Perhaps a Silver Lining – Time to Refinance?

The coronavirus has been brutal. There are now over 1 million cases and 54,000 deaths worldwide.  Left to itself, the covid-19 pandemic doubles every few days. Millions have lost their jobs. Most of America is on lockdown. We’re certainly in a recession right now. Worse yet- there continues to be a huge uncertainty as to when the coronavirus will stop its path of destruction and when we can all start to return to some form of normalcy.

We sincerely hope you and your family are safe and healthy. And, we hope all the other Americans and fellow citizens of Planet Earth that have been impacted will get through this crisis quickly and successfully.

At the same time, the equity markets have crashed since February 19th, ending an 11 year bull run. We were probably due for a pullback or correction after the huge run-up in 2019. The coronavirus seemed to provide the tipping point.  Economic growth in 2020 will certainly be less than 2019, though we don’t know how much less.

With all of this gloom, here is one possible “Silver Lining.”

With many investors running for safety into bonds and the Fed dropping rates, the fixed income markets are showing huge drops in interest rates.  10 year treasuries are near .6%.  30 year U.S. treasuries are at 1.25% interest.  These rates foretell less economic growth and lower inflation in the future.

The Mortgage Bankers Association is forecasting lots of business this year for new purchases and refinancings.  They expect $2.6 trillion in new mortgages this year, a 20% gain over 2019. Refinancings are the key drivers of the change and are expected to be up 37% in 2020.  Bloomberg reported yesterday that the average rate for a 30-year mortgage loan was 3.33%, down from 3.5% last week.

Because there are typically costs to refinancing, doing so makes the most sense for people who plan to stay in their house for some time and where the cost to refinance is less than the interest expense that can be saved.  In addition, if inflation will be lower in the future, then nominal investment returns should be lower as well.  For example, if your nominal investment return is 6% and inflation is 3%, then your “real” return is 3% (the amount above inflation).  If inflation is 1.5%, then a 4.5% nominal return produces the same 3% real return.

If you have a mortgage with an interest rate of 4% or more, you likely should be looking at refinancing it or paying it off.  Because of the increase in the standard deduction and the limitations on state and local income taxes, 90% of households no longer itemize deductions. If you are in that 90%, you get no tax benefit from your mortgage interest.

So, if it is time to look into refinancing, check around and keep your eyes open for low mortgage rates.  At this point, there is no reason to believe that rates will be going up anytime soon.  And, if you would like a second set eyes to help you determine if it is time to refinance, give us at DWM a call.  We are always happy to talk.  Stay well.

Stay safe and stay healthy during this pandemic. And, if appropriate, take advantage of one of the few silver linings of the pandemic by refinancing at a new low rate.

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Moving Forward with Reverse Mortgages

reverse mortgageUntil recently, we haven’t thought too highly of reverse mortgages.  High fees and expenses and inflexible settlement options made reverse mortgages problematic for aging homeowners and their heirs.    Now, important changes including the Reverse Mortgage Stabilization Act of 2013 and more recently last April HUDs (Department of Housing and Urban Development) “Financial Assessment” have made reverse mortgages safer for both borrowers and lenders.  These changes have lowered the upfront costs and put protections in place to ensure the borrower has a capacity (income test) and willingness (credit) to maintain the property and afford taxes/insurance going forward.  With the growing “Aging in Place” movement across the nation, reverse mortgages have become a potential strategy in retirement planning.  Let’s look at two examples.

First, keeping your existing home.  Let’s say you have a large home with an existing mortgage and would like to live there another 5-10 years and reduce your current expenses.  A reverse mortgage might be an answer. You can use the Home Equity Conversion Mortgage (HECM) program to pay off your existing loan and even open a line of credit for future needs.  The maximum principal limit or loan amount is based on the value of your home, the age of the youngest owner, and interest rates.  Since this loan is insured by FHA (Federal Housing Administration) there is a maximum value of the house of $625,500.  Let’s say you are 75 and your spouse is 74.  Age 74 produces a principal loan amount of approximately 60% of the home value; i.e. a $375,000 line of credit (“LOC”).  Further, let’s say that you have a current mortgage of $300,000. This existing mortgage will need to be paid off at closing, so the net LOC availability would be approximately $75,000 which can be used for emergencies, travel or whatever you wish.  Going forward, no monthly mortgage payments would be required and the current payment of let’s say $1,000 no longer goes out each month, therefore increasing your monthly cash flow. Plus the line of credit increases each year by 1.25% above the interest rate so there are potentially more funds available down the road.

Before we leave this example, let’s discuss how a reverse mortgage is paid off.  Assuming you are joint borrowers, the loan must be paid off at the earliest of 1) when you both move out, 2) when you sell the house, or 3) when you both die.  Also since this is a non-recourse loan you, your estate, or your heirs will never owe more than the value of the home at the time of sale.  On the other hand if there is still equity in the property at the time of sale, that remains with you, your estate, or your heirs.

