New housing bill is good news for older homeowners interested in reverse mortgages

The housing legislation Congress approved this weekend contains a bonus for older homeowners: much higher amounts will be available to FHA reverse mortgage borrowers. Once President Bush signs the legislation, the new rules will take 60 to 90 days to implement, according to the National Reverse Mortgage Lenders Association.

The new limit on the FHA home equity conversion mortgages will be $417,000, more than twice the current limit in many areas. As much as $625,500 will be available in very high cost areas. You also will be able to use an FHA reverse mortgage to buy a home. 

What's a short sale?

Q: In following real estate news, I have come across the term "short sale." What does this mean? How does it work, etc.? is this another greed angle that will cause more grief for homeowners?

A: Quite the opposite. A short sale in real estate is a sale for less than the amount of the mortgage. The lender agrees to accept the sale proceeds as satisfaction of the debt. It's an alternative to going through foreclosure. The problem is usually convincing the mortgage lender to agree to a short sale.

Note: the interest forgiven is generally taxable income unless the property was the borrower's primary residence. 

Could your home help finance your retirement?

Reverse mortgages are a hot financial product these days, mainly because mortgage lenders and brokers see them as a way to revive their flagging business. However, they actually are a great financial tool under the right circumstances, as I wrote about today.  Quite simply, they are a way that older homeowners (62 and up) can tap the equity in their homes for living expenses without having to pay the money back so long as they remain in the home. If that sounds like something that interests you, read my story and check out these great pamphlets

Home Made Money from AARP

Money from Home from Fannie Mae

Take my money, please!

Sunday's column is about the extraordinarily difficult time one homeowner had trying to pay off his mortgage. Unfortunately, customer service has never been a strong point in the mortgage servicing industry and the situation appears to be getting worse rather than better based on the complaints I hear. Getting a company to call you back appears to be an accomplishment these days.

Should I refinance my mortgage?

Q: We currently have a 30-year fixed-rate mortgage at 5.75%. Our unpaid principal balance is $145,496. We've been in the home for five years. We have credit card debt of almost $16,000 that we'd like to pay off. We've been offered a new loan for $175,000 at 5.375% rate for 30 years. The closing costs will be about $9,734, monthly payment approximately $1,363 (including taxes and insurance). We will receive approximately $1,100 in cash. We really can't afford to make another bad decision. What should we do?

A: I would not do this, but I do not know what your alternatives are. Something is wrong with your math, because it looks to me like you'll end up owing $13,504 more than you do now and extending your mortgage for an additional five years, both of which seem like a bad deal to me. The best approach, in my opinion, would be to put your credit card balance on the lowest interest rate card you can get and make extra-large payments every month until it is paid off. 

The way I look at it, there are hundreds of thousands (maybe millions) of homeowners out there who a few years ago did something very similar to what you are contemplating and now regret it very much. This is particularly a problem if their mortgage is now more than their house is worth. If you had to sell your house, would it bring at least $175,000 plus real estate commissions and other closing costs?  If there's any doubt about that, you definitely don't want to refinance.   

Are you telling me that it is impossible for you to pay off your $16,000 in credit card debt? If so, maybe you should be considering bankruptcy. Talk to a credit counselor about your options before signing anything. Credit card debt can be discharged in bankruptcy but if you put it on your mortgage, you put your house at risk. Here are some calculators (one, two)  you can look at in analyzing your situation. There are numerous others on the Web as well--just do a google search on mortgage refinancing calculators.

Should we tap our home equity?

Q: We are both newly retired and living on one Social Security check and investments. Would it be ridiculous to borrow on our already mortgaged home? In doing this, we would be getting a tax break and invest the amount not needed. We would use that amount borrowed to supplement our monthly income in place of the drawing down our investments. Common sense tells me that this is not a good idea. Do you think it's crazy?

