29
Oct
By Mike Pfefferman
Mortgage

What is the Difference Between a Reverse Mortgage and a Home Equity Conversion Mortgage?

Retirement planning is about ensuring you have a steady income stream to support yourself comfortably. For many retirees, tapping into the equity in their homes becomes an attractive option. Two terms often come up in this context: reverse mortgage and Home Equity Conversion Mortgage (HECM). Although they are related, there are some critical differences between them. Understanding these options can help you make an informed decision about what suits your financial needs.

What is a Reverse Mortgage?

A reverse mortgage allows homeowners to access the equity in their home and convert it into cash without selling their property. It’s often used to supplement Social Security benefits or other retirement income. Unlike a traditional mortgage, where you make monthly payments to the lender, a reverse mortgage works the other way around—the lender pays you. These payments can be structured in several ways: as a lump sum, fixed monthly payments, or a line of credit you can access as needed.

One significant advantage of a reverse mortgage is that no monthly mortgage payments are required as long as you live in the home and maintain it. The loan balance becomes due when you move out or sell the property. It’s important to note that while you’re borrowing against your home’s equity, your name remains on the title, meaning you retain ownership throughout the duration of the loan.

Reverse mortgages are designed for homeowners aged 62 and older, and they can be a valuable tool for those who own their homes outright or have significant equity. However, it’s crucial to understand the terms and conditions of these loans to avoid potential pitfalls, such as losing your home if you fail to meet the loan obligations, like paying property taxes and homeowners insurance.

What is a Home Equity Conversion Mortgage (HECM)?

A Home Equity Conversion Mortgage (HECM) is the most common type of reverse mortgage, and it’s backed by the Federal Housing Administration (FHA). It’s specifically designed for homeowners aged 62 and older and offers additional protections for both borrowers and their heirs.

One of the primary requirements for an HECM is that you must use a portion of the loan to pay off any remaining balance on your existing mortgage, if applicable. Once that’s settled, any remaining funds are disbursed to you, either as a lump sum, monthly payments, or a line of credit. The amount you can receive is determined by several factors, including the age of the youngest borrower, the current interest rate, and the national lending limit set by the FHA. Typically, older homeowners with higher home equity and lower loan balances can receive more funds.

HECMs provide flexibility and peace of mind. Because they’re insured by the FHA, you and your heirs are protected if the loan balance ever exceeds the home’s value when it’s time to sell. This protection ensures that neither you nor your estate will owe more than the home’s worth. However, like all reverse mortgages, HECMs come with fees and interest rates, so it’s crucial to review the terms carefully.

Is This Option Right for You?

Deciding whether a reverse mortgage or an HECM is right for you depends on your unique financial situation. Before proceeding, it’s wise to consult with a mortgage professional who can explain the details and help you weigh the pros and cons based on your circumstances. We can walk you through the application process, evaluate your eligibility, and ensure you understand your obligations as a borrower.

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28
Oct
By Mike Pfefferman
Financial Reports

What’s Ahead For Mortgage Rates This Week – October 28th, 2024

This week saw relatively light activity, primarily focused on discussions with the Federal Reserve Board. The only truly notable report released was the Consumer Sentiment Report, which happily reported that sentiment had risen for the month of October. Meanwhile, the Federal Reserve’s latest Beige Book survey noted a slight decline in manufacturing activity.

Consumer Sentiment (Final)

Confidence among Republicans in a potential Donald Trump victory helped drive consumer sentiment to a six-month high less than two weeks before the U.S. presidential election. The University of Michigan reported on Friday that the initial October reading of consumer sentiment rose to 70.5, up slightly from 70.1 in the previous month—marking the highest level since April.

Federal Reserve’s Beige Book

The Federal Reserve’s latest Beige Book survey of conditions across the country continued to paint a weak picture, with nine out of 12 regional district banks reporting flat or a slight decline in activity. Most districts reported declining manufacturing activity and consumers were reported to be on the hunt for bargains.

Primary Mortgage Market Survey Index

  • 15-Yr FRM rates saw an increase of 0.08% with the current rate at 5.71%
  • 30-Yr FRM rates saw an increase of 0.10% with the current rate at 6.54%

MND Rate Index

  • 30-Yr FHA rates saw a 0.23% increase for this week. Current rates at 6.36%
  • 30-Yr VA rates saw a 0.24% increase for this week. Current rates at 6.38%

Jobless Claims

Initial Claims were reported to be 227,000 compared to the expected claims of 245,000. The prior week landed at 242,000.

What’s Ahead

With such a light release schedule the previous week, we should be returning to a heavier release schedule next week. The most relevant and impactful reports are job releases, personal income, non-farm payrolls, S&P Manufacturing PMI final statistics, and JOLTS job change openings.

25
Oct
By Mike Pfefferman
Mortgage Rates

What Is A Mortgage Par Rate And How Does It Work

Think of the par rate as the raw, default rate offered by a lender. It’s not the lowest rate you can get, nor is it inflated by any adjustments. Lenders determine the par rate based on a variety of factors, such as current market conditions, your credit score, the loan type, and the loan amount.

Discount Points: Lowering Your Rate

When you’re negotiating your mortgage, you can choose to buy “discount points” to lower the interest rate below the par rate. Each discount point typically costs 1% of the loan amount and can lower your interest rate by a fraction of a percentage point. For example, if the par rate is 5%, purchasing one discount point might reduce your rate to 4.75%.

While paying for discount points increases your upfront costs at closing, it can save you money over the long term. If you plan to stay in your home for several years, buying down your rate could reduce your monthly payments and save you thousands of dollars over the life of the loan.

Lender Credits: Increasing Your Rate to Reduce Costs

On the other hand, lenders may offer something called “lender credits.” Lender credits are essentially the opposite of discount points. Instead of paying a fee to lower your rate, you accept a higher interest rate than the par rate in exchange for credits that reduce your upfront costs, like closing fees.

For example, if the par rate is 5%, you might accept a 5.25% rate, and in return, the lender gives you a credit that could cover some or all of your closing costs. This option can be attractive if you’re short on cash for closing or would prefer to minimize your out-of-pocket expenses.

However, the downside to accepting lender credits is that you’ll pay more in interest over the life of the loan. The higher interest rate will lead to higher monthly payments and increased overall loan costs, which may outweigh the short-term benefits of lower closing costs.

How Is Your Par Rate Determined?

Several factors influence what par rate you qualify for:

  • Credit Score: Lenders view borrowers with higher credit scores as lower risk. The better your credit, the more likely you are to receive a favorable par rate.
  • Loan Type: Different types of loans (fixed-rate, adjustable-rate, FHA, VA, etc.) will have varying par rates.
  • Loan Term: A 15-year loan typically offers a lower par rate than a 30-year loan.
  • Market Conditions: Interest rates fluctuate depending on the overall economy and housing market trends. Lenders adjust par rates based on these factors.

It’s important to compare the par rates from different lenders and consider how buying points or taking credits could affect your overall loan costs. A par rate isn’t necessarily the rate you should settle for, but it gives you a clear starting point for negotiations.

Making the Right Decision for You

Ultimately, the decision to accept the par rate, buy down the rate with discount points, or increase the rate in exchange for lender credits depends on your financial situation and long-term plans. If you plan to stay in your home for a long time, paying for discount points might be worth the upfront cost. Conversely, if you’re looking for lower upfront expenses, opting for lender credits could make sense, especially if you plan to refinance or sell the home within a few years.

Understanding the mortgage par rate and how it works is crucial when shopping for a home loan. Whether you choose to stick with the par rate, buy it down, or increase it for short-term savings, being informed will empower you to make decisions that benefit your financial future.