Security One Lending (S1L) is making headway in educating financial planners on the use of reverse mortgages as a viable retirement tool.
S1L, a division of Reverse Mortgage Solutions, presented a national webinar last week specifically designed for Certified Financial Planners, which attracted more than 500 advisors.
The webinar, “A Fresh Look at Reverse Mortgages,” featured guest speaker Michael Kitces, a partner and the director of research for Pinnacle Advisory Group. Located in Columbia, Maryland, Pinnacle is a private wealth management firm that oversees approximately $1 billion of client assets.
Attending CFPs also received one hour of C.E. credit for the session, the second in an ongoing series of national webinars offered by S1L and the American C.E. Institute. In June, Dr. Barry Sacks presented the first webinar in the series, “Reversing Conventional Wisdom.”
“The success of these presentations clearly shows the reverse mortgage has evolved from merely a needs based ‘product of last resort’ to true and viable option to be considered as just one component in an overall and more comprehensive retirement plan,” said Torrey Larsen, president of retail lending for RMS.
Eliminating reverse mortgage misconceptions among the mainstream financial community is a key element in S1L’s “education business model,” said Director of Business Development Shelley Giordano, who has been working on S1L’s ongoing education efforts among the financial planning community. Those efforts have included the webinar series as well as the recent establishment of a reverse mortgage advisory board to target misconceptions about the product among financial planners.
“The success of these first two national webinars clearly shows this topic is incredibly timely and relevant to financial advisors working with seniors,” Giordano said.
Future presentation topics will address the relationship of long-term care and reverse mortgages, as well as the ongoing series “Using Household Wealth During the Distribution Phase of Retirement.”
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Mortgage rates have been rising since late spring, when Federal Reserve Chairman Ben Bernanke first announced the possibility of a reduction in the $85-billion-a-month bond-buying program. The Fed has been the primary purchaser of mortgage-backed securities since late 2008, creating constant demand for these products, which helped push mortgage rates to record lows. Mortgage rates spiked at the end of June when the Fed signaled that paring back of bond-buying could begin in September. And rates have remained elevated since then, but the Fed’s unexpected decision to not scale back on its program will likely result in a break from rising mortgage rates. Instead, rates are likely to drop at least for the next month, says Keith Gumbinger, vice president at mortgage-info website HSH.com.
For home buyers who are about to get a mortgage, the announcement should result in lower rates. The average rate on 30-year fixed-rate mortgages fell slightly to 4.64% by end of day Wednesday, down from 4.68% for the week ended Sept. 13, according to HSH.com. Gumbinger says rates could drop by as much as 10 basis points, the equivalent of 0.10 percentage point, in total by the end of the week, which would bring average rates to 4.58% and they could drop to as low as 4.48% on average by mid-October, especially if the economic reports released during this period are weaker than expected. At 4.48%, rates would be back to where they were in the beginning of July.
A break in rising rates is unlikely to last long though. It’s unknown whether the Federal Reserve will change course at its meeting in late October, and mortgage analysts say it’s possible that rates could rise in the days leading up to the Fed’s next announcement. It also remains to be seen what will happen when the Fed starts to exit the market. More private investors could step in to purchase mortgage-backed securities, but they might not buy as much as the Fed currently is. Less demand could result in higher rates. If economic data remains weak and if the Fed presses on with its bond-buying program into November, 30-year mortgage rates could drop by as much as 20 basis points, or 0.20 percentage points, falling to 4.28% on average, says Gumbinger.
Of course, the prediction of lower rates to come is based on many assumptions. Rather than trying to time the market, mortgage applicants who want to proceed with their home purchase over the next few weeks should find out if their lender offers any options that would allow them to tap into lower rates—if such rates materialize. Lenders often offer what’s called a float-down option: If home buyers get to closing and rates have dropped below the rate they were quoted, a float down allows them to get that lower rate instead. Most float downs kick in if rates drop anywhere from one-eighth to a quarter of a percentage point. In most cases, borrowers will have to pay a nonrefundable fee of roughly a quarter-percentage point of the total dollar amount of the mortgage.