A: I recommend listening to your common sense. Using home equity as a piggy bank to finance living expenses is something best saved for when you are in your 70s or older and have no other options. Borrowing against your home equity to make investments is a high-risk strategy I don't recommend, especially not to retirees. You don't say how old you are, but I assume that one of you is too young to collect Social Security. If you are concerned about the adequacy of your investments to last you through retirement, you've probably retired too soon. Working a few extra years or continuing to work part-time in retirement can make a huge difference in the adequacy of your retirement income.

Banks freezing home equity credit lines

You know that home equity credit line you thought would substitute for an emergency fund if you ever had an emergency? Think again. Banks are "freezing" credit lines left and right, as I report in my story today. A freeze means you can't charge any more than you already have. Credit lines generally are frozen with no prior notice, to prevent you from running up debt at the 11th hour. That means if your credit line hasn't been frozen yet and you know for sure you'll need the money, you'd better borrow it now. That could be especially important if you've got a home improvement project in process. Of course it's always best to avoid borrowing if it's not necessary.

Banks are giving the general decline in real estate values as the reason for the freezes. If your home value goes down, you have less equity and they have less security for any money you borrow.

 

Can we deduct taxes we paid when we bought our home?

Q: When we bought our home last year, we paid about $1,700 for recording fees for the deed and and mortgage, mortgage intangible tax and mortgage doc stamps. Can we deduct any of these on our federal income tax?

A: No. Those are considered transfer taxes, which are not deductible. If you or the seller paid points on the loan and they were clearly earmarked on your closing statement, those are deductible. So are your mortgage insurance premiums if you have an insured mortgage (but NOT property insurance premiums). And, of course, your mortgage interest and real estate taxes are deductible.

New plan offers hope to homeowners in mortgage trouble

Project Lifeline, which the government announced today, offers the possibility of help to another group of homeowners behind on their mortgages. Here’s how it will work:
Q. Which lenders/mortgage servicers are participating?
A. Bank of America, Citigroup, Countrywide, J.P. Morgan Chase, Washington Mutual and Wells Fargo.
Q: Which properties qualify?
A: Owner-occupied homes; the type of mortgage doesn’t matter. Officially the homeowner must be at least 90 days behind on mortgage payments, although some mortgage lenders will talk to borrowers who are only 30 days behind. The property cannot have a foreclosure sale date set within the next 30 days. The homeowner cannot be in bankruptcy.
Q. What kind of help will people get?
A. The lenders say they will send letters to borrowers, some going out as soon as this week. The message: Call to discuss options for modifying your loan to make it more affordable, generally by reducing the interest rate. In some cases, foreclosure can be postponed for 30 days to allow time to negotiate.
Q. Who can I call right now?
A. Call your lender or mortgage servicer directly or call the toll-free HOPE Hotline (888) 995-HOPE set up by the Homeownership Preservation Foundation.

-- Helen Huntley, Times Personal Finance Editor

Here's where to turn if you're having trouble making mortgage payments

If your mortgage payments have become overwhelming, don't just sit idly by and wait for the bank to foreclose.

If you can't sell your house for enough to pay off the mortgage, read my column today to learn more about short sales and deeds in lieu of foreclosure.

If you really want to keep your house even though you can’t make the payments, here’s what to do next:
• Get advice from a pro. Go to www.hud.gov or call toll-free (800) 569-4287 to find a HUD-approved
housing counselor near you. Or call the Project HOPE hotline at (888) 995-4673. The earlier you ask for help, the better. A counselor can help you evaluate your options and review your budget to see what’s financially feasible for you.
• Refinance or ask your lender to modify the terms of your mortgage if that would bring the payments to a level you could afford and you can qualify. If you have an adjustable rate mortgage that recently reset or will soon, talk to any FHA lender about the FHASecure program to see if you can qualify. The drawback: If you have no equity in your home, you probably will have to put up some cash to refinance.
• Consider a Chapter 13 bankruptcy filing. You’ll stop foreclosure proceedings and be put on a
payment schedule for all your debts. Eventually you may be able to refinance. The drawback: bankruptcy stays on your credit report for 10 years.

