If you’re at least age 62 and own your home you may be able to qualify for a reverse mortgage. Any existing financing on the property would have to be paid off, but that may be attractive because you can go from a loan that requires monthly payments to financing which does not demand a monthly check.

In effect, a reverse mortgage is a way to withdraw equity from an asset (your home) without selling, moving or refinancing with a new forward loan. That’s a combination which is attractive to a lot of people. HUD says that it’s already insured more than 105,000 reverse mortgages through the FHA this year.

Attractions

So what is that people like about reverse mortgages?

One issue has to be the application process. Basically, income and credit don’t count because the mortgage is instead based on asset values. In other words, the equity in your home is a storehouse of value that can be accessed even when times are tough.

But the other aspect which makes reverse mortgages attractive is that you can stay in place, you don’t have to move. That’s important because moving is disruptive, expensive and a quality-of-life change that can be tough to handle.

Lastly, there is the matter of repayment. A reverse mortgage is only repaid when you move, sell or pass away. There are no required payments for principal and interest.

Steps to Take

What’s the best way to get a reverse mortgage?

Since virtually all reverse mortgages are insured by the FHA the programs are the same. The question is how much you will pay — and costs vary. For this reason it make sense to take several steps:

First, be a good consumer — speak with a number of lenders.

Second, be wary of deals that are too good to be true or that magically require you to use the money from your reverse mortgage for another product or service.

Third, protect your interests — sign nothing until you’ve spoken with an attorney who specializes in elder law.

Fourth, speak with family and friends. Ask for their ideas and opinions.

Fifth, you have options. A reverse mortgage is not for everyone. If it’s for you, fine. If it’s not for you, that’s fine also. Act in a way that’s best for your personal preferences — and your finances.

Reverse Home Mortgage is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Using 20 illustrated steps, Hudson explains some of the conditions which will lead many households into a lifetime of debt and too many others into an inevitable pit of foreclosure and bankruptcy. He acutely understands that “affordability” today is too often measured in terms of monthly payments rather than overall debt load.

“Why is the demand for mortgage debt so high?” he asks. “There are several reasons, but all of them have to do with the fact that banks encourage people to think of mortgage debt in terms of how much they can afford to pay in a given month — how far they can stretch their paychecks — rather than in terms of the total amount of the loan.”

The problem, of course, is that for too many borrowers paychecks are essentially fixed while monthly mortgage costs are not. If interest rates rise — or if loans automatically convert from low “start” rates to bigger payments in three — five or seven years, then many owners will face one of three realities:

• They will not be able to sell at a profit or a break-even basis (because prices will have declined as more homes come on the market);
• They will not be able to rent at a profit or a break-even basis (because too many owners will try to rent unsold units at once); and
• They will not be able to hold (because monthly payments will be crushing).

At first it may seem as though the inability of someone to pay their loan is a problem just for those who bought and financed imprudently. However there are other parties who will be impacted, not a minor matter since one of those parties may be you.

Even if you’ve been financially cautious to the point of absolute boredom, the value of your property does not exist in a vacuum. If a few additional homes above the norm in your neighborhood are foreclosed, if they sell at distressed prices, guess what happens to the value of your home?

It’s not just homeowners who will suffer if there are price declines. Lenders too will be walloped by the marketplace.

At the 2006 annual meeting of BerkshireHathaway, billionaire investor Warren Buffett gave his usual clever and insightful performance before investors.

According to Money magazine, Buffett said with regard to lenders and their annual (10K) reports that “dumb lending always has its consequences. It’s like a disease that doesn’t manifest itself for a few weeks, like an epidemic that doesn’t show up until it’s too late to stop it. Any developer will build anything he can borrow against. If you look at the 10Ks that are getting filed and compare them just against last year’s 10Ks, and look at their balances of ‘interest accrued but not paid,’ you’ll see some very interesting statistics.”

In other words, there’s no value to a loan which potentially produces a lot of interest if the interest is not actually being paid.

The issue, of course, is that a nonperforming loan secured by a property which has lost value or cannot be quickly sold or rented is not an “asset” in the usual sense of the term. Instead, nonperforming loans are a financial albatross that when spotted can undermine balance sheets, valuation models and stock prices — something that no doubt interests Buffett and other investors.

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Published originally by Realty Times on May 16, 2006 and posted with permission.

The Illusion of Mortgage Assets is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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