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Rates for 30-year mortgages dropped again, but homes remain unaffordable in most areas. (iStock)
Rates for 30-year mortgages dropped again, but homes remain unaffordable in most areas. (iStock)
Mortgage rates dropped to 6.63% this week, according to Freddie Mac’s Primary Mortgage Market Survey. Rates for 30-years fixed-rate mortgages were 6.69% last week, dropping by 0.06 percentage points.
Rates for 15-year mortgages also dropped slightly from 5.96% last week to 5.94% this week. Both 15-year mortgages and 30-year mortgage rates are still higher than they were last year.
A year ago, 30-year mortgages sat at 6.09%, on average, while 15-year mortgages averaged 5.14%, Freddie Mac reported.
“Mortgage rates have been stable for nearly two months, but with continued deceleration in inflation we expect rates to decline further,” Freddie Mac Chief Economist Sam Khater explained.
“The economy continues to outperform due to solid job and income growth, while household formation is increasing at rates above pre-pandemic levels. These favorable factors should provide strong fundamental support to the market in the months ahead.”
As mortgage rates drop, you may decide it’s the right time to finally buy a home. To find the right mortgage for your needs, Credible can show you multiple mortgage lenders all in one place and provide you with personalized rates within minutes.
HOMEOWNERS INSURANCE RATES ON THE RISE, MAINLY DUE TO INCREASE IN NATURAL DISASTERS
After remaining for high most of the year, home prices are dropping slightly in some metro areas.
Data from a recent S&P report showed prices in 12 out of 20 metro areas decreasing. This decrease in prices has led some households to move across state lines in search of more affordable areas.
Charlotte, Providence and Indianapolis saw the largest increase in buyers as they fled high-cost cities, stated a Zillow report.
Households that made these moves found homes were $7,500 less, on average, than where they left.
Cities that saw the highest outflow in households included Chicago, San Diego and Cincinnati. These metro areas often have higher housing costs and less robust economies, Zillow found.
If you think you’re ready to shop around for a home loan, consider using Credible to help you easily compare interest rates from multiple lenders, all without affecting your credit score.
HOMEOWNERS MOVING ACROSS STATE LINES, SEEKING AFFORDABILITY, FIND IT IN CERTAIN CITIES
The housing market is trudging toward recovery, largely thanks to mortgage interest rates dropping in recent months.
“The surge in pending home sales and new home sales, both determined by contract signings in the early stages of the buying process, indicates increased participation from buyers in the market,” explained Realtor.com Economist Jiayi Xu in response to Freddie Mac’s recent mortgage rates update. “Simultaneously, the recent rise in listing activity suggests that sellers are closely monitoring mortgage rates and adjusting their selling strategies accordingly.”
Potential homebuyers won’t see a full recovery anytime soon, however. JP Morgan experts predict that the real estate market will become affordable again about three and a half years from now. This is largely dependent on continued interest rate decreases.
“Despite the promising increase in listing activity, inventory is likely to remain low as sellers may not respond as swiftly as anticipated. In other words, a more substantial improvement in mortgage rates is necessary to attract more sellers to the market,” Xu said.
Until rates drop more substantially, mortgage payments are likely to stay high. In November 2023, the average monthly mortgage payment was $2,198, up from $1,993 a year earlier, a National Association of Realtors report found.
If buying a home is your near future, make sure you’re getting the best mortgage lender and rates with the help of Credible. Credible helps you compare rates and lenders and get a mortgage pre-approval letter in minutes.
JUST OVER 15% OF HOME LISTINGS WERE CONSIDERED AFFORDABLE IN 2023: REDFIN
Have a finance-related question, but don’t know who to ask? Email The Credible Money Expert at [email protected] and your question might be answered by Credible in our Money Expert column.
Source: foxbusiness.com
Freddie Mac will offer a $2,500 credit for very low-income purchase borrowers to help with down payment and closing costs amid elevated interest rates and low housing supply.
Effective March 1, the credit will be available for homebuyers earning 50% of area median income (AMI) or less through Freddie Mac’s Home Possible and Housing Finance Agency (HFA) Advantage mortgage products.
The credit can be used for down payments, closing costs, escrow and mortgage insurance premiums.
“Today’s announcement is a vital lifeline for would-be homeowners, as studies show that down payment and closing costs are among the largest barriers to homeownership for very low-income homebuyers,” Sonu Mittal, senior vice president and head of single-family acquisitions at Freddie Mac, said in a prepared statement.
“This new effort continues the progress we made in 2023 and is particularly important in today’s housing market, where elevated rates and low supply have created affordability challenges for many families,” Mittal added.
