April 2010 Archives
How did reverse mortgage start?
Roger Maris broke Babe Ruth’s single-season home-run record in 1961 but like most things in life, a single act of kindness has a much longer longevity and a more widespread influence than that of fame and ironically these acts of kindness remain obscure.
The earliest reverse mortgage can be traced to Nelson Haynes of Deering Savings & Loan (Portland, ME) who made the first reverse mortgage loan to Nellie Young, the widow of his high school football coach. This event was reported to be motivated by kindness and started a chain of events over the following forty years to extend a helping hand to today’s retirees.
Reverse mortgage helps many retirees in their twilight years to cope with their financial difficulties and help them to have a way in retaining their independence and dignity. And retirees are reaching for this solution in record numbers. According to the National Reverse Mortgage Lenders Association in 2004, lenders originated a record 37,829 HECM loans during the most recent federal fiscal year – a 109 percent increase over the 18,079 loans closed the previous year.
So why would someone want to give out money to the elderly and to wait forever to get back their profits you might ask. The act of kindness may have started this idea but lenders are not charitable organizations and they will not be in business long if they don’t have a return on their investments. So therefore it is crucial that they take heed when calculating the amount they lend based on the value of your home, the potential of the projected appreciation, your age and a number of other factors before giving out the loans. Their profits are really the accrued and compunded interest on the money expected to be paid in full when the homeowner moves or dies.
Effects of Low Mortgage Rate
Recently we have witnessed a boom in the mortgage industry. With increasing real estate values and a very low inflation, interest rates have touched an all time low. Since inflation is running extremely low at present, economists feel that mortgage rates will remain low in the near future also. As an obvious consequence homeowners are giving serious thoughts to the effects of low mortgage rate.
Usually, mortgage lenders offer a variety of combinations of interest rates and points. For example, 6.0% and 2 points, 6.5% and 1 point or 7.0% and no points. Points are a one-time upfront payment that the borrower makes to the lender at the time of closing the mortgage. It is a fee like the interest and not a part of the down payment. A drop in mortgage interest rates reduces the cost of borrowing and should logically result in an increase in prices in a market where most people borrow money to purchase a home (for instance, in the United States), so that average payments remain constant.
One of the direct effects of low mortgage rate is that the homeowners opt for greater savings through refinancing. Hence the cost to savings ratio is exceeded. Refinancing can be a boon in several situations since some of the main reasons to refinance are: – Lower interest rate – Consolidate 2nd mortgage loan – Lower loan term – Lower monthly payments – Payoff other personal loans and – Take cash out from equity
One of the most intriguing effects of low mortgage rate is the dilemma faced by the borrowers about whether to reduce their payments or the length of the loan term itself. Lower rates allow you to reduce your mortgage from say 25 years remaining to 15 years remaining with the same monthly payment. The next thing you would like to do is refinance again so that you will be able to reduce it to 10 years.
Another common rationale for refinancing and taking the equity out of your house as an effect of low mortgage rate is to be able to pay off credit card debt. You can also opt for a debt consolidation loan. By reducing your payment you will be able to pay off higher rate debt like credit cards. But try to eliminate interest payments wherever possible. The average credit card will have an interest rate of 18% to 25%. You can actually get rid of those high rate credit cards by taking advantage of the low mortgage rates. Also by lowering your debt you will be actually saving for the future.
It is also vital to understand that in most cases the loans are adjustable rate mortgages. The adjustment period may vary significantly depending on the loan program you are considering. You might not realize the effects of low mortgage rate unless you consider the stability and vulnerability of the interest rate that you are required to pay throughout the repayment tenure. Hence it is important to bear in mind that not only the current effects of low mortgage rate, but also effects of any future rise in interest rates should be considered when opting for a variable rate mortgage.
Benefits Of A Reverse Mortgage
A home loan that you do not have to pay back for as long as youre alive or for as long as you live there? That sounds too good to be true, but thats what reverse mortgages do.
A reverse mortgage is a loan that you make where you do not have to pay back anything for as long as you still own that property you have bought. Reverse mortgages provide you with money for you to invest. By turning the value of your home into cash, reverse mortgages gives you virtually unlimited funds without having to move and even without repaying the loan every month.
There are several ways tthe cash is given out from reverse mortgages. You can get cash from a reverse mortgage all at once or in a single lump sum. With a reverse mortgage, you can also opt to receive a fixed monthly cash pay out.
In addition, a reverse mortgage can offer you cash as a credit extension to your account. This creditline account from will let you get the amount of money you want whenever the need arises. And if none of these suits you, reverse mortgage cash may be given to you using any combination of the abovementioned.
Whether or not you want your cash from a reverse mortgage be paid to you in lump or in installment, the main thing is that you do not have to pay anything back until you die, sell your home, or permanently move. Reverse mortgages usually cater to homeowners who are 62 years old and older.
Reverse Mortgage vs. Other Home Loans
In most other loans, a systematic check on your income and assets is done in order to pre-qualify for the mortgage. This is done as an assurance to the lender that you will be able to afford the monthly payments tied with a loan. Since reverse mortgages do not involve any monthly repayments, you not have to go through these prequalification procedures. To qualify there is no minimum income required and no monthly repayments.
In every story, there is always the other side of the coin. While reverse mortgages have their advantages, they also have its ugly side. As you know already, reverse mortgages do not require monthly paybacks. This means that you are actually taking out equity from your home and turning it into cash.
Heres how it works. Other mortgages require a person to make a down payment when buying a home. As years go on, they use their income to pay back the money they borrowed in making the purchase which decreases their debt and increases the value of their home.
With a reverse mortgage, everything works in the other way round. You have your home. You convert its equity value into cash. And then you take out that cash as and when you need it and this will increase your debt steadily and reduce your home equity as you go.
This is not always the case with reverse mortgages. If your home value grows quite consistently or you only have one particular loan on your home, theres every chance that your equity could increase over time.