Hill's Personal Finance

When Your Mortgage is Upside Down

You now have more refi options to explore.

 

Are you underwater? Upside down? Those terms mean the same thing: you owe more on your mortgage than your home is worth. If that is your predicament, what are some of your refinancing options?

You could turn to Fannie and Freddie. Fannie Mae and Freddie Mac have revamped their underwriting engines. If your loan is held by Fannie or Freddie (or the Federal Housing Administration), it may be possible to refinance to up to 105% of your home’s value, get a lower interest rate or reduce monthly payments, and move from an ARM to a fixed-rate loan. Owner-occupants of single-family homes, condos, and rental properties of up to four units are all potentially eligible for this.¹

Am I eligible for the Fannie or Freddie programs? To find out, go to this web page: makinghomeaffordable.gov/refinance_eligibility.html. To see if your mortgage servicer is participating, visit makinghomeaffordable.gov/contact_servicer.html. (It’s worth remembering that your lender might bring in underwriting "overlays" more rigorous than the Fannie or Freddie guidelines.)

Another possibility: the FHA programs. Maybe FHA Secure and Hope for Homeowners (H4H) can help. FHA Secure lets borrowers with non-FHA home loans to refi current or delinquent mortgages into an FHA mortgage. H4H looks long-range, assisting borrowers to refinance current mortgages into a new 30- or 40-year home loan with more reasonable monthly payments. You don’t have to be behind on your mortgage to get help from these programs. If you are 90 days or more delinquent, the FHA offers a Streamlined Modification Program to help you in that case.²

A deadline looms. The Making Home Affordable program is scheduled to end on June 10, 2010 – but there is the possibility that application deadline could be extended.¹

Another option: try to renegotiate on your own. Many homeowners have tried this, and for many, the result has been “no” or an extended run-around between this department and that department of a mortgage lender. Mortgage redos are more commonly arranged via the Fannie, Freddie and FHA programs.³

Mortgage industry pros suggest that if you have to try and do it on your own, you should present your case for renegotiating as politely and professionally as you can, and keep talking to the same human being (the same contact person) consistently and persistently. When you get a Broker's Price Opinion to back up your argument for a refi, get multiple BPOs from brokers not involved in your transaction.

Get as much knowledge as you can. Yes, you could simply suck it up and continue to make the payments, or rent all or part of your home out and become a landlord. Your neighbor might have settled for a short sale or a deed in lieu of foreclosure, or walked away. If you are entertaining any of those options, why not check out the new refinancing possibilities mentioned above? There may be options available to you now that weren’t there several months ago. Talk to us 800-572-6024 or email at [email protected]

 

Citations.

¹ bankrate.com/finance/mortgages/do-you-qualify-for-refi-plan-1.aspx     [5/7/09]

² mainstreet.com/article/moneyinvesting/real-estate/dont-walk-away-underwater-mortgage                [12/16/08]

³ cbs4denver.com/recession/refinancing.payment.mortgage.2.1015314.html            [5/20/09]

 

New Rules for Reverse Mortgages

Dana Dratch  at Bankrate.com has written an article on the changes on federally insured  reverse mortgages. They have increased the lending amounts and have capped the origination fees lower.

The reverse mortgage has a place in one's retirement planning, especially if it is not a house to pass on to your heirs. The article includes many things to look for in a reverse mortgage that is federally insured or a private label one.

The Reason for the Sub-Prime Mess

The linked article from the Wall Street Journal shows why we have this mess. The thing I cannot figure is why the investors in the original mortgage sale didn't do their due diligence when they purchased this loan from the originator. This should be a case of fraudulant conveyance.

Read the article and give your opinion.

Time to refinance is now

January is a typically a month with an above average amount of mortgage refinancings. Add the current Fed rate cuts that accelerates the amount. If you are planning to refinance, now is the time to start the process. The Fed rate has come down, but mortgage rates came down and have started back up.

Liz Moyer at Forbes.com has chronicaled this event for you information.

THE SUBPRIME MORTGAGE RESCUE PLAN

Who it is supposed to help, how it is supposed to help, and who is not happy about it.