Freddie Mac’s announcement to provide a $2,500 credit for very low-income borrowers comes on the heels of Fannie Mae’s updates to its HomeReady product.
In January, Fannie Mae said it would offer a temporary $2,500 credit to borrowers with income less than or equal to 50% of the AMI limit for the subject property’s location.
The credit will be effective for whole loans purchased on or after March 1, 2024 until Feb. 28, 2025, and for loans delivered into mortgage-backed securities with issue dates on or after March 1, 2024 until Feb. 1, 2025.
Freddie Mac financed about 800,000 home purchases in 2023, with first-time homebuyers representing about 51% of these loans, according to the government-sponsored enterprise (GSE).
As part of the GSE’s efforts to make homeownership more accessible for low-income families, Freddie Mac rolled out DPA One, a free tool for lenders that matches borrowers with down payment assistance programs across the country.
With more than 2,000 DPA programs offered through state finance agencies as well as local and municipal sources, finding and comparing the many programs and their guidelines is challenging.
DPA One is aimed at tackling this difficulty and streamlines the available state programs into a single source that lenders can use to find and compare programs for their borrowers.
Source: housingwire.com
Across the United States, many homeowners are saying yes to renovating their homes in 2024.
Key findings from Opendoor’s 2024 Home Decor Report reveal that Americans plan to spend an average of $5,635 on home remodeling projects this year. This money will be invested to breathe new life into their existing spaces.
See: 10 Expenses Most Likely To Drain Your Checking Account Each Month
Learn: How To Get $340 a Year in Cash Back — for Things You Already Buy
What are Americans prioritizing with their home renovations? GOBankingRates spoke with several experts in the renovation business to learn more about homeowner ideas for improving their spaces in the year to come.
Investments are being made in the kitchen this year, especially when it comes to updating appliances. According to Opendoor’s report, updated kitchen appliances may potentially help with resale value when and if homeowners decide to sell their homes.
When deciding which appliances to replace, Stephanie Duncan, senior home designer at Opendoor, recommends opting for sleek, stainless-steel appliances. These appliances, like a new refrigerator and stove, should inspire potential buyers to imagine life in that kitchen — and encourage them to make an offer right away.
As an additional shopping pro tip, Duncan said you don’t need to buy the most expensive appliances on the market.
“While it is important to have updated appliances, it is not necessary to buy the top-of-the-line options. Not overspending on the most luxe brands will ensure people see a return on their investment,” said Duncan.
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Stained wood tones are making a comeback in kitchens as more homeowners move away from head-to-toe white kitchens. Julie Hampton, interior designer and project director at Freemodel, said some of the popular stains she sees range from light cerused oak to inviting medium hickory shades.
The good news for buyers is that it’s cost-effective to shift cabinet finish from paint to stain. According to Hampton, homeowners who choose stain over paint can save $3,000 to $5,000 on their project.
Related: What Is the 75/15/10 Rule? A Simple Path to Financial Wellness
The spotlight is on kitchen cabinets and cupboards this year.
Buyers trying to avoid overspending on their kitchen renovations are recommended by Duncan to upgrade knobs and handles on their cabinets or cupboards. Switching the hardware out is an effective way to upgrade these spaces without needing to buy new pieces.
Buyers this year are getting inspired by organization-themed TV shows, Instagram Reels and TikTok when it comes to kitchen storage for specific purposes.
Amber Shay, national VP of design studios at Meritage Homes, has seen everyday items, like snacks and supplies, being organized into specific pantry containers. Shay said there’s also storage being used as a decorative element with containers in fun colors and designs to match the décor scheme.
For the full kitchen, Hampton said buyers can expect to spend $3,000 to $6,000 on customizing cabinet interiors. Other options to explore, if you have a big budget to work with, include appliance garages or pantries with pullout shelves.
Those on a budget can still customize their cabinet interiors. “Homeowners should budget $150 to $1,200 for each cabinet to add options such as drawer pullouts, appliance lifts or converting a cabinet with doors to drawers,” Hampton recommended.
Read: 5 Frugal Habits of Barbara Corcoran
The primary bathroom is getting a makeover as a relaxing retreat inside homes.
Buyers seeking to create a luxurious, spa-like atmosphere in their bathrooms are recommended by Shay to explore the following investments:
Adding vintage rugs, art and other décor to make the primary bathroom look and feel like a welcoming place of respite. (Opendoor’s survey notes Americans spend an average of $1,599 per year on home décor.)
Embracing matte black. “A matte black faucet seamlessly blends with on-trend iron and aged brass light fixtures in a bathroom,” said Shay.