Beyond mortgage rates, it remains to be seen if a delay in tapering will impact home sales. Home sales have been rising for much of this year as buyers rushed to lock in mortgage rates before they climbed further. But as mortgage rates have increased, home sales have started to stall. New home sales, which are tallied at the signing of the contract, tumbled 13.4% in July from a month prior—the steepest drop in three years, according to the Commerce Department’s latest data. Existing-home sales, which are a lagging indicator that tally transactions that went to closing, also suggest a drop in the pace of home buying as rates have risen. Existing-home sales increased 1.7% in August from a month prior, according to data released Thursday by the National Association of Realtors. In contrast, July sales rose 6.5% from a month prior
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Question: I am planning to retire in two years when I’m 62. I have a small mortgage at 5 percent interest and plan to keep my house at least another 10 years. Should I sell investments to pay off the mortgage now? This would use most of my non-retirement account.
Answer: I assume you have long-term capital gains on those investments; if you wait until retirement to realize those gains you may pay less tax.
Retiring debt-free is an admirable goal, however, mortgage debt is still considered “good debt” (credit cards are not). Your mortgage interest rate is 5 percent; are you earning that on your investments? Are you able to deduct the mortgage interest on your tax return? Under certain circumstances, it makes sense to keep a mortgage.
Accounting for the unaccountable is a great way to stay out of trouble, and having an emergency fund is a basic financial planning principle. Without it, you may be forced to sell when the market is down.
Switching from the accumulation phase to the withdrawal phase is a huge mind-set change. Expect your expenses to exceed your income. Retirement is why you've been saving.
Estimate your retirement income from all sources. Next, estimate your retirement living expenses. Determine withdrawals needed and then decide the amount to withdraw from the various accounts. Consider the effect of income taxes as you decide the amounts to take from each account (taxable, tax-deferred, and tax-free). Try not to go up to the next tax bracket.
Let’s assume that you pay off the mortgage by selling your investments after you retire. It’s typically not an irrevocable move. If you have an emergency and don’t want to take additional distributions out of your IRA, consider a Home Equity Line of Credit (HELOC) as a short-term solution.
A mortgage free retirement is a gratifying plan and has significant emotional upside, but it’s also smart to have an emergency fund. If you can have both, that’s the best answer. Your individual situation should determine if you pay off your mortgage at retirement. Watch for penalties and fees and consult your adviser.
Average interest rates on the popular 30-year, fixed-rate mortgage held steady this week, giving a respite to potential homebuyers who have seen rates creep up for much of the year.
The average rate of 4.57 percent was unchanged from last week, Freddie Mac reported in its weekly survey Thursday. A year ago, the average interest rate was 3.55 percent.
Also unchanged this week was the 3.59 percent average interest rate on a 15-year, fixed-rate mortgage. A year ago, average rate was 2.85 percent.
Despite the pause, most economists expect home loan rates to edge closer to 5 percent by year's end, affecting affordability. Only four months ago, in early May, the average rate on a 30-year, fixed-rate mortgage was 3.35 percent.
Applications to refinance existing mortgages fell 20 percent last week from the previous week, to its lowest level since June 2009, according to the Mortgage Bankers Association. Meanwhile, home-purchase mortgage applications last week were down 3 percent from the previous week.
The slowdown in mortgage activity, particularly the refinancings that drove the industry when rates were low but few were buying homes, has triggered unemployment in the housing industry. Several of the largest lenders, including Bank of America, Wells Fargo and JPMorgan Chase, have laid off thousands of employees from their home mortgage businesses.
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WASHINGTON – Average fixed rates on U.S. long-term mortgages neared their highs for the year this week amid signs of further strength in the economy.
Mortgage buyer Freddie Mac said Thursday that the average rate on the 30-year loan was 4.57 percent, up from 4.51 percent last week and close to this year’s high of 4.58 percent Aug. 22.
The average on the 15-year fixed mortgage rose from 3.54 percent to 3.59 percent, near the year’s high of 3.6 percent.
Long-term mortgage rates have risen more than a full percentage point since May, when Federal Reserve Chairman Ben Bernanke first signaled that the Fed could reduce its bond purchases later this year if the economy continued to strengthen. The bond purchases were intended to keep long-term loan rates ultra-low.
Among the indicators the Fed will consider in deciding whether to slow its bond buying is the government’s estimate that the economy grew at a 2.5 percent annualized rate from April through June – much faster than estimated. Economists expect growth to stay at an annual rate of around 2.5 percent in the second half of the year.