A plan to help stressed homeowners. If you have a mortgage set to readjust soon, help may be on the way. Last Thursday, President Bush announced a new plan to help subprime borrowers, just hours after the Mortgage Bankers Association reported the largest number of mortgage delinquencies since 1986.¹

Which homeowners would benefit? In a nutshell, homeowners with subprime loans and acceptable credit who can prove that they can’t afford their homes at higher mortgage rates. Some of these borrowers could qualify for “fast-track” loan modification and a five-year interest rate “freeze” – their adjustable-rate mortgages would remain at the low “teaser” interest rate for another five years.

Who would qualify for a freeze? Not everyone. In addition to demonstrating your inability to shoulder higher mortgage payments in the future, other conditions will have to be met. The home must be your primary residence (this plan is not designed to bail out real estate investors). You cannot have missed any mortgage payments so far under the introductory interest rate. Your mortgage must have originated between January 1, 2005 and July 30, 2007, and it must be scheduled to reset between January 1, 2008 and July 31, 2010. If you don’t qualify for a freeze, you might have the option of refinancing into a new private mortgage or getting an FHA-backed loan.²

While President Bush stated Thursday that the assistance could potentially aid 1.2 million subprime borrowers, respected economist Mark Zandi of Moody's Economy.com thinks that “it will probably help at best about 250,000 homeowners." ³

Who isn’t pleased? Although the Dow Jones Industrial Average gained 174 points Thursday, some Wall Street analysts are unsatisfied. Standard & Poor’s has warned that it will diminish the value of mortgage-backed securities and trigger lawsuits from MBS investors. Democratic presidential candidates John Edwards and Hillary Rodham Clinton had proposed stronger measures. Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, felt the plan made a “grave error” with “a cutoff at a 660 FICO score,” reducing eligibility for those with good credit histories.⁴

Maybe it’s time to learn more. If you find yourself in need of refinancing help, talk to a qualified mortgage specialist or financial advisor today to see how this announced plan and other financial options may help you. You may have more choices available to you than you think, and with the insight of a professional, you can explore them.

The Tax Bill after a Foreclosure

To get rid of a mortgage people can't afford, some just walkaway from the house and let the bank foreclose. When the new year rolls around they get a tax bill for the difference between the mortgage and what the bank sold it for. Kay Bell at Bankrate.com explains the ins and outs of this double whammy.

Mortgages Now: Perception Vs. Reality

Contrary to popular belief, the entire mortgage market is not in crisis.

How easy is it to get a mortgage today? It may be easier than you think. Many consumers believe all types of mortgages are difficult to arrange right now, thanks to the shock wave from the subprime mortgage crisis. But the so-called “mortgage meltdown” has really clouded the reality of today’s mortgage industry.

The reality is, most mortgage products have not been hugely affected as a result of the subprime crisis, and mortgage money is still abundant. Maybe you don’t have a spotless credit history, but if you’ve got a good one, you can likely qualify for a 30-year fixed-rate mortgage (FRM) with interest rates of 6.5% or less. Jumbo loans can be arranged with interest rates well below 8%.¹

Conventional mortgages are alive and well. You’ve probably read that major mortgage lenders like Countrywide Financial expect to originate fewer mortgage loans in 2008.² But conventional mortgages aren’t disappearing, just the “liar loans” and lenient underwriting standards that permitted people to buy more home than they could comfortably afford.

With stated income loans now all but history and fewer exotic mortgages being written, that means lenders are going back to basics. If you want to buy a home, they will look very closely at your credit score and repayment history, then W2s and pay stubs (or your tax records, if you work for yourself). A lender may ask for proof that you have enough cash reserves to pay 2+ months worth of mortgage, insurance and tax payments. If you’re applying for a jumbo loan, expect a lender to ask for proof of 6 months of cash reserves or more. Accept the fact that it will probably take a week or more for the loan to be approved.³

What about guarantors like the FHA? If you’re a first-time buyer and you have great credit history, you may be able to buy with nothing down through Freddie Mac and Fannie Mae (if you need a loan of less than $417,000) or with help from the FHA or VA. And the FHA may undergo a real transformation – in addition to the FHA Secure program designed to help those with ARMs refinance, FHA loan limits could be raised as well. On September 18th, the House of Representatives passed legislation introduced by Rep. Maxine Waters (D-CA) and Rep. Barney Frank (D-MA) that would, among other provisions, raise FHA single-family home loan limits from 95% of a market region’s median home price to 125% of a market region’s median home price, or 175% of the limit for loans bought by Freddie Mac and Fannie Mae.⁴ The Bush Administration is opposed to the higher loan limits, however.