Second, purchasing a house.  Let’s assume, on the other hand, you decide to downsize by selling your existing home.  Let’s say you find a new home for $500,000 that you love and traditionally would have to seek financing or pull from other assets to complete this new purchase.  However, using a reverse mortgage for purchase you qualify again for approximately 60% or a $300,000 loan.  The net result is you only have to bring $200,000 of your net proceeds from the “big house” sale to complete the purchase. The remainder of your sales proceeds could be invested and ultimately spent or left as part of your legacy.  Again, you will not be required to make principal or interest payments on the new house while you live there.  And, again, this is a non-recourse loan, regardless of house prices, interest rates and how long you stay there, you will never owe more than the value of the home at the time of sale.  And, if there is still equity when it sold, you, your estate or heirs will receive it.

As you can see, reverse mortgages may be an excellent strategy for some seniors.  Of course, every family’s situation is unique and full details are needed to determine if a reverse mortgage is appropriate.

In Charleston, we have found a great source of information on this topic, David Heilman of Franklin Funding.  David is one of 130 professionals across the country who have obtained the Certified Reverse Mortgage Professional® (“CRMP®”) designation.  These folks not only know what they are doing, they have committed to ethics standards concerning their work.  David is part of a national organization, National Reverse Mortgage Lenders Association, whose website, www.reversemortgage.org provides information on reverse mortgage lenders across the country, some of which have the CRMP® designation.

We expect reverse mortgages to be a strategy that will be of benefit to more of our clients in the future and wanted to let you know some of the basics and DWM’s ability, collaborating with appropriate professionals, to help guide you through the process of due diligence and implementation.  Please give us a call if you have a question.

 

 

 

 

Advice for New Nesters

New NestersThey have graduated from college and have finally secured their first job. They are officially launched. Give yourselves a high five. It is what all parents dream of and sometimes fear. An empty nest with quiet solitude and, presumably, less mess and lower grocery bills. Now those fledgling adults need their own places to roost, but rents are high in Charleston or Chicago or other cities where they may have migrated. The best areas to live and work are always the most expensive. Paying rent to a landlord can seem like throwing money away. Wouldn’t it make more sense for them to buy their own nest?

The good news is that mortgage rates are favorable now and the real estate market is stronger in many areas. Real estate will likely be an asset that appreciates. There are some favorable mortgage programs for first-time home buyers. Generally, there are two categories for loans: the conventional mortgages offered by Fannie Mae/Freddie Mac and then the slightly more lenient programs offered by the FHA. There is also a kind-of hybrid program offered by Fannie Mae called My Community Mortgage that is similar to the FHA loan programs, but has income limitations based on the HUD median income in your area. Lastly, if looking in a small-town area, there is a USDA loan program that offers favorable rates, flexible lending guidelines and can offer options with no down payment. There are location and income limitations for the USDA loans, but worth looking into, if purchasing real estate in a small town. The individual banks will occasionally offer short-term “niche” loan programs, but there can be some catches with those.

The first place to start in the home-buying process is to get an accurate and current credit score and credit report for your first-time home buyer. All loan programs will require this information from the buyer and it is good for them to know where they are before starting the process. Lenders look carefully at payment history, debt ratios and employment history for young buyers. FHA loans will allow letters of explanation for credit issues and flexibility in some of the other guidelines. They can get pre-approved for a mortgage so they know exactly what amount is possible to borrow. Generally speaking, the conventional mortgages require a credit score minimum of 680. The other programs are more flexible and will individually evaluate to qualify, though 620 is probably their minimum. They can certainly start by checking with their bank on what they can do. The mortgage broker we spoke with says that they work hard to find the best available option for the borrower and to make sure that they manage the underwriting process to ensure qualification. Having options and someone to help with underwriting can be especially useful for a first-time buyer. The rates and down payment minimums might be better in a conventional loan program, but the guidelines are a little stricter. It is advisable for the new buyer to get educated and look into improving their credit worthiness, if needed.

Prior to real estate shopping, it is also recommended that the buyer have a very good understanding of their budget so they know exactly how much house they can afford. It is good to remember all the “sleeper” costs in both the purchase and ownership of a home. There are settlement costs, taxes, insurance, maintenance, repairs, HOA fees etc. that all should be considered as part of the budget. Also, have the potential new nester check out the neighborhood at different times of day to see if it meshes with their lifestyle. And be sure to test the commute to and from work… in this day and age, that can be a very big consideration for quality of life as well as resale!

There are several options for you to participate in as parents. All of the programs allow some down payment and/or settlement cost help from family members. The rules vary, but there are definitely options to provide 100% as a gift, as long as the buyer can qualify for the mortgage on their own. The lender will require proper gift letters and possible bank statements. There is also the ability to be a non-occupant co-borrower that can help with qualification, as long as the occupant can demonstrate that they can afford the payments with their income. This will affect the parents’ debt ratio and appear on their credit report. You could also purchase something and rent it to your child, possibly even with a rent-to-own contract. There are, of course, tax advantages to ownership for the young buyer and may be advantages for you, also.

DWM clients know that financial planning assistance for their children, including first time home buying, is covered as part of our Total Wealth Management process. We’re happy to help with nest-building for the entire family.