How Reverse Mortgages Can Help Retirees Short on Cash

Saving up for retirement is something that everyone should start working towards the moment they enter the workforce. But it’s not as easy as it sounds. Life can throw curveballs at us, from unexpected medical emergencies to a sudden job loss. And with so many baby boomers reaching retirement age over the recent past and into the foreseeable future, there’s great concern that many of them won’t be able to live comfortably throughout retirement, or even meet basic needs.

When retirement savings aren’t adequate enough to fulfill these needs, home equity can step in to fill the void through a reverse mortgage.

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What Exactly is a Reverse Mortgage?

If you’ve got equity built up in your home, you can potentially use it to fund many expenses throughout retirement. Basically, a reverse mortgage is a type of loan for older homeowners (aged 62 or older) who borrow against the equity in their homes. It’s a great option for retirees since there’s no need to make monthly mortgage payments to pay it back. Instead, the loan is repaid when you sell your home or after you’ve passed on. At this point, the estate will be obligated to repay the loan with the proceeds of the sale of the home.

The amount of money you’re eligible to borrow depends on a number of factors, including:

  • Age
  • Property value
  • Interest rate

Basically, the older you are and the more your property is worth, the more money you’ll be eligible for. You can collect the cash in a lump sum, through a fixed monthly payment, or through a line of credit.

Who is Eligible for a Reverse Mortgage?

To qualify for a reverse mortgage, you’ve either got to outright own your home or have a low outstanding balance on your current mortgage. You also can’t be delinquent on any federal debt, and need to be able to make payments on time for carrying costs (such as property taxes, HOA fees, home insurance, etc).

There are many types of reverse mortgage programs, but the most common is the Home Equity Conversion Mortgage (HECM). These types of reverse mortgages are issued by private banks and are backed by the Federal Housing Administration (FHA).

Not only are there no medical requirements to be eligible for a reverse mortgage, there are also no restrictions on how you choose to spend the money. However, the main drawback to this type of reverse mortgage is that the maximum amount you can obtain from this loan is capped at either the appraised value or the mortgage limit of $625,500, whichever of the two is lower.

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How Much Does it Cost to Obtain a Reverse Mortgage?

Just like any other type of loan, there are fees attached to reverse mortgages.

For starters, you’ll have to pay a Mortgage Insurance Premium (MIP), which guarantees that you’ll still get your loan payments even if the loan servicer goes out of business. Usually, this fee is paid up front, and typically costs 0.5% of the appraised value of your home, or 2.5% if more than 60% of your available funds are taken out in the first year. On top of that, you’ll need to contribute 1.25% of your outstanding loan balance every year.

If your home is appraised at less than $125,000, you may be required to pay your lender an origination fee up to $2,500. If your home is appraised at more than $125,000, 2% of the first $200,000 of your property’s value may be charged by your lender, in addition to another 1% of any amount over $200,000. These loan origination fees are limited to $6,000.

Other closing costs that are typical with mortgages will also need to be covered, including property appraisals, title searches, home inspections, credit checks, and taxes.

The beauty of reverse mortgages is that the funds can be used for just about any purpose. Whether you need to make improvements on your home, pay for medical bills, or simply live more comfortably throughout your Golden Years, a reverse mortgage can be a great way to free up some capital and boost your cash flow.

9 Mortgage Mistakes to Avoid

The mortgage process is a potentially complicated one. During the underwriting process, a number of obstacles can get in the way of your approval. And considering the huge commitment, it’s crucial that you make sure the mortgage you get into is one you can live comfortably with. 

There are plenty of potential mistakes throughout the mortgage process that can prove costly, which is why you want to avoid them.

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1. Not Checking Your Credit First

If your credit score is seriously lacking, you’d be better off taking a few months to improve it before applying for a mortgage. If it’s anywhere under 560, odds of getting approved are slim. Even if approval is granted, you’ll likely be stuck with a super high interest rate that will only make the mortgage more expensive over the long haul.

2. Making Major Purchases on Credit

If you’re applying for a mortgage, the last thing you want to do is add more debt to the books. Your debt-to-income ratio will play a key role in your lender’s decision about whether or not to approve your application – the higher you make that number through expensive purchases on credit, the lower the odds of a rejected application.

