Reverse Mortgage Tidbits

My fellow Americans,

Some interesting news! In the soon to be released Obama Stimulus Plan, there is a provision which increases the maximum loan amount for a reverse mortgage up to $625,000 through December 2009. That sounds like pretty good stuff for those with bigger homes who want some monthly payment relief.

Just in case you're not familiar with the intricacies of the reverse mortgage, I'll give you the abridged 101 Cliff Note bullet points...

1. You (and your spouse if married) must be 62 years of age or older to get a reverse mortgage.
2. The reverse mortgage allows you to pull equity out of your home, in the form of cash to you, and you don't have to pay the money back on a monthly basis for as long as you're alive.
3. You must continue to have the home which has the reverse mortgage as your primary residence.
4. If you currently have a mortgage on your home, you can refinance into a reverse mortgage and pay off your old mortgage.
5. You don't have to worry about having income or good credit, it doesn't matter when getting a reverse mortgage.
6. The amount of the reverse mortgage depends on the value of your home, your age and your life expectancy.
7. The money you take out of your home can be paid to you in lump sums or installment payments.
8. Interest accrues on the money you take out of your home.
9. You can use a reverse mortgage to purchase a home.
10. You still must pay applicable taxes and insurance on your home.

That's probably more than enough to get you started, so let's look at a scenario. You're 65 years old and just retired. You're getting a small pension and social security. Your home is worth $300,000 and you have $100,000 left on your mortgage. You need a little money, maybe $30,000, to refurbish your home and make it a little more comfortable. Your monthly mortgage payment is $925, not including taxes and insurance. The problem is you can make your mortgage payment every month, but it's choking you financially. You hardly have any money left over at the end of the month to enjoy your retirement. You want to refinance and take money our of your home to spruce up your home, but starting over with another 30 year mortgage doesn't sound too delectable to you. Aside from that, you really can't afford it anyway. What do you do?

Well, this scenario may be tailor made for a reverse mortgage. You can get a reverse mortgage to pay off the $100,000 you have left on your current mortgage and take out $30,000 in cash. If you add on closing costs you may have a new reverse mortgage of approximately $135,000 to $140,000. The beauty is you don't have to make any monthly mortgage payments for as long as your home remains your primary residence. What you've done is put $30,000 in your pocket to use at your pleasure and you've eliminated the $925 monthly mortgage payment you previously had. What a deal!

Is there a downside? Yes and no. Yes, if you think about the fact that interest is accruing on the $140,000. That means if you sell your home 3 years from now, the loan could be maybe $155,000 (just as an example, depending on your interest rate). If it bothers you that your mortgage balance is increasing instead of decreasing, that can be an issue. Also, you may feel as though you're locked into your home because it must remain your primary residence for you to retain the right to not have any monthly mortgage payments. On the contrary, there is no downside if you don't care that interest is accruing on the $140,000 and you don't intend on moving, especially since you're livin' the high life because your cash flow has increased by $925 per month.

Of course, every scenario is different and it's best to speak to a professional and get all the facts. Feel free to contact me at any time.

Kirk Charles, 973-919-8065

Obama's Big Plan!

Well, finally we have something from the feds that can have a big impact on the housing crisis! Team Obama has scored a big win with the new stimulus plan that is set to take effect sometime in March.

Here are a few highlights...