Using plants as accessories. This helps bring the outside indoors.
Buyers don’t need to spend a lot of money to create a stylish living room that they love.
“Think of items like upscale hotel-style bedding, monogrammed towels, cozy throw pillows or a stylish mirror. You can keep your eye out for original art when you’re on the hunt for furniture at thrift stores,” said Shay.
“Also, consider investing in a high-quality area rug that’s designed to look like a priceless heirloom — it can set the tone for the entire space,” she added.
Discover: 9 Frugal Secrets I Learned From Growing Up Poor
More homeowners are prioritizing eco-friendly solutions in their laundry rooms.
Hampton uses the example of homeowners choosing to air-dry clothes instead of putting them into the dryer. This choice is both environmentally friendly and causes less damage to garments.
“Laundries may include pullout drying racks that are hidden in the cabinets to maintain the aesthetic,” said Hampton. “Popular systems with installation cost around $1,500.”
According to Opendoor’s survey results, kitchens are the number-one remodel priority for homeowners with the number two slot going to interior painting. (New lighting fixtures and new floors take the third and fourth priority spots, respectively.)
As far as which colors are popular with buyers, Duncan said subdued greens and blues are emerging to the forefront. Both shades offer grounding and stability to homeowners.
Shay also agrees with Duncan’s color assessment, adding in her color recommendations of sea blue and darker, moody blues for interior painting.
Buyers who choose sea blue will be able to complement any marble and other natural stones in a space or use it as a fun accent while a moody blue is ideal for a sophisticated and dramatic space. If you dare create a bolder look in your home, Shay said to use dark blue as an interior wall or ceiling color or for painted cabinets and furniture.
More From GOBankingRates
This article originally appeared on GOBankingRates.com: Experts: Here Are 8 Home Renovations Buyers Want the Most in 2024
Source: finance.yahoo.com
The average long-term U.S. mortgage rate eased this week, welcome news for prospective homebuyers as the spring homebuying season approaches.
The average rate on a 30-year mortgage fell to 6.63% from 6.69% last week, mortgage buyer Freddie Mac said Thursday. A year ago, the rate averaged 6.09%.
Borrowing costs on 15-year fixed-rate mortgages, popular with homeowners refinancing their home loans, also fell this week, pulling the average rate down to 5.94% from 5.96% last week. A year ago it averaged 5.14%, Freddie Mac said.
The cost of financing a home has been mostly easing in the weeks since the average rate on a 30-year mortgage hit 7.79%, the highest level since late 2000. So far this year, the weekly average has ranged between 6.60% and 6.69%.
Initial and recurring applications for US unemployment benefits both rose to a two-month high, suggesting some slowdown in the labor market.
Initial claims increased by 9,000 to 224,000 in the week ending Jan. 27, according to Labor Department data released on Thursday. The median forecast in a Bloomberg survey of economists called for 212,000.
Continuing claims, a proxy for the number of people receiving unemployment benefits, rose to 1.9 million in the week ending Jan. 20.
The US labor market has defied economists forecasts over the last year despite elevated interest rates, but there are signs of cooling. Fewer people are quitting their jobs than at the peak of the pandemic recovery and recent high-profile job-cuts announcements from companies including United States Parcel Service Inc. may be early signs that unemployment will pick up in coming months.
Source: bostonherald.com
If you scan through mortgage programs and lender rate sheets you may have come across mortgage lingo such as “pay rate” or “teaser rate”.
Though the two terms are sometimes used interchangeably by loan officers, mortgage lenders, and mortgage brokers, they are actually very different. Allow me explain why.
A “pay rate” is essentially an option to make a mortgage payment that is lower than the actual note rate (mortgage rate) associated with the home loan.
In other words, if you only make the pay rate payment, which is usually referred to as the minimum payment, negative amortization will likely occur.
This means you aren’t paying enough each month to cover the total amount of interest due, and the unpaid portion will be tacked onto the existing loan balance.
For example, if you owe $1,000 in interest in a given month, but the lender gives you the option to only pay $800, that $200 shortfall would be added to the outstanding balance going forward.
So you don’t actually get a discount, you get a payment deferment, which will actually cost you because the loan balance will grow, resulting in more interest on subsequent payments.
Of course, it can serve a meaningful purpose if you have cash flow issues, or if you simply want to allocate your liquidity elsewhere.
But don’t be fooled into thinking the pay rate is a low introductory rate like those you see with 0% APR credit cards.
If you find yourself with a pay rate loan, make sure you know how payments are applied and what happens with the shortfall.