Fed cuts rates, wild day on Wall Street

Talk about a crazy day. The Fed delivers the biggest interest rate cut in more than 25 years and the traders who dominate Wall Street can't decide whether to buy or sell. The Dow is down 400-plus points in one moment and then only down 40 something at another.

Stock investors generally like rate cuts, but their happiness that the Fed is taking action is tempered by the news that the Fed economists apparently think that recession warning lights are going off like crazy. The good news is that as rate cuts work their way through the economy, they make it less expensive for businesses to borrow money to expand or just stay afloat and for consumers to handle their credit card debt and home equity loans. Of course not everybody has good enough credit to qualify for a loan and take advantage of the good rates. However, if you've got an adjustable rate mortgage that's getting ready to reset, this is really good news for you.

The bad news is that every rate cut increases concern about inflation, reduces income for retirees who depend on CDs and money market accounts and hurts the dollar.

Mortgage rates are great--if you've got good credit

Mortgage rates are at their lowest levels in two years, according to Bankrate.com, which is good news if you've been thinking of refinancing or buying a house. You should be able to get 5.45% on a fixed-rate 15-year loan or 5.88% on a fixed-rate 30-year loan, according to Bankrate's survey. That's if you've got good credit, of course.

Should I take a buyout offer from my siblings?

Question: I recently retired at 58. My only debt is a $65,000 mortgage. My mother just passed away and left her home worth $200,000 (no mortgage) to her five children in a trust. It is currently rented for $1,000 per month. I have a chance to be bought out by my brothers and sisters. I would use this money to pay down my mortgage. Would being closer to being debt-free be a good decision versus remaining one-fifth owner of a rental house?

Answer: Being one-fifth owner of a rental house is fraught with peril. If a new roof is needed, you may be called upon to put up a fifth of the money. If the house is vacant for a while, you may experience outgo rather than income. And you and your siblings could have disagreements over the best way to handle these and other issues that may arise. Keep in mind also that rent is not all profit. You will be paying for insurance and taxes as well as repairs. In addition, whichever sibling does the work involved in managing the property should be entitled to compensation. As long as it's a reasonable price, I'd say take the buyout offer.

Whether to pay down a mortgage is a separate issue. What's best depends on the return you would earn on your investment alternatives. How would you invest this money if you did not pay down your mortgage? There also are psychological considerations. Paying off your house is a conservative approach, one that many people find gives them peace of mind.

How should I pay for my new roof?

Q. I have recently discovered that I need a new roof on my small home. Estimates are coming in around $6,000 and I don’t have a liquid $6,000.  I have an IRA and a 403B rollover, each with approximately $6,000, but I don’t think I can take any money out of these accounts without a penalty. Is there a better option between a home equity loan, a home equity line of credit, or simply spreading the $6,000 across my two credit cards?  I’m not fully clear on the definition of home equity, but I think that I have a sufficient amount of equity as my home is valued at $160,000 and I only owe about $40,000 on it.  Any advice?

A. Don't cash in your retirement accounts. You would owe income taxes on the money plus a 10% penalty if you are younger than 59 1/2.

Home equity is simply the value of your home minus the amount of your mortgage. You have equity available and a home repair or improvement is the most legitimate use of home equity. The general rule is that a home equity loan is best when you have a single expense you'll be paying for in a lump sum--your roof repair is a perfect example. A home equity credit line is best when you'll be borrowing at various times. A credit line is often more convenient but it has a couple of drawbacks. One is that the interest rate is adjustable and could go up. The other is that it makes it very tempting to spend more than you originally intended until you have maxed out your credit line.

A credit card is the best option only if you've been offered a low rate that's locked in for a while. A "teaser" rate good for just a few months is worthless unless you think you can pay off the loan very quickly.