• Enabling 4 to 5 Million Responsible Homeowners to Refinance. If you're underwater on your mortgage and it's owned by Fannie Man or Freddie Mac, you may be able to refinance into a much lower interest rate, given that you've been paying your mortgage in a responsible fashion. -- If you intend to stay in your home for the long haul, this sounds really attractive.
• Reducing Monthly Payments. There will be a low cost refinance for those who don't have 20% equity in their homes. -- This sounds good if you've been thwarted in your attempts to refinance.
• Helping Hard Pressed Homeowners Stay in Their Homes. This initiative is to help those struggling with mortgage payments because of an interest rate increase, yet cannot sell their homes. -- I assume homeowners will be allowed to apply for some sort of loan modification. Exactly how remains to be seen.
• Protecting Neighborhoods. When a home is foreclosed on all of the surrounding properties are affected negatively. There is some plan to help the surrouding homeowners retain their home values. -- I don't know how this one is going to work.
• Support for Responsible Homeowners. This plan will help homeowners get loan modifications before they start missing payments. -- How will these people be targeted?
• Shared Effort to Reduce Monthly Payments. This is a plan to bring a homeowners mortgage payment down to 38 percent of his monthly income by reducing his interest rate. Furthermore, there is incentive to get the mortgage payment down to 31 percent. Lenders will also be able to reduce the principal to bring down the monthly mortgage payment. -- This sounds like a winner, which is simply just modifying the mortgage to make it reasonable for the homeowner to pay each month.
• "Pay for Success" Incentives to Servicers. Mortgage servicers will get an up-front fee of $1,000 foe each eligible loan modification meeting guidelines established under the initiative. They will also receive monthly fees for three years, up to $1,000, as lon as the homeowner stays current on the loan. -- This sounds like a winner. There's no incentive greater than money to get the job done.
• Incentives to Help Borrowers Stay Current. A monthly balance reduction plan is proposed to those who pay their mortgage on time. -- For obvious reason this sounds like a winner too.

All in all, I think this plan is ambitious and can help a whole lot of folks who are in trouble, however there may still be a whole lot of folks who are left standing outside in the storm. If your mortgage ain't owned by Fannie or Freddie, what do you do? Are Alt-A and subprime loans eligible for the plan? It doesn't sound like it just yet. How will second mortgages be affected? How will the PMI companies handle insuring the mortgages?

What I'm really saying is I don't know what's going to happen. Things are still very much up in the air. We in the mortgage industry are anxiously awaiting guidelines from banks, investors, etcetera. This housing problem is so complicated that even if the President seems to have a perfect solution for it, it has tidal wave effects throughout the entire economy, the ramifications of which are obviously undetermined at this point in time.

But, aha, I did look into my crystal ball this morning. What did I see? My prediction is that this plan is going to help a lot of people and do a great job, but implementing it might be a pain you know where. It all seems to be one giant loan modification. The question is who is going to do all of the modifying???

Anyway, if you have any questions or concerns, contact me.

Subordination Agreements

Many homeowners refinancing today have a 1st and 2nd mortgage on their home. For instance, their housing value is $300,000 and they have a 1st mortgage of $200,000 with a 6.5% interest rate and a HELOC (2nd mortgage) of $50,000 at 3%. And you know how HELOC interest rates are now, right? Low, low, low! The homeowner is trying to seal the deal to refinance the $200,000 at 4.75%. Of course, any sane individual would want to keep the 3% HELOC. (Keep in mind the HELOC has a variable interest rate. A year from now it could shoot up to God knows what!) But that sneaky little HELOC is in a very powerful position. If you try to refinance the 1st mortgage the HELOC must sign off on a Subordination Agreement.

So what you say? The Subordination Agreement means the HELOC will not take first lien position after the refinance and it will remain in second lien position. So what you say, again? Let's say that our homeowner slips into the abyss of foreclosure. The first and second mortgage would have to be paid off if the home is sold at auction. But, let's say the home auctioned off for $215,000. When it's auctioned, the mortgage in first lien position gets paid off first. In this case, the $200,000 mortgage is paid, but there's only $15,000 left over to pay the $50,000 HELOC. Of course, the HELOC gets upset because it's short $35,000! That's the risk of being in second lien position.

If the homeowner wants to refinance and the HELOC does not sign off on the Subordination Agreement, the HELOC would get paid off first in case the homeowner slips into foreclosure. You know what that means? It's almost impossible to refinance the first mortgage without the Subordination Agreement signed off by the HELOC. The mortgage company refinancing the first mortgage would almost never put itself in the position of being in second lien position behind the HELOC in first position. In this case it's purely a matter of who gets paid off first if the stuff hits the fan.

So, what am I saying? Although there's a refinance boom right now because of low interest rates, the process is not a slam dunk. In our scenario, if the HELOC does not sign off on the Subordination Agreement, the homeowner may have no choice but to refinance both mortgages, which could present another problem if the homeowner didn't get the 1st mortgage and the HELOC at the same time. Oh well, I'll save that discussion for next time...

Give me a buzz if you're in need of a mortgage...or just a friend in need!

Kirk Charles, 973-919-8065, kirkcharles@comcast.net