Tip: Pay rates are usually associated with those 1% option-arm loans everyone is angry about.
On the other hand, a teaser rate actually allows homeowners to pay less interest for a set period of time without accruing additional interest.
Teaser rates are typically seen on home equity loans, mostly as an incentive to open one. You may see an ad for a home equity line offering “prime minus 2% for the first six months!” Or something similar.
What this means is that you’re actual mortgage rate will be reduced for the first six months of the loan term, and will then adjust to the standard interest rate agreed upon.
You could also argue that the starting rate on products like the 5/1 ARM have a teaser rate attached because it’s offered for an initial period before the loan can adjust higher.
But technically, an ARM loan can also adjust down or simply remain flat, so it’s not necessarily a true teaser rate, it’s more like a fixed start rate.
Regardless, teaser rates can save you money, but don’t choose a loan program just because it offers a special low start rate.
Make sure you factor in other important aspects, such as how long you intend to keep the loan, how you plan to pay it back, and what the alternatives are.
It might be in your best interest to go with a fixed mortgage instead, even if the rate is higher at the outset. You won’t have to worry about rate adjustments in a rising interest rate environment.
And watch out for loan officers and brokers who use these two terms loosely. Over the last few years, many unscrupulous and/or uneducated loan officers were selling the pay rate as if it was a teaser rate, causing a lot of headaches, missed mortgage payments, and even foreclosures.
Source: thetruthaboutmortgage.com
Our experts answer readers’ home-buying questions and write unbiased product reviews (here’s how we assess mortgages). In some cases, we receive a commission from our partners; however, our opinions are our own.
Borrowers saw mortgage rates drop dramatically late last year, and experts have been calling for rates to go down this year as well. But a key economic indicator suggests the path to lower rates could be somewhat rocky.
On Friday, the Bureau of Labor Statistics released January’s jobs report, which showed that the US economy added many more jobs than expected last month.
In January, 30-year mortgage rates averaged around 6.34%, which is just nine basis points down from the previous month’s average, according to Zillow data.
Mortgage rates are expected to fall this year once the Federal Reserve starts lowering the federal funds rate. The Fed first started aggressively raising rates in 2022 to combat record high inflation. Inflation has since come down substantially, and Fed officials have indicated they’re ready to consider cutting rates this year.
But this latest labor market data could push back the Fed’s timeline for lowering its benchmark rate. Since the economy is doing so well in spite of the Fed’s hikes, officials may decide to wait longer before they start cutting.
The longer the Fed waits to start cutting rates, the longer borrowers will likely have to wait for lower mortgage rates. We’ll need to see some more data, including the latest Consumer Price Index numbers, to get a better idea of when a Fed cut might come.
Mortgage type | Average rate today |
Real Estate on Zillow
Mortgage type | Average rate today |
Real Estate on Zillow
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Mortgage rates started ticking up from historic lows in the second half of 2021 and increased dramatically in 2022 and throughout most of 2023.
But many forecasts expect rates to fall this year now that inflation has been coming down. In the last 12 months, the Consumer Price Index rose by 3.4%, a significant slowdown compared when it peaked at 9.1% in 2022.
For homeowners looking to leverage their home’s value to cover a big purchase — such as a home renovation — a home equity line of credit (HELOC) may be a good option while we wait for mortgage rates to ease. Check out some of our best HELOC lenders to start your search for the right loan for you.
A HELOC is a line of credit that lets you borrow against the equity in your home. It works similarly to a credit card in that you borrow what you need rather than getting the full amount you’re borrowing in a lump sum. It also lets you tap into the money you have in your home without replacing your entire mortgage, like you’d do with a cash-out refinance.
Current HELOC rates are relatively low compared to other loan options, including credit cards and personal loans.
We aren’t likely to see home prices drop this year. In fact, they’ll probably rise.
Fannie Mae researchers expect prices to increase 3.20% in 2024 and 0.30% in 2025, while the Mortgage Bankers Association expects a 4.10% increase in 2024 and a 3.30% increase in 2024.
Sky high mortgage rates have pushed many hopeful buyers out of the market, slowing homebuying demand and putting downward pressure on home prices. But rates have since eased, removing some of that pressure. The current supply of homes is also historically low, which will likely push prices up.
House prices usually drop during a recession, but not always. When it does happen, it’s generally because fewer people can afford to purchase homes, and the low demand forces sellers to lower their prices.
A mortgage calculator can help you determine how much house you can afford. Play around with different home prices and down payment amounts to see how much your monthly payment could be, and think about how that fits in with your overall budget.