3. Not Looking at All the Costs Associated With Homeownership

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Obviously, you’ll need to be able to afford your mortgage payments. But on top of that, you’ll need to make sure you adequately budget for a variety of other costs that come with paying down your principal, including property taxes, property insurance, and mortgage insurance.

4. Making a Major Career Change

Your employment and income are important factors that your lender will look at. They’ll want to be certain that you are able to comfortably afford your monthly mortgage payments into the foreseeable future. But if you suddenly decide to change jobs or quit your current job in favor of self-employment, it could throw a wrench into the mortgage underwriting process. If you’re thinking of making a change in your field of employment, wait until you’ve sealed the mortgage deal first.

5. Not Paying Attention to APR

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Many buyers will be attracted to low posted interest rates, but may fail to recognize that many of these deals often come with high fees attached. It’s important to look at the yearly percentage rates from Truth-in-Lending disclosure forms to figure out which mortgage package actually costs less. A mortgage with a slightly higher rate and lower fees may actually be the more affordable option, so it’s wise to compare mortgages side-by-side to identify which one will cost you the least amount.

6. Putting Forth a Minimal Down Payment

There are mortgage options out there that allow borrowers to put a small down payment towards their purchase. But the less money you put towards the purchase price, the larger your loan amount will be, obviously. Along with a larger loan amount comes a lot more money paid towards interest, which can translate into tens of thousands of dollars by the end of life of the mortgage. And any down payments less than 20% means you’ll be stuck paying Private Mortgage Insurance (PMI), which will cost you an extra 0.2% to 1.5% of your loan balance every year.

7. Not Scrutinizing Your Loan Documents

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You’ve got the right and the responsibility to look over your mortgage documents with a fine-tooth comb before you sign on the dotted line. It might be a nuisance to have to look through the documents in detail, but it can save you a lot of headaches in the long run. At the very least, thanks to the Truth in Lending Act (TILA), you’ve even got three days to rescind the contract if there is something you don’t like without losing a dime.

8. Not Taking Advantage of Specialized Loans

Depending on your specific situation, you may be eligible to apply for specialized loan programs. For instance, first-time homebuyers with a less-than-stellar credit score may be able to obtain an FHA home loan that’s backed by the Federal Housing Administration. With the FHA guaranteeing a portion of the loan by the FHA, borrowers may be able to more easily qualify for mortgages. And if you’re a service member of the military, you might also be eligible for a VA loan that’s backed by the Department of Veterans Affairs, which often requires no down payment or mortgage insurance.

9. Not Locking in at a Super Low Rate

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While there are adjustable-rate mortgages available, you might be better off with a fixed-rate mortgage if the current rate is very low. And with today’s mortgage rates as low as they are, it might be a good idea to lock a good rate before they start to rise. All those rates that you might be quoted really don’t mean anything until you’ve got it in writing, so if you like the rate, lock it in.

Sunny Southern States Experiencing Rapid Population Growth

Some of the fastest growing states in the US are in the sunny south, according to the US Census Bureau.

Florida, Texas and California made up 27 percent of the population in 2015, yet were responsible for 48 percent of the population growth in the country from 2014 and 2015. Compared to the average population growth in the US since 2010, Texas experienced a 9.2 percent growth in population during that same time period, and Florida and California saw a growth rate of 7.8 percent and 5.1 percent, respectively.

If this trend continues, the population in these three states combined could reach 100 million by 2030.

This is the largest surge in migration to the south since the recession of 2007-2009 that temporarily stunted population growth in these states. In contrast, population growth in the ‘Snow Belt’ – the Northeast and Midwest — only grew by approximately 258,000 residents combined throughout 2015.

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Strong Recovery Following the Recession of 2007-2009

Based on these numbers, it’s clear that the trend of southern migration has resumed following a temporary stall as a result of the recession from eight years ago. The labor and housing market has been picking up steam over the last few years, but migration shifts to the south have been lagging behind up until now.

