credit line by a $15,000 withdrawal. At the end of the fifth year you owe just over $90,000. In this scenario, the net works out to around $1 million plus $40,000.

There are so many variables in this calculation, as it depends if your intention is to spend only the income you generate, or spend part of the $300,000 loan on consumable items right away. Either way, the concept of borrowing against a debt-free principal residence allows retired homeowners to stay in their home for a few more years.

The exercise of thinking investments through in reverse is good practise, always try to visualize both sides of the transaction. The exercise of reading the AIF for any business you work in or invest in , is an exercise any new investor should try.

Dave Ellis is a certified financial planner and a fellow of the Canadian Securities Institute. He is a vice president at RBC Dominion Securities in Vernon.

If you would like more information here’s the roadmap to get a read on AIF from Home Equity. Go to www.sedar.com. Access the company profiles, under H for home equity

income fund. Scroll through looking for the Annual Information form

published March 28,2008.

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