Articles for home owners who want to refinance or move.

Too late to buy?

Many people in their 50s or 60s who do not own a home may think buying a home won’t benefit them, but it can.  This is the story of one such person.  Mary (not her real name) was single, age 59, and renting in 2012. Her income was  about $3,000/month.

In March 2013, she bought a two-bedroom condominium for $100,000 with a 3.5% down FHA loan.  Her monthly payment including consumer debt totaled $1,193.31.  While living there, she maintained the property and made some low-cost improvements.

In August 2015, 2.5 years later, Mary sold the condominium for $168,000. This enabled her to pay off her consumer debts and buy a three-bedroom condominium for $180,000 with 20% down.  With no remaining consumer debts, her monthly payments were $1,122.79.

Let’s say current appreciation continues. By March 2018, five years after she bought the first property, she should have enough equity to obtain a Reverse Mortgage and eliminate her mortgage payment.  She will then be in a home with expenses for taxes, insurance, HOA, and maintenance of about $550/month.  She will have two extra bedrooms that she can rent out using or to provide additional income.

The net effect? Based on current numbers, Mary may be able to stop working and live on her Social Security income when she reaches full retirement age.  If she had not purchased a home, it is unlikely that her Social Security alone would have been adequate to pay market rent.  Additionally, rooms on or may rent for more than what her condo will cost with a Reverse Mortgage.

I cannot predict future appreciation, but wouldn’t you agree that owning a home without a mortgage payment is a good option for low cost housing?
Orion Mortgage, Inc. offers Reverse Mortgages and HECMs to eliminate the mortgage payment for homeowners over 62.  Call Don Opeka at 303-469-1254 with questions.  Colorado MLO license 100007878

The Move Down Trap

People in their 40s, 50s or 60s commonly buy a “trophy house” while they are working and have a family, with the intention of “moving down” when they retire.  This can work fine if the “trophy house” is paid for, along with all other debt, before the buyer stops working.  If not, then the trap can be not enough equity to make a “move down” economically viable.  Let me give you two recent examples:

George (not his real name) bought a home for $262,000 with a $221,000 loan when he was 56 and his wife was 52.  Six years later, when he was 62 and wife was 58, they still owed about $210,000 and the value was $329,500.

George wanted to sell because he decided they could not afford to keep the house.  He hoped to buy another home without a mortgage, using the cash from the sale and perhaps adding a little to it.  Typically a seller will have to pay about 10% of the sale price in closing costs, commissions, repairs, moving expenses, and other miscellaneous costs.  In this case, a $329,500 sale would result in $32,950 in costs and $210,000 mortgage payoff, leaving about $86,550 cash to George.  If he adds about $40,000 cash, he can afford to pay  $125,000 for a home.

With $40,000 cash and a reverse mortgage, on the other hand, he could stay in the original home.  I estimate the cost of taxes, insurance, and maintenance on this 2092 square foot ranch-style home at about $500/month.  George may be able to find a much older condo to live in for $125,000, but taxes, insurance, and maintenance probably won’t be much different than in the $329,500 house.  In many cases, for the price of HOA fees on a condo, a homeowner can hire people to do the lawn care, snow shoveling, and other exterior maintenance.

If George decides to rent instead of buy, it’s likely his rent will be significantly more than $500/month, and the $86,550 proceeds of the sale will dissipate quickly.

Here’s the second example. Henry (not his real name) bought a home for $428,200 with a $385,380 loan when he was 60 and wife was 59.  Three years later, Henry inquired about a reverse mortgage.  In that time, the property had increased in value to about $570,000 and the loan had been paid down to $367,400.  With these numbers, Henry needed about $65,300 cash to obtain a reverse mortgage.  If the home value increased to $625,500, the maximum lendable value for an FHA Reverse Mortgage, he still needed about $36,000 cash to get the reverse mortgage, or he had to pay the loan down to about $330,000.

On the other hand, selling the home for $570,000 would result in costs of $57,000 and a mortgage payoff of $367,400, leaving about $145,600.  At Henry’s age, he could buy a home under $300,000 with $145,000 cash and a reverse mortgage.

A recent quote for a newer 1 bedroom apartment in a senior community was $1,755/month, and a 2 bedroom was $2,245/month.  If Henry chose to rent, his $145,000 wouldn’t last long.

For both George and Henry, the income reduction associated with “retirement” came sooner than expected.  With a large mortgage and limited additional financial assets, both George and Henry were left without any attractive options.

I recommend that people moving in their 40s or 50s consider homes that they can sustain into retirement.  I understand that a bigger and more expensive home is always attractive, but being forced to choose a less expensive one as a result of financial pressure can have a disappointing outcome.

Why You Should Review Your Mortgage Twice Yearly

We recommend that everyone do a mortgage loan review at least once or twice per year just as you go to the dentist for a checkup, visit a doctor and review insurance and legal documents.  This review should involve more than just “What’s the rate?”  It is too easy to think that a borrower got a great rate on the last mortgage and since rates are not significantly lower, that nothing has changed.  

Check out these seven scenarios that show the potential financial health benefits of  a refinance:

Rule Changes

FHA mortgage insurance is still required for the life of the loan, but rates have come down. Reduced mortgage insurance rates typically only apply to new loans, including refinances, and not retroactively to old loans.

Home Value

As the value of a home increases, it creates opportunities:

  • to drop the mortgage insurance
  • to lower the mortgage insurance rate
  • to consolidate or lower the rate on other debts
  • to shorten the loan term without increasing the payment.

Credit Changes

We are finding borrowers with loans that are 5-15 years old who could easily qualify for better financing now. That’s because old credit issues such as late payments, loan modification, bankruptcy, or foreclosure  have been resolved. Without a periodic review of their situation,  they continue to pay higher rates than necessary, unfortunately.

Student Loans

Adults sometimes return to school for training in a new occupation.   While they are in school, their student loans are in deferment. All too often, though, they are not well-informed about the rates that will be attached to the payments once they finish school.  In some cases, they struggle to manage repayment terms when the deferment ends. Consolidating these loans into the mortgage may be attractive depending on the rates and terms of each loan. It’s worth exploring.

Consumer Debt

Car loans, credit cards, or other consumer debts may have very high rates. In some cases, borrowers can save enough on consumer debt interest to justify a refinance even if the mortgage rate is not reduced. This must be done with caution, though, because high-rate consumer debt can result from either a temporary non-recurring expense such as medical treatments, or excess spending. Underwriting guidelines now discourage refinance to cover overspending.

Remodeling or Major Repairs

Roof repair, new windows, basement finishing, an addition, or other major home improvement projects may be paid for with a cash-out refinance or a second mortgage. A quick comparison of loan rates and terms will show which is best.

Combination of Events

Sometimes the reason for a refinance is not just one of the above, but a combination. For instance, say you recently remodeled your basement and then had to replace your car. You have worked hard to improve your credit score over the 15 years since you took out your first mortgage. During your mortgage review, you learn that the mortgage rate has not significantly decreased, but because of your improved credit you can decrease your total loan repayment cost by consolidating your new debts.

A mortgage review can be as quick as checking current home value, rates and fees for a refinance and the terms of the current loan. We can do an estimate of the rate and fees to refinance the mortgage without a credit report or any charge to the borrower. A more complete analysis including all debts may require a credit report. We still would not charge for the analysis, but the borrower would need to pay a nominal fee for the credit report.  In either case, we could analyze the borrower’s position, generally within 24 hours. Our report would show whether a refinance would benefit  the borrower, who could then decide to proceed with an application or not.

Your financial health is important to us. When you are ready to schedule your mortgage’s annual checkup, let us know if we can assist you.