The wave of population migration to the south proves an improvement in financial health and economic confidence in Americans who are increasingly willing to pick up and go. Many of these southbound moves between 2014 and 2015 were the result of a quest for job opportunities, better climate, and the need to be closer to relatives, according to a census report.

Texas, in particular, has been a major target for job seekers around the country, which is largely why the state realized a spike in population growth of 490,000 residents between 2014 and 2015. Georgia and Nevada were also strong magnets for those seeking employment, considering the states’ huge spikes in job growth.

Florida Now More Populated Than New York

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Although migration to the Sun Belt has been strong, it still hasn’t reached its record levels from the mid-2000s, with the exception of Florida. Last year, the Sunshine State passed New York as the third most populated state in the country. From 2014 to 2015, the population in Florida grew by 1.8% to 20.3 million. During the same time period, New York’s population only increased by 0.2% to 19.8 million.

The housing market had been suffering throughout the recession and beyond, but improvements on the real estate and employment fronts could help explain the major population growth. Foreclosures in Florida have dropped significantly, and the unemployment rate of 5% is a drastic reduction from its peak of over 10% in 2009.

Foreign Immigration Playing a Role in Population Growth

While domestic migration has been largely contributing to the population growth in the sunny states of the US, outside immigration  – particularly from Latin America- has also been a big player. In fact, this immigration has been an important driver in the relatively youthful populations in Texas and California.

Despite the fact that the overall population in the country is aging quickly as the baby boomer generation hits retirement age and beyond, states such as those in the south have been able to keep their age demographic youthful by appealing to immigrant workers. Combined, California, Florida, and Texas saw an increase of 412,000 immigrants – predominantly from Latin America – between 2014 and 2015. Of the three, California experienced the biggest increase.

In states where population growth expands rapidly, the economy also grows quickly. A strong economy is often a big reason why Americans move to a certain state, or the result of people moving there. Median household income and property values also tend to increase as a result.

The housing market in these states continues to post strong numbers, and the rapid growth in population is no doubt playing a key role.

How Do Sky-High Property Values Impact Homebuyers?

The housing market across the US is on its way to a full recovery, with 26% of the country’s markets surpassing previous records in property values since the peak of the housing bubble.

This may come as no surprise in many markets, including California and New York. The median price of homes in the San Francisco Bay area hit $702,150, a 15.2% increase from the same time last year. Southern California saw a hefty boost in property values, with the median home price reaching $453,910, a 7.9% increase from last January.

A similar effect is being seen in many other parts of the country too. Median property values in Nashville, TN increased 9.5% to a median price of $189,100, while those in Phoenix, AZ spiked 8.1% to $218,300. Boston, MA median home prices increased 5.9% to $387,400, and Seattle, WA now boasts a median home price of $373,000, up 9.4%.

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Homebuyers Are Left With Limited Options

Many factors are responsible for driving the prices of properties up, but perhaps one of the most critical is housing supply. The spike in property values in many markets across the US is the direct result of tight inventory, which means the number of listings is a lot less compared to a few months ago.

With an inventory squeeze and a spike in property values, buyers are being left with fewer options when it comes to relocating or getting into the market at all. Even with a decent down payment and healthy credit, finding the right home can be a real challenge.

San Fernando Valley’s housing inventory dropped 13% since the same time last year, and Portland, OR inventory is dipped 28%. And it’s the same story in many other markets across the US.   

With limited options, multiple offers and bidding wars are imminent. And nothing drives sale prices higher than a handful of eager buyers doing their best to outbid each other. Many are coming in with all-cash offers to ensure they’re the winning bidder, making it tough for younger first-time homebuyers to compete.

Rent isn’t exactly cheap either, making it hard to save up to get into an expensive market.

How Much Higher Can Prices Go?

“Housing bubble” has been a really popular buzzword in the world of real estate these days, and for good reason. Many are concerned that a new housing bubble is closer than initially anticipated, especially in red-hot markets all over the state of California. Many centers have been experiencing double-digit increases in home prices for a few months now, sparking the question about how much longer such a rapid pace can last before losing steam and succumbing to a bubble. 

Despite the labor market showing strength overall, it’s still incredibly difficult to realistically afford certain prices based on income, igniting a housing affordability issue in many centers across the country. 