Typically, experts recommend spending no more than 28% of your gross monthly income on housing expenses. This means your entire monthly mortgage payment, including taxes and insurance, shouldn’t exceed 28% of your pre-tax monthly income.
The lower your rate, the more you’ll be able to borrow, so shop around and get preapproved with multiple mortgage lenders to see who can offer you the best rate. But remember not to borrow more than what your budget can comfortably handle.
Source: businessinsider.com
A bill intended to protect Nevada homeowners by labeling mortgage lending fraud a crime has led to a great deal of confusion and frustration for lenders and mortgage brokers statewide and beyond.
Assemblyman Marcus Conklin, D-Las Vegas, prime sponsor and author of “AB440”, said the bill was intended for consumer protection, not to “slow up the process for qualified people” attempting to purchase homes.
Per the bill, as of October 1, 2007 it will be an “unfair lending practice for a lender to: (b) Knowingly or intentionally make a home loan, other than a reverse mortgage, to a borrower, including, without limitation, a low-document home loan, no-document home loan or stated-document home loan, without determining, using any commercially reasonable means or mechanism, that the borrower has the ability to repay the home loan.”
Unfortunately, because the wording of the bill is somewhat vague, it was misinterpreted by lenders and mortgage brokers, many of whom believe stated income loans in Nevada will soon be illegal.
In fact, some banks and mortgage lenders have already stopped or have said they intend to stop originating “stated income” home loans in Nevada because of the verbiage in AB440.
But the truth is, AB440 was written to ensure homeowners are financially able to repay their mortgages, and simply asks that licensees discuss and document that ability to repay with borrowers before the loan process begins.
The hope is that fewer borrowers will end up in home loans they aren’t qualified for, reducing the number of loan defaults and foreclosure proceedings in the state.
In an effort to clear up the confusion, a letter from Mortgage Lending Division Commissioner Joseph L. Waltuch was addressed to licensed mortgage brokers and bankers on September 13. Here is an excerpt:
“AB 440 does not prohibit specific mortgage products or types of documentation that may be utilized in the making or underwriting of home loans. Instead, AB 440 recognizes, and specifically defines, “low-document”, “stated-document” and “no-document” home loans.”
Many licensees were led to believe that stated income loans would be banished in Nevada, but as this letter states, no loan programs or loan documentation types will be explicitly prohibited.
In fact, the Mortgage Lending Division of Nevada has made it fairly simple for licensees to comply with the new law, by asking that they fill out a worksheet in good faith to ensure they have discussed with homeowners the ability to repay the loan.
“It is also important that licensees document for examination purposes that these discussions and verifications have occurred. One suggested method for doing so would be the completion of a worksheet for each home loan…”
The “Division” said it will also allow other methods of determining a borrower’s ability to repay, “as long as they are reasonable and frequently used within the lending community.”
The new bill should actually protect both homeowners and loan originators, as it will document the fact that a detailed discussion took place to ensure both parties were clear on the terms of the loan, which could prevent homeowners from blaming brokers and loan officers for improper loan disclosure.
However, one downside is that the confusion associated with the bill may drive more lenders away from the state, and could prove to be problematic for the many borrowers in Nevada who earn much of their income from tips, which is often difficult to state and/or document.
Nevada posted the highest foreclosure rate in the United States in July, a whopping one filing per 199 households, three times the national average.
The state reported 5,116 filings during July, an increase of 8% from June.
According to state officials and the Nevada Association of Mortgage Professionals, “Stated income” loans account for a quarter of all home loans in Nevada, and roughly half of the loans in the Las Vegas area.
Source: thetruthaboutmortgage.com
While it’s common for young, prospective homeowners to live with mom and dad to save money for their down payment and future mortgage payments, there’s a potential downside.
Banks and mortgage lenders can sometimes decline applicants without adequate rental history. This is especially true if you have other issues, such as poor credit or shaky employment.
Though it makes perfect sense to live at home to save money on things such as rent, groceries, utilities and the like, it does little to prove you’ll be a sound borrower once you finally do move out.
Going from living with mom and dad to paying thousands per month is a big step. Lenders will want to know you can handle it.
And though you might get approved for a mortgage without rental history, it can be helpful regardless to prepare you for homeownership.
When you apply for a mortgage, the bank or lender will dig into your financial history, whether it’s in the form of credit cards, auto loans, or a previous lease. If you fail to provide these things, they’ll be hesitant to lend to you.
In short, if you want to qualify for a mortgage, it’s best to rent first so you have the ability to document that rent for at least a year. Doing so will also prepare you for the responsibility of homeownership.