The Fed will meet Sept. 17-18, after which analysts expect it to announce a scaling back of its bond purchases.
Mortgage rates remain low by historical standards. But the recent rate increases could slow the housing recovery. The increases spurred some homebuyers to close deals quickly.
U.S. sales of newly built homes dropped 13.4 percent in July to a seasonally adjusted annual rate of 394,000, the lowest level in nine months.
But spending on construction projects rose in July to its highest level since June 2009, the Commerce Department said Tuesday.
Mortgage rates have been rising because they tend to track the yield on the 10-year Treasury note. The yield has climbed 1.3 percentage points in the past four months as bond traders have anticipated that the Fed will slow its bond buying. The 10-year note’s rate rose to 2.89 percent Wednesday from 2.86 percent Tuesday. It jumped to 2.96 percent Thursday morning.
To calculate average mortgage rates, Freddie Mac surveys lenders across the country Monday through Wednesday each week. The average doesn’t include extra fees, known as points, which most borrowers must pay to get the lowest rates. One point equals 1 percent of the loan amount.
The average fee for a 30-year mortgage was unchanged at 0.7 point. The fee for a 15-year loan held at 0.7 point.
The average rate on a one-year adjustable-rate mortgage increased to 2.71 percent from 2.64 percent. The fee rose to 0.5 point from 0.4 point.
The average rate on a five-year adjustable mortgage rose to 3.28 percent from 3.24 percent. The fee was unchanged at 0.5 point.
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The spigot on reverse mortgages has been slowly tightened over the last several years. Borrowers can no longer tap as much of their home equity as they could before the housing crisis.
Now the rules are about to change again.
As a result, some people with heavy debt who were hoping a reverse mortgage would solve their financial problems may find that it is no longer a viable option. Under the new rules, which go into effect on Sept. 30, many borrowers will be able to get access to even less of the value locked in their home — about 15 percent less — compared to the maximum available now. The rules also put new limits on the amount of money that can be taken out in the first year, which may further deter the most distressed prospective borrowers.
“The changes really put the product on track as a long-term financial planning tool as opposed to a crisis management tool,” said Ramsey Alwin, senior director of economic security at the National Council on Aging.
The Federal Housing Administration, which insures most reverse mortgages, is making the changes in an effort to strengthen the program, which allows people 62 and older to tap their home equity without making payments. Lenders get their money back once the house is sold.
Since the economic crisis, more homeowners withdrew the entire pile of cash they were eligible for all at once, which strained the program’s reserve funds (lenders were also paid more when borrowers took large sums, and reverse mortgage experts say lenders prodded borrowers in this direction). Declining home values also hurt the program’s overall finances, since lenders often could not recoup the full loan amounts when the houses were ultimately sold.
The F.H.A. hopes that the changes, particularly the limits on how much can be withdrawn in the first year, will encourage people to tap their home equity slowly and steadily, in a way that will enable property owners to stay in their homes as they age. That’s a change that several consumer advocates, along with members of the industry, agree was necessary.
Up until now, just about anyone could qualify for a reverse mortgage. But perhaps the biggest change to the program will go into effect early next year, when borrowers will also need to prove that they have the wherewithal to pay property taxes and insurance over the life of the loan. If they cannot, they will have to set that money aside — and that could consume much of the loan’s proceeds.
There is still a little time to get a mortgage using the current program. As long as prospective borrowers go through the required financial counseling and receive a case number before Sept. 28, they will be able to qualify under the current rules.
Here’s a closer look at how the changes will affect prospective borrowers:
FIRST-YEAR LIMIT There will now be a limit on the amount of money that can be withdrawn in the first year. A homeowner eligible to withdraw a total of $200,000 in cash, for example, would be allowed to get only $120,000, or 60 percent of that sum, in the first year.
There are exceptions. Some homeowners will be able to draw a bit more if their existing mortgage, along with other items like delinquent federal debts, exceed the 60 percent limit. Homeowners are required to pay off those items — which regulators call “mandatory obligations” — before qualifying for the loan. So borrowers can withdraw enough to pay off these types of obligations, plus another 10 percent of the maximum allowable amount (in this case that’s an extra $20,000, or 10 percent, of $200,000).