Take time to shop. The mortgage industry is healthier than publicized. You still have choices. In this financial climate, the brokers who have strong relationships with the largest lenders or good, credible contracts with Freddie Mac or Fannie Mae will likely provide the widest range of options for you.

Yes, you can still buy – and refinance. The days of “easy credit” may be gone, but if you talk with a qualified mortgage professional, you may be relieved at what you learn. The consumer perception of today’s mortgage market differs from the reality.

Mortgage Points

Do you understand them? And can you deduct them?

Mortgages come with “points” – a polite synonym for fees or premiums that your lender charges for loan origination or refinancing. The math on points is simple: one point equals 1% of the amount of the loan you take out, two points equal 2%, and so forth.

There really is a point. When you buy a point or two along with your mortgage, you get a lower interest rate and a lower monthly payment. Pay $3,000 for a point now, and you could save that much and more later on.

But it may seem pointless. The problem is, points don’t move when you do. If you have a 30-year loan and you sell your home and move five years from now, you lose the points and the benefits. The same is true when you refinance. There’s also the interest rate aspect. Let’s say you buy two points at 6% interest when you get your mortgage. What if two years later, interest rates fall to 4%? Your points are useless.

Are points tax-deductible? Sometimes. Usually, points are amortized over the duration of your mortgage – that is, paid off in installment payments over the life of the loan. But you might be able to deduct the cost of these points at tax time. If you took out your mortgage to buy or refinance your primary residence, you could qualify for a deduction in the tax year you took out the loan, if your loan meets certain conditions. The IRS has a 9-point test, and the key items are: a) the points must be a percentage of a principal amount clearly defined on the settlement statement, b) the points can’t be paid in place of separately stated amounts elsewhere on the settlement statement; c) funds supplied by the buyer + points paid by the seller must be equal to or greater than points charged; d) points charged must not be excessive, and e) the charging of points must be “an established business practice” for such a mortgage. If you buy a home and the seller pays any points, you can deduct those points.

If you’re refinancing, there is no quick tax break. Points have to be amortized, unless you are using part of the loan for home improvement. Then a partial deduction is allowed.

Ten Myths about Reverse Mortgages

The reverse mortgage has become a very common tool in retirement planning. It is not as widespread as it could be because there are a lot of misconceptions about them. Senior Journal.com has a good article debunking these myths and more information on reverse mortgages that are worth checking out.

Should I Pay Off My Mortgage

Maybe … maybe not.

To pay or not to pay … that is the question. It sounds good, right? Pay off the mortgage and suddenly you have no more monthly payments, better cash flow, and the opportunity to make other investments. After all, buying a home is an investment, but owning a home is the American Dream. Right?

While owning a home free and clear may seem like the obvious best scenario, there are valid reasons not to pay off your mortgage. For example …

Consider the taxes. If you’re still in the early stages of your loan and mostly paying off interest instead of principal, then paying it off could mean losing your mortgage interest deduction. More than likely, the largest tax write-off a homeowner will have in his lifetime will be mortgage interest. While some homeowners just want the security that may come from knowing a home is paid in full, others choose to retain that valuable tax break. Neither choice is incorrect, just bear in mind … when you stop making payments, you can no longer deduct your mortgage interest.

Past value = present reduction. Consider this … if you established your mortgage twenty years ago, the value of your home was also determined then. Right now you’re actually paying your mortgage, in essence, with dollars that are worth less (in today’s market in terms of purchasing power). Think of it this way: If twenty years ago you bought your house for $200,000 and today it is valued at $500,000, then today it’s as if you’re paying 40 cents on the dollar.

Money in the bank vs. money tied up. Money in a savings account offers easy access, and money in a home is tied up, right? Not necessarily. Today there are more options and opportunities for quick, if not immediate, access to home equity, including the popular HELOC. Remember, fundamentally equity is akin to money in the bank … whether you can withdraw it from an ATM or not.

So, should you pay off your mortgage? It depends on many factors, and no one answer is “the answer” for everyone.  Before you decide, you should consider some very important factors … taxes, inflation, liquidity, and return on investment. To make an informed decision, you need to fully understand how these factors affect your finances. If you have questions, find answers. Speak with a qualified Financial Advisor and get the information you need to make YOUR best decision