Sure, you can ask mommy or daddy to co-sign for you, but if you don’t have that luxury, don’t assume you’ll get financing for that dream home you’ve got your eye on unless you can provide a VOR (Verification of Rent) or cancelled checks for the previous 12 months.
And no, providing a VOR from a family member won’t fly in most cases, even if you insist that you pay your parents rent each month. It really doesn’t make sense from the lender’s point of view. You’ll need cancelled checks or something that actually proves the rent was paid.
If you don’t have a current housing payment and suddenly take on a mortgage payment of several thousand dollars a month, banks and mortgage lenders are going to bet you may struggle to make your mortgage payment each month.
In reality, they won’t really know without anything to go on, but they’ll err on the side of caution.
This theory is known as payment shock, and is generally defined as an increase in your monthly housing payment beyond 200%. In other words, if your payment more than doubles, you’re automatically labeled a risky borrower.
Let’s look at an example:
Borrower A
Current housing payment living at home: $0
Proposed mortgage payment: $2,500
Borrower B
Current housing payment: $1,500
Proposed mortgage payment: $2,750
As you can see, Borrower B will be favored for mortgage financing over Borrower A based on rental history alone.
If you insist upon living at home and/or rent-free prior to applying for a mortgage, it may not be a problem if you are otherwise qualified.
Most home loans, including those backed by Fannie Mae, Freddie Mac, the FHA, VA, and USDA, are pushed through automated underwriting systems these days.
As such, rental history documentation may only be required if the system flags it.
This is typically the case if you have limited credit history or bad rental history that somehow shows up in your file.
For example, if you only have one credit card to your name, the system may want to know more about your rental history.
Conversely, if you’ve got excellent credit and deep credit history, the system may not ask for rental history. However, the underwriter could still ask for clarification or a letter of explanation.
Ultimately, they’ll still want to know what you were doing before you made an offer on a piece of property, they just won’t scrutinize it as much. And that can be a good thing!
If you apply for an FHA loan and have been living with mom and dad, they’ll simply ask that you provide documentation from the property owner that you have in fact been living rent-free and the amount of time you’ve been doing so.
Assuming you pay a relative or friend rent each month, it might be advisable to pay via check so you can provide cancelled checks in the event they are required. It’s pretty difficult to prove you paid in cash.
Additionally, it’s important to have other credit tradelines, such as credit cards, auto loans, student loans, etc. to show lenders you have some credit history if you lack rental history.
Aside from potentially getting denied, you may be subject to stricter underwriting guidelines if you’re unable to document rental history, such as a lower maximum DTI ratio.
The good news is with more and more first-time home buyers living at home prior to applying for their first mortgage, this issue is becoming less of a roadblock.
Read more: How to move out of your parents house.
Source: thetruthaboutmortgage.com
Reverse mortgages can be an attractive option for seniors who want to supplement their retirement income, pay off debts, or make home improvements. However, they should be carefully considered as they can have significant financial and legal implications.
Here’s how reverse mortgages work, the pros and cons, and what to consider before deciding if it’s right for you.
A reverse mortgage offers a unique financial option for homeowners aged 62 and older, enabling them to utilize the equity in their home without the obligation to make monthly mortgage payments.
Through this arrangement, homeowners have the flexibility to receive funds in several ways: a single lump sum, as ongoing monthly payments, or through a line of credit that can be accessed as needed. The defining characteristic of a reverse mortgage is its payment structure; rather than the homeowner paying the lender, the lender pays the homeowner based on the equity built up in the home.
This type of loan is specifically designed for seniors looking for additional income streams during retirement, leveraging the equity they have accumulated in their property over the years. The loan balance, including interest and fees, is deferred until the home is sold, the homeowner permanently relocates, or in the event of the homeowner’s death, at which point the estate is responsible for repayment.
Reverse mortgages enable senior homeowners to access their home’s equity in a flexible and strategic manner. This financial tool is especially beneficial for those who wish to remain in their home while supplementing their retirement income, covering healthcare expenses, or funding home improvements, all without the requirement to make monthly loan repayments. The process is straightforward and designed to provide seniors with financial relief by tapping into the value of their most significant asset—their home.
To kick things off, confirm your eligibility for a reverse mortgage. Requirements include being at least 62 years old, owning your home (or at least having a significant amount of equity in it), and using the home as your primary residence. You’ll also need to demonstrate that you can handle ongoing costs like property taxes, homeowners’ insurance, and regular maintenance.
