Reverse Mortgages
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A great deal has been said lately about reverse mortgages which are geared towards senior citizens. For those unfamiliar with a reverse mortgage, it is a type of loan whereby a homeowner can continue to own and live in their place of residence at the same time as they take a portion of their equity and allow it to be turned into money that they can use right now.
A reverse mortgage, as the name implies, works the exact opposite from a conventional mortgage. The homeowner does not make a monthly payment to the lender but the opposite happens- the lender gives money to the homeowner.
Eligibility for a Reverse Mortgage
Your income does not play a role in whether you will be eligible for a reverse mortgage or not. What does matter is that every individual who is listed on the title of the home must be 62 years of age or older (no exceptions are made for adult children living in the residence) and the person or persons listed must have paid off their mortgage or presently have a small portion of money remaining on their mortgage. The title will always remain with you. As well, if the homeowners own more than one house, it is THIS house that must be their primary residence. A reverse mortgage will not work for a summer cottage for example.
The reverse mortgage is an anomaly in the financial world. There can be more than one name on the mortgage but the mortgage remains in effect until the last person listed either moves out of the home, sells the home or dies.
How much money is owed at the end of the loan’s term? All of the money that was advanced to the homeowner throughout the duration of the loan plus all of the interest that has built up in that time period is the answer.
A reverse mortgage can also work in another unique scenario, i.e. in a purchase transaction. To explain this further, a senior can buy a home but not make any mortgage payments, which runs counter to how a traditional mortgage would be structured.
The Benefits of a Reverse Mortgage
How can this benefit those of an advancing age? If a senior wishes to relocate to be in closer proximity to other family members then mortgage and/or financial worries need not be a deterrent to doing so.
Other benefits to seniors include:
· Being entitled to an extra monthly income that is not taxable
Or
· Receiving a lump sum payment
· Paying for health and medical care needed in the home
· Paying for long-term care insurance
· Canceling a mortgage payment that is due and payable
· Paying for repairs and renovations needed for a home
If you are on a fixed income and fit the aforementioned criteria, a reverse mortgage is something that would be well worth considering. This is especially the case if you find yourself constantly worried about how you are going to pay this bill or that bill. You can supplement your small income with a reverse mortgage. The money you receive from the mortgage should not affect your eligibility for social security or your need for Medicare.
The Options for a Reverse Mortgage
There are three options for a reverse mortgage if you decide that it is in your best interests. Firstly, you can choose to accept a lump sum of money. The second option is to choose payments on a monthly basis. There is also a third option and this is the one that tends to be favored by most individuals. That option is to accept a line of credit. If you do this then you will be granted access to money any time you require it. The positive side to this is that the money gains interest as time passes and you therefore do not get stuck with a penalty as those for example, who choose the first option, that of receiving a lump sum all at once.
Buying REO Properties
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What IS REO property and how do you buy REO Property ? It is Real Estate Owned. It is property which is in the possession of a lender as a result of foreclosure or forfeiture. In today’s economy there is to put it mildy a surplus of REO property on the market. This may present opportunity for the real estate investor, speculator or home buyer, but be cautious.
Always be sure to conduct home inspection for the bank owned property. The previous property owner might have done something to the property that the bank is not aware of.
Usually, VA or FHA financing is not allowed on REO properties.
The benefit of purchasing a REO owned property would be the discounted prices these properties are priced down to. Lenders are in the business of lending money and will work hard to release properties that have been repossessed and or foreclosed on.
REO – Bank owned properties, can most often be purchased at a discount to current market valuations. Sometimes in really strong real estate Markets, this is not the case.
REO properties are generally sold “as is”, so make you look the property over with a fine tooth comb if you are planning on doing any repairs yourself.
Bank owned properties are often purchased by real estate investors. Many REO houses require a lot of work by investors to be marketable. A handy first time home buyer can buy a REO requiring cosmetic repair and after some repair have instant equity in their home.
Buying Bank Owned Properties
In the world of real estate there are many, many types of properties that you can buy. The majority of the time people hire a real estate agent to help them buy a property that is listed on the MLS (multiple listing service) of the area that they are looking for. Whilst most people go through this route, other, perhaps more astute, or bargain hunting people, look at houses that are either in foreclosure of REO (Real estate owned) by a bank or Loan Company.
A common misconception that people outside of the real estate industry make believes that foreclosure and an REO purchase is the same thing. Although they are similar, they are in fact different; more precisely they are corollaries of each other, with an REO being a direct result of a failed foreclosure sale. To understand the difference between the two and how they vary from each other it is best to define what each is, and their respective merits.
The term Real Estate Owned propriety is sometimes used ambiguously, but has a specific meaning in the real estate industry; a property that has been fore-closured on by a bank or Loan company and has reverted back to the ownership of the lender. So as already explained above an REO is the result of property that has been foreclosed on, and is produced only as a result of a failed foreclosure sale.
Knowing that an REO is the result of a foreclosure leads us to wonder what is foreclosure, what are the benefits of buying a house that has been foreclosed on and what are the reasons why they fail to find a buyer.