Credit cards are not considered a mandatory obligation, so people with significant credit card debt may find they can’t withdraw enough money to pay those loans off, said Christopher J. Mayer, professor of real estate, finance and economics at Columbia Business School, who is also a partner in a start-up company, Longbridge Financial, that provides reverse mortgages. “There will be fewer financially distressed borrowers for whom a reverse mortgage will provide a satisfactory solution,” he added. “The product will be more attractive for people using it as part of a retirement plan.”
Borrowers generally choose to receive the money in one of two ways: as a lump sum (using a fixed-rate loan) or through a line of credit (which carries a variable rate). But lenders typically require people who use a fixed-rate loan to withdraw all the money at once — so they’ll be limited to 60 percent (or the amount of their mandatory obligations plus 10 percent). Only borrowers who opt for the line of credit may be able to access more money over time.
LOAN AMOUNTS The two types of reverse mortgages available now — the “standard” and the “saver” — are essentially being eliminated and consolidated into one.
The maximum amount of cash you can withdraw still largely depends on the age of the youngest borrower, your home value and the prevailing interest rate. (The older you are, the higher your home’s value and the lower the interest rate, the more money you can withdraw.)
Starting on Sept. 30, however, many prospective borrowers will have access to about 15 percent less home equity, on average, than the maximum amount available now.
With a mortgage rate of 5 percent, that means a 62-year-old will be able to withdraw up to 52.6 percent of the home’s appraised value, minus fees, under the new rules, according to the F.H.A. Under the existing program, the same person can tap up to 61.9 percent of the home’s value using a standard reverse mortgage, and 52.3 percent using a saver mortgage (which is cheaper than the standard, but gives you access to less home equity).
PRICING Part of the mortgage’s cost will now be based on the amount withdrawn. If borrowers take out more than 60 percent of the total amount available in the first year, they will have to pay a higher upfront fee: the upfront mortgage insurance premium, which can be wrapped into the loan, will be 2.5 percent of the appraised value of the property. Everyone else — that is, people withdrawing less than 60 percent — will pay 0.5 percent of the value of the property. (Previously, the upfront fees were 2 percent for standard mortgages and 0.01 percent for savers.)
The second fee, known as the annual mortgage insurance premium, will remain at 1.25 percent of outstanding loan balance.
FINANCIAL ASSESSMENT Lenders will also be required to ensure that homeowners can afford to make all the necessary tax and insurance payments over the projected life of the loan. Starting Jan. 13, lenders will analyze all income sources, which includes any earnings as well as pension income, Social Security, individual retirement accounts and 401(k)’s, among other things. A borrower’s credit history will also be factored in.
Lenders will also look closely at how much money is left over after paying typical living expenses, which include all property-related costs, federal and state income taxes, utilities and other debts and obligations, like a car payment or alimony.
If a single homeowner has from $529 to $589 left over after paying those expenses (thresholds are higher for couples and families), they will probably be able to qualify for a reverse mortgage free and clear — that is, without having to set aside a big sum of money for property tax and insurance.
If a prospective borrower falls short, the lender is supposed to look at other factors. The guidelines say they can consider “extenuating circumstances,” but it is unclear how lenders will interpret them. F.H.A. officials said they would also factor in how the loan proceeds would help improve a consumer’s financial situation.
SET ASIDE If a lender determines that you may not be able to keep up with property taxes and the required flood and hazard insurance payments, you will be required to set aside money (depending on your situation, it may be charged to your credit line or deducted from your payments), which means less cash in your pocket.
This requirement could disqualify many borrowers. “In many cases, the reserve consumes the entire credit line and then some,” said Mark Browning, president of Community Home Equity Conversion Corporation, a reverse mortgage lender in Rochester. “This provision hits especially hard in geographies where home values are more modest and property taxes and/or insurance charges are higher as a proportion of the home value.”
The upside: Property taxes and insurance would be taken care of, leaving other income to pay for living and other expenses. How all of this will work in practice, of course, remains to be seen.
“What regulators are trying to do is shift behavior so that people are more thoughtful and methodical about how they draw the money,” said Peter H. Bell, president of the National Reverse Mortgage Lenders Association, the industry trade group. “The changes are intended to put the program back on track and encourage people to take what they need and no more.”
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