Your home’s equity is central to determining your reverse mortgage potential. Simply, it’s the difference between your home’s market value and any outstanding mortgage balance. The greater your equity, the more you might receive from a reverse mortgage.
Explore the different types of reverse mortgages available, including the federally insured Home Equity Conversion Mortgage (HECM), proprietary reverse mortgages for higher-value homes, and single-purpose reverse mortgages from certain state and local governments. Each type caters to specific needs and financial scenarios.
An essential step in the process is obtaining a professional appraisal of your home. This assessment determines your home’s market value based on factors such as location, condition, and the sale prices of similar homes nearby.
A crucial step is to undergo counseling from a HUD-approved agency. This ensures you fully understand the reverse mortgage process, its financial implications, and how it fits into your overall estate planning.
Reverse mortgages offer several options for receiving your funds: as a lump sum, in monthly payments, as a line of credit, or a mix of these methods. Your choice should align with your financial objectives and needs.
No monthly payments are required with a reverse mortgage. The loan is repaid when the last borrower dies, sells the home, or the home is no longer used as the primary residence. Typically, the home is sold, and the proceeds are used to pay off the loan balance, including interest and fees.
Imagine homeowners John and Mary, who own a home worth $300,000 clear of any mortgage. They qualify for a reverse mortgage that grants them access to $150,000. Opting for monthly payments, they supplement their retirement income, demonstrating how equity determines borrowing capacity and the flexibility in receiving funds.
When considering a reverse mortgage, it’s crucial to understand the different types available to you. Each type comes with its own set of features, benefits, and limitations.
Here, we’ll delve into the three primary types of reverse mortgages: the Home Equity Conversion Mortgage (HECM), proprietary reverse mortgages, and single-purpose reverse mortgages. By comparing these options, you can make a more informed decision that aligns with your financial situation and retirement goals.
Pros:
Cons:
Pros:
Cons:
Pros:
Cons:
Choosing the right type of reverse mortgage depends on several factors, including your financial needs, the value of your home, and how you plan to use the funds. HECMs offer flexibility and security, but come with higher costs.
Proprietary reverse mortgages can provide access to larger sums for those with high-value homes but lack the insurance and sometimes the stability of HECMs. Single-purpose reverse mortgages are cost-effective for specific needs but offer limited flexibility.
Before deciding, it’s recommended to consult with a financial advisor or a HUD-approved counselor. They can provide personalized advice based on your financial situation and help you navigate the complexities of each option, ensuring you choose the reverse mortgage that best fits your retirement planning needs.
The FHA insures certain reverse mortgages, as long as borrowers meet certain requirements:
You’re more likely to get the money you need if you own your home outright, or if your loan balance is small so that you have a great deal of equity.
When you apply for a reverse mortgage loan, your lender will consider a few factors that will influence the amount of money you receive, including:
The older you are, and the more equity you have in your home, the more you’re likely to be approved for. Keep in mind, too, that fees associated with reverse mortgages are often much higher than fees for other types of home equity loans. That’s going to eat into how much you actually receive — even if you have a lot of equity in your home.
One of the perks of FHA-insured reverse mortgages is the fact that you don’t have to pay back more than the home is worth. So, if the value drops, and you owe more than it’s worth, you (or your heirs) might have to sign a deed in lieu of foreclosure turning it over to the bank. This is one reason many reverse mortgage lenders won’t actually lend you the entire amount of your equity.
You can use the money for whatever you want, whether it’s paying off debt, covering living expenses, or going on a vacation.
If you get a fixed-rate reverse mortgage, you’ll receive a lump-sum payment. You can then take that money and do whatever you want with it. However, when it runs out, it’s gone. Some retirees use a lump sum to fund a retirement investment portfolio or purchase an immediate annuity. Others use the money to pay off debts or cover other expenses.
With an adjustable-rate HECM, you have different options available. You can choose to receive set monthly payments for a specific period of time or get payments for as long as you or an eligible spouse live in a house.
If you choose an open-ended payment schedule, you’ll likely get a smaller amount each month. However, you can be reasonably sure that you’ll continue to receive money until you pass on or move into a long-term care facility. With a fixed-term payment schedule, you could see higher cash flow every month. However, you run the risk of outliving the payments and trying to figure out what to do next.
Finally, you can also choose to use your reverse mortgage as a line of credit. You can withdraw funds as needed, up to the credit limit. This is a little more flexible and can be useful if you have other sources of income, and just want the HECM in case you need to fill a gap on occasion.
If you’re considering a reverse mortgage, it’s a good idea to start with an FHA-approved lender so you receive protection. You can use an online locator to find a counselor who can help you with the process, or you can call 800-569-4287.