Under the terms of foreclosure a bank or Loan Company reposes the property due to the tenants inability to continue with payments on their loan; that they used to purchase the property the first instance.
Once the foreclosure notice has been issued and foreclosure has started the bank or Loan Company legally has the right to sell the property; regardless of whether the tenants haven’t moved out yet.
In order to purchase a property in a foreclosure sale there are a number of items that the bidder needs to successfully complete. Firstly the buyer has to submit a minimum bid that includes the following:
The loan balance on the property. All accrued interest on the property Attorneys fees All costs associated with the foreclosure process.
Regardless of the above, in order to bid at foreclosure the buyer must also have a cashier’s check in hand for the full amount of the bid. If the buyers is successful then they will be offered the house in its ‘as is’ condition; complete with tenants who need evicting and liens secured on the property.
Because of all the difficulties and lack of concrete benefits in buying at foreclosure, most people who want to buy a foreclosed property will go through the REO route.
The REO method of purchase offers much more benefits, incentives and less stress than the foreclosure method.
When a bank or Loan company takes back a property they then have the property listed as a sellable asset on their books. The role of the bank is to maximize the wealth of its shareholders. If the foreclosed property can be sold to release cash to invest, then this is the main motive for the bank or Loan Company; sell the property and invest the cash.
In most situations a bank will be looking for a quick sale, and as such will offer many incentives and benefits to prospective buyers:
Savings of up to 20% off the market value of the property Market an REO purchase as the most simple way for first time homebuyers and experienced investors to buy properties Give prospective buyers have immediate access to the property for home inspections Remove all back taxes and liens Allow negation on rehab costs, interest, closing points, loan amount, etc. Describe the purchase as nearly 100% risk-free Accept a less than normal down payment
Although the benefits of an REO seem to out weigh those of a foreclosure purchase you should not take them at just face value; you should always look into exactly what you are getting and what you are liable for, should you choose to purchaser a property.
In a REO sale the bank will evict the tenants (or you could leave them there and let them pay rent), remove any liens etc and do the basics. Most of the time however the bank will not make any repairs to the house and want to sell it to you in what is called ‘as-is’ condition: the condition the house was in when it reposed it. IF this is the case you should seek the services of a home inspector, to find out the sate of the property and to help you decide whether you wish to continue the transaction.
Although a bank owned property might look like a good deal on the outside, it is necessary that you do your background research on the property before you commit to any contracts. Your first priority should be to find out what the house is worth in today’s current market; having a comparative market analysis carried out will help you with this aspect of the purchase.
The reality that a bank or loan company is trying to sell its REO property does not necessarily mean that they are going to sell the property at a bargain price; such would be going against their role: to maximize shareholder worth.
If after you have had the property checked you still wish to continue with the purchase you will most likely make the bank or Loan Company an initial offer. Generally the bank’s response will be to counter the offer and ask for a higher price; a standard trick for the industry.
The emphasis will now be on you to decide on what you want to do. If you decide that the price that the bank or Loan Company is asking for does not reflect the market value of the property then you can stop and walk away. If you are happy you can counter their offer and submit a new bid.
It is most likely that the bank or Loan Company will have a whole department to handle their REO transaction, and as such it may take a while to get back to you, as around 3 or 4 people may have to review your offer.
If the bank approves your offer, then great for you! If they reject the offer however you should look at whether you are happy paying more or whether you feel that the price they are asking is either above market value or unacceptable to you.
If you continue with the transaction the bank or loan company will draw up a contract. It is necessary for you to take a good look at the contract and maybe have your attorney go over it with you, as once you sign it you are liable for what it states.
If you have not done so by the time you accept the banks offer you should have the house inspected by a professional. If you are waiting for an inspection, and already have the contract drawn up you should have an inspection contingency written into the agreement, so that you can pull out of any deal if the result of an inspection produce surprises or faults you are not comfortable with. You should always remember that the bank or Loan Company will always want to sell the property ‘as-is’.
You should if possible always consult a Realtor or real estate agent before committing to a contract, or indeed making your offer to the bank or Loan Company. If you do have a Realtor working for you, you should as him or her to find out from the listing agent the following details about the property, before you come to you conclusion on the offer you will make:
Are there any inspection reports? What repair work has the bank agreed to? Is there a special “as is” form? How long will it take the bank to accept your offer? How do you, or your agent, deliver the offer?
Should You Pay PMI or the Higher Interest Rate
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You Compare mortgage rates but,should I pay PMI or go with the loan with a higher interest rate but no PMI? This is a choice many borrowers face when deciding on a loan. There are many pros and cons for each choice. Borrowers should talk to an experienced Mortgage Consultant or Financial Consultant to help with their decision.
Some lenders pay the mortgage insurance on loans over 80% by raising the rate by a small fraction. This allows the borrower to get one loan and not having an additional expense which is not deductible on one’s taxes.
There are loans out there where PMI is not required and your interest rate will not be effected as well. For example, keeping your LTV (loan to value) below 80% will allow you to not pay PMI with any loan, where it may just be a lender that does not require it.