With a heightened level of competition for properties in markets like San Francisco, Seattle and Phoenix, the combination of limited inventory and high property prices can be a dire one for homebuyer hopefuls looking to get into the market.

The Brighter Side: Rising Equity

While homebuyers might be negatively affected by spikes in home prices, many who already own homes are enjoying sizeable equity in their properties. More homeowners owe less on their mortgages that what their properties are worth compared to last year, which means they’ve got the advantage of more equity.

Once they’ve built up a certain level of equity, they can make a handsome profit on the sale of their properties, and open up inventory at the same time. 

Another bright side to the story is that the overall housing market in the US is not playing catch-up anymore as it had been since the recession eight years ago.

But in the meantime, buyers have to deal with a shortage of inventory and an affordability issue that will likely continue well into the near future until the bubble finally bursts.

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How Do You Know When a Building Permit is Necessary?

You know exactly what you want to do to improve your home: a kitchen renovation, a bathroom remodel, a finished basement . . . the list can go on.

But having a vision and making it come to fruition isn’t as easy as hiring a contractor and picking out your finishes. There are plenty of steps – and obstacles – along the way, one of which is obtaining building permits.

If you neglect to apply for the necessary building permits, you could face a myriad of problems down the line, including fines, problems with the finished work, and even issues when selling down the road. Permits are also meant to ensure that everyone is kept safe. A shoddy job that compromises the integrity of a structure could easily result in injury, and even lawsuits – and it’s happened many times.

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What’s the Point of a Building Permit?

Building codes exist to protect people from lazy contractors who cut corners, as well as unsuspecting do-it-yourselfers who don’t fully understand the ins and outs of the work they’re doing.

Obtaining a building permit basically gives a knowledgeable professional the chance to look over your renovation plans and pinpoint errors before the work starts. Throughout the renovation process, building inspectors will pop in to make sure that the job is being done correctly so that serious mistakes are rectified before the job is done.

But how do you know when permits are needed for the specific job you’re doing?

To play it safe, assume that a permit will be needed for your project, which is almost always the case. Every homeowner should get a permit and hire a reputable contractor when the law calls for it.

The International Building Code (IBC) is a uniform code that governs residential building codes in most states across the country. According to the IBC, a permit is always needed for any addition or structural modification to an existing property. That includes electrical alterations, plumbing work, mechanical system changes, and window modifications.

So, if you are rewiring your home, adding a bathroom, changing the roof line, knocking down a wall, or installing a fireplace, you’ll likely require a permit.

Check With Your Local Jurisdiction

Of course, building codes vary from one state or municipality to the next, and can often differ between rural areas and big cities as well. It’s always essential to check with your local jurisdiction before starting any work. The rules governing construction can also change over time, and typically become increasingly rigorous as time passes. Double-checking with your local building department is the safest, most responsible thing you can do.

The world of building permits isn’t entirely black and white, however. There are certain exterior jobs that may or may not require a building permit. Building a retaining wall, putting up a fence, or building a deck might not necessarily require a building permit depending on how extensive the work is, where they’re situated, and their specific design.

If the work you’re doing is strictly cosmetic in nature, a permit isn’t needed. If you’re repainting, installing new carpeting, or refinishing the hardwood floors, you shouldn’t have to worry about applying for a permit to complete these jobs.

Obtaining a Permit

Permits are typically pretty easy to get for the majority of interior renovations if the exterior of your home isn’t being changed or replaced, as long as you don’t live in a historic home. If the renovations are relatively simple, you’ll likely get what’s referred to as an ‘over-the-counter’ permit, which means you can get your permit the same day after submitting your plans to the city. However, more in-depth and complex renovating plans will likely require days or even weeks before your municipality grants your the permits needed for work to start.

And don’t forget about the cost that comes with obtaining a permit: the national average cost of a building permit is $922, with the average ranging anywhere between $393 and $1,486.

Having a contractor or architect go through this process with you can help familiarize you with the process of getting a permit.

Never start any work without first determining whether or not a permit is needed. Consulting with a professional or your local jurisdiction that governs building permits should always be your first step to protecting yourself from issues in the future.