Carefully consider the pros and cons, too.
There are some ways to benefit from a home equity conversion mortgage that you wouldn’t see with a more “traditional” home equity loan.
While a home equity conversion mortgage might seem like a no-brainer, there are some downsides to consider before you proceed.
Scams related to reverse mortgages are a serious concern, as they often target vulnerable seniors who may be seeking financial relief or have cognitive impairments. These scams can come in the form of dishonest vendors or contractors who promise home improvements in exchange for a reverse mortgage. However, they then either fail to deliver quality work or outright steal the homeowner’s money.
Similarly, family members, caregivers, and financial advisors may use a power of attorney to obtain a reverse mortgage on a senior’s home and then steal the proceeds. They may also try to convince seniors to buy financial products that they can only afford through a reverse mortgage, which may not always be in the senior’s best interest.
It’s important to be cautious and do thorough research to protect yourself from these types of scams.
With a reverse mortgage, you can use your home as an asset if you know you’ll stay in it for a long time and need a little extra income for retirement. Borrowers who don’t intend to pass the home to heirs may benefit financially from the home during retirement. That is, as long as you can keep up with the costs of maintaining the home and pay property taxes.
In contrast, getting a reverse mortgage loan might not make sense if you can’t afford home maintenance or if you wish to leave your home to your heirs. When you’re no longer living in the home, your heirs will need to sell the home to pay off the loan. If not, they’ll have to pay the loan themselves to keep the house. If there’s enough money in the estate to pay it off, it will reduce how much ready cash they receive when you pass on.
Carefully consider your situation and your priorities before you decide to get a reverse mortgage. Then, make the decision most likely to benefit you in retirement and increase the chance that you’ll outlive your money.
Source: crediful.com
Thinking of pursuing homeownership without a partner? You’re in good company. Singles are redefining what it means to be a homeowner while also becoming a growing segment in the home purchase market.
To delve deeper into the journey of buying a home on one’s own, Pennymac reached out to 500 single male and 500 single female homeowners across the United States. We wanted to uncover the driving forces and potential roadblocks of purchasing a home solo. Among our interesting findings? The majority of today’s single females believe that waiting for a partner to buy a home is an outdated notion.
Take a closer look at our survey results to find out how participants financed their homes, the role societal pressures played in their decisions and the biggest challenges they faced.
One of the biggest roadblocks for many first-time homebuyers is the down payment. A down payment is a portion of the total cost of a home that is paid upfront when the home is purchased. It typically ranges from 3% to 20% of the purchase price, depending on the lender and the type of mortgage.
While homebuyers sometimes use gifts from family for the down payment, most of our surveyed single homebuyers (67%) saved for it on their own and didn’t have any financial assistance from family and friends. How much did they save? The most popular down payment range reported by both male and female respondents was 6%-10%, with most individuals (65%) purchasing a home in the $0-$250,000 range.
There are many reasons why people choose to buy a home, from the opportunity to build their own equity to reaping potential tax benefits. Our survey explored what specific factors drove the decision to buy a home as a single person — and our findings were insightful.
According to our survey, it’s not cultural norms, as 70% of respondents did not feel societal pressure to buy a home.
Half of these single homebuyers (50%), like many homebuyers, were simply ready to have a place of their own. Since 43% of respondents stated that they rented on their own prior to purchasing their home, they decided to make the leap to build their own equity. And with 36% securing a mortgage interest rate between 3.1% and 4%, they may have felt the timing was right to make the move.
Another interesting fact: Homeowners didn’t feel the need to have a partner to take this exciting step. The idea of waiting for a significant other to buy a home was deemed outdated by over half of respondents, with slightly more females (54%) than males (48%) agreeing it’s an old-fashioned notion.
They also want to put down roots. Nearly half of single homebuyers purchased their first home between the ages of 25 and 34, and 58% anticipate living in their home for nine or more years.
Buying a home is a milestone, but it’s not without its obstacles. However, females and males identified different challenges as their most significant. More than half (55%) of females reported their biggest challenge when buying a home solo was finding a home in their price range, while 51% of males cited saving for the down payment as their number one hurdle.
Single homeowners are an important segment of the housing market. They’re saving for down payments, securing financing and bucking societal trends by not waiting for a partner to buy a home. They’re gaining the freedom, sense of security and peace of mind that comes from the exciting homeownership experience.
Homeownership is for everyone, not just couples. No matter your partnership status, Pennymac is here to help support you on your home-buying journey. Contact a Pennymac Loan Expert today to start your path to homeownership with confidence.
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Source: pennymac.com