Why do lenders charge PMI if your loan is above 80% LTV? Studies have shown that most foreclosures happen before the borrower has 20% of the mortgage’s principal paid off. So, loans with an LTV of 80% or higher pose a greater risk to the lender.
You may also choose to do a combo mortgage like an 80/20 to avoid PMI. A combo mortgage carries with it a higher rate
on the second mortgage. Even with a higher rate second the borrower often comes out ahead when compared to a traditional loan with PMI.
Some savvy buyers will negotiate for the seller to pay the PMI as a one time up front charge. Be sure to ask your Loan Officer and Realtor if seller paid PMI is an option for you.
PMI is not tax deductible, but mortgage interest is. You will want to take that factor into consideration when making your choice.
There are also some lenders that offer a lender paid MI program. On pay option loans they will usually increase the start rate of the loan.
There are also some loan programs now available that do one loan up to 100% with no PMI, ask your Loan Officer for more details.
Private Mortgage Insurance (PMI) must be maintain until the loan balance falls below 78% loan-to-value (LTV) ratio. The decision on getting a loan with a higher interest rate or one with PMI depends partly on how long for the loan to reach 78%. Also, home owners tend to opt for mortgages with PMI if they intend to refinance in the near future.
Compare Mortgage Rates , Can You Afford To Buy A Home
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Can I afford to buy a home? There are many different factors that go into deciding if you can afford to purchase a home. The most important factors are what is my present income and how much do I have saved. Borrowers can qualify for many different loan purchase programs however they must decide if they can afford it and compare mortgage rates
When someone asks “can I afford to buy a home?”, he or she is often thinking of the short term of 1 or 2 years.
Instead, try thinking of the long term. In many parts of the country, over a period of several years, homes increase in value by at least 5% a year. So, home owners have an asset that is growing.
At the same time, if their mortgage has a fixed rate, their housing expenses are staying relatively constant, unlike renters, who are seeing an increase in housing expenses generally of 3% to 5% a year.So, in the long term, home owners have less money going out and an asset increasing in value.
Why should you pay for someone else’s mortgage? In a sense that is what you are doing when you are renting. Contact your mortgage professional to see what price range of home is right for you and let your money work for you and not your landlords,
Investing in a home is still one of the safest places to invest your money. Real estate will almost always appreciate and give a good return on the initial investment.
When considering to buy a home and figuring out how much you can afford, it is a good idea to sit down with your spouse and calculate your total monthly expenses. This should include all of your monthly bills such as car payment, credit card payments, cell phones payment, personal loans, cable/satellite television bills, etc… This way you can calculate how much you can comfortably afford to spend on a monthly mortgage payment and not fall into the trap of buying a home that is out of your price/payment range. Many homeowners and potential homeowners can qualify for homes and monthly payments that are much, much more expensive than what they can comfortably afford, while living the same lifestyle that they are used to. Please remember just because you can qualify for a $400,000 home does not mean you have to buy a $400,000. Buy a home because it meets your needs and most importantly it is within your budget comfortably. Allowing your home to own you instead of you owning your home has been an increasing trend over the past few years with the availability of all of the new mortgage programs and competitive underwriting programs available out there.
Can you afford to continue renting? Home ownership is the most popular investment tool. With a mortgage you gain equity be paying down principle as well as through property appreciation. You can also use the interest paid on your mortgage as a tax deduction, however you may need help with taxes . To determine if you can afford a home you need the experience and expertise of both a good loan officer and a good real estate agent. Together they will help you determine how much you can afford and if there are homes in your area that meet your preference and price range.
As far as most banks loan qualification guidelines are concerned, home owners should have debt payments, including mortgage and other necessary housing expenses, of no more than approximately 45% of gross income. However, since people have different spending habits, homeowners should decide for themselves how much of a mortgage can they afford.
A good rule of thumb is to keep your mortgage payment approximately the same as your current rent payment. If you have been able to pay a rent payment every month, then you should be able to afford a mortgage payment of the same amount.
Regardless of where you live, how much you earn or what type of house you are shopping for, as soon as you find out how much the seller is asking, your first reaction might be something like, “Wow! That’s expensive!” Your initial assessment is correct. With prices rising quickly, particularly in areas like New York and Boston, even starter homes can carry hefty six-figure price tags. Your next reaction is likely to be, “Can I afford that?”
Generally speaking, most prospective homeowners can afford to mortgage a property that costs between 2 and 2.5 times their gross income. Under this formula, a person earning $100,000 per year can afford to mortgage between $200,000 and $250,000. But this calculation is only a general guideline.
Ultimately, when deciding on a property, you need to consider a few more factors. First, it’s a good idea to have an understanding of what your lender thinks you can afford – to gain a precise idea of what size of mortgage their clients can handle, lenders use formulas that are much more complex and thorough. Secondly, you need to determine some personal criteria by evaluating not only your finances but also your preferences.
Many brokers are able to perform a rent vs. buy analysis that will not only compare rate quotes and your monthly payments, but also the potential tax savings, the appreciation of the home, and other factors you may not have considered. In many cases it is actually cheaper in the long run to purchase a home than to continue renting.
