Using a reverse mortgage to purchase a home

Maybe you have heard of reverse mortgages. They are not a scam but there are reverse mortgage scams.The youngest borrower in the household must be at least 62 and the homeowners must have a lot of equity.

The reverse mortgage is exactly as it sounds. Instead of making a house payment every month the mortgage company sends the homeowners a check. There are no mortgage payments. The mortgage is due when the home is sold or when the owners die.

The reverse mortgage is a way to unlock the equity that might be tied up in real estate.

Reverse mortgages can also be used to purchase a home. They do require a down payment and the youngest borrower must be at least 62. The borrows must have a lot of equity or own the home outright and have good credit ratings. On loans for purchases, buyers must have the resources to pay property taxes, homeowners insurance, and association dues if applicable.

Reverse mortgages can also be used for home improvements. Sometimes people want to stay in their home and age in place but the home needs some upgrades to make it more senior friendly.

Talk to your bank or lender if you are interested in any of these programs and learn more. There is also counseling for people who choose a reverse mortgage. For more general information visit the HUD.gov web site and read about reverse mortgages.

Historic and current mortgage rates

chart of interest rates
Freddie Mac rates

Mortgage interest rates have been at an all-time low. it is possible that they will go all the way up to 5%, maybe even this year. Back in 2006 during the housing price peak and before the housing market crash and the great recession mortgage rates were over 6.3%. When we look at mortgage rates I think putting them in context helps.

Higher rates are bound to have an impact on the housing market. Here in the metro area, there are so few houses on the market that it will be hard to see the impact.

 

Can you afford a house?

The question is really about being able to get a mortgage. Most people can not pay cash for a home and need a mortgage and need a pre-approval stating that they are at least qualified for a mortgage.

The easy but not exact rule of thumb is that if you add up all your monthly expenses and a mortgage and divide by your gross monthly income you need to come up with a number no higher than 36%.  Lenders are looking at an income to debt ratio. Debt is car payments and student loans and credit card payments and of course a monthly mortgage payment.

There are mortgage calculators all over the internet which makes it easy to calculate how much a mortgage payment might be.

Home buyers also need a down payment and the ability to pay closing costs. Down payments start at about 3% and typical closing costs will add up to about 3% of the loan amount. There are programs for downpayment assistance and sometimes sellers can help with the closing costs.

We struggled to buy our first home but have never regretted it.

Also see Housing for minimum wage earners

Your house is a bank?

House - bank

Mortgage interest rates have gone up a little from what has been an all time low. Some are even up over 4%. GASP! I can not help but remember all the years when they were over 8% and even over 15%.

However when rates go up fewer people refinance and that means that fewer loan officers have loans to work on which means their income goes down. Get ready for the post cards and mailers about how much you can borrow.

Last night I even saw an advertisement about how your home is your bank. Using home equity as a source of cash isn’t a bad thing. Especially when the money is used for a new roof or for that boiler you have always wanted. The interest rates are usually more favorable than they are on other types of loans and for some there is a mortgage interest tax deduction.

However there is some danger in treating a home like a bank, because it isn’t just a bank it is where you live and probably your most valuable asset. It wasn’t all that long ago that home values went down and millions of home owners ended up owing more on their homes than the homes could be sold for. Getting into a negative equity situation can lead to foreclosure.

There are numerous advantages in not borrowing money that should also be explored before withdrawing money from the bank of home equity.

Maybe I just have the post housing crash jitters. . . but please borrow responsibly. It doesn’t seem like the banks suffered because they lent money to people who could not pay it back but many former home owners did and still are.

 

Mortgage rates were not as fair a decade ago

state fair

This is from a post I wrote on the first day of the Minnesota state fair 10 years ago.

Mortgage Rates – Freddie Mac Primary Market Survey – average rates for 30 year, conforming, fixed rate mortgages:

week ending 8/24/2006 6.48%

week ending 8/17/2006 6.52%
week ending 8/10/2006 6.55%
week ending 8/03/2006 6.63%
week ending 7/27/2006 6.72%
week ending 7/20/2006 6.80%

According to Freddie Mac Average rates this week look like this:

Average rate for a 30 year conforming loan is 3.43%

Houses in St. Paul are still on average less expensive than they were in 2006 and interest rates are lower.

Today is the first day of the Minnesota State Fair. Enjoy!

 

It isn’t sold until it closes

Most home buyers and sellers are only vaguely aware of what a closing is. Here in Minnesota we close at the table which means that the buyers and sellers get together and sign documents. Checks, keys and often best wishes and advice are exchanged. Either party can choose to “pre-sign” and skip the closing and that happens too. Occasionally so much animosity has built up during the buy/sell process that buyers and sellers opt to close in separate rooms.

In Minnesota purchase agreements (contracts to buy a home) have to have a closing date in them. Closings do not always happen on time. The most common reasons for a delay is delayed loan approval. There are a ton of reasons for this too and no penalty to the lender for a delayed closing.

Closings are usually held in a conference room at a title company. Even though I run a fairly paperless business closings involve a lot of actual paper documents and often require copiers and believe it or not fax machines.

On homes that are financed prior to or during the closing money is wired to the title companies trust account and that money is used to pay for the house. Checks for the proceeds of the sale are cut and given to the sellers. The actual closing usually takes an hour and buyers will be doing most of the signing because of all of those loan docs.

Title companies provide title insurance for buyers and they make sure the necessary documents get filed with the county. They also send money to the sellers mortgage company to pay off the mortgage and they prepare these wonderful settlement statements that show all of the charges buyers and sellers pay when the buy or sell real estate.

Working as a closer requires a license. Closers are the people who make sure every t is crossed and i is dotted.

Some home buyers and sellers let their lender of real estate agent recommend a title company and others search the internet looking at prices. Either way buyers and sellers always have a choice. Usually the closing takes place at the buyer’s title company. Closings are often scheduled for Friday at the end of the month.

After the closing we can usually find out how much the home sold for.