Here's a new source of help if you're worried about losing your home

The National Foundation for Credit Counseling has launched a new Homeowner Crisis Resource Center offering a helping hand for homeowners who are having difficulty making their mortgage payments. There's a "mortgage reality check" quiz to help you determine how serious your problems are and numerous resources, including referral information for housing counselors and alternatives to foreclosure.

My advice is to be proactive. Don't wait until you get a foreclosure notice before doing something about your situation. If you know you can't afford your mortgage - or won't be able to when your adjustable rate loan resets - talk to a housing counselor now about your options.

[St. Petersburg Times art by Steve Madden]

What should you do if you are facing foreclosure?

If you can't afford your mortgage, don't wait until you are several months behind on your payments before trying to do something about it. Your first step should be to call your lender and ask to speak with someone in the "workout" or "loss mitigation" department about modifying your loan terms. Even if you previously were given the cold shoulder, I recommend trying again, because pressure is increasing on lenders to work out terms with homeowners. Step two is to speak with a housing counselor. (Or try here or here.)

If you have an adjustable rate mortgage, you may be eligible for the new FHASecure refinancing program.  Here are some other good tips from Bankrate.com. Whatever you do, don't fall for a "foreclosure rescue" scam.

(Photo credit: Getty Images)

Housing bailout: What form should it take

I today's paper I wrote about President Bush's proposal to help homeowners whose adjustable rate mortgages are resetting at payments they cannot afford. This really puts the issue of a housing bailout on the table for national discussion. In my opinion the question is not whether there will be some kind of bailout but what form it should take. Bush's proposal is relatively modest and not likely to cost the government much. No doubt we soon will be seeing many more aggressive proposals. Some will be aimed at helping individual borrowers. Others will be aimed at improving the overall real estate market. What kind of help do you think the government should be  offering homeowners who might face foreclosure?

Money question of the week: How have you been affected by problems in the mortgage market?

Have you found it more difficult to get a mortgage? Are you caught in an adjustable rate loan you can't refinance? Been unable to sell a house because your would-be buyer can't get a mortgage? Seen your high-yield bond fund take a hit?

A sampling of responses to this question will be published in the Sunday Money section. Comments must include your first and last names and city. If you don't want to answer here, you can email your comment to me.

(Photo credit: Getty Images)

Housing slump has a long way to run

Don't hold your breath waiting for the real estate market to rev up. Wachovia economist Mark Vitner says Florida's housing market may be approaching a bottom, but it won't improve appreciably until 2009 or later. One in every 431 households in Florida is in some stage of foreclosure, according to RealtyTrac. The good news: That's not as bad as it was in June. Nevada's situation is the worst in the country.

(Photo credit: Getty Images)

Are reverse mortgages a good idea?

Q. With the cost of homeowners insurance, the maintenance fees and property taxes, we are trying to determine the best way to approach our home here.  A number of friends have suggested a reverse mortgage.  Is there an unbiased evalaution on a reverse mortgage that we can obtain to make our decision? We do not know enough about this type transaction and don't want to be misled by companies that could take advatage of us.

A. AARP publishes some good consumer info (here and here) on this topic. Fees are the big drawback of a reverse mortgage, so it's only something to consider if you plan to be in your home for the long haul. If you were to sell in a couple of years, it wouldn't be worth it.

Also, in case you didn't see it, here's my column about homestead tax deferral, which is basically a "mini" reverse mortgage without the fees.

Homes at Risk: Is yours one of them?

The Times' Sunday and Monday business sections feature a two-part report on foreclosures and the risks posed by adjustable rate mortgages. You'll be hearing more about adjustables, particularly the controversial option ARMs, which start out with minimum payments that don't even cover all the interest accruing. They made it possible for many people to buy homes they otherwise couldn't afford, but now they're adjusting upward and some borrowers can't afford the payments.

We'd like to hear about your experiences with adjustables and your opinions about our stories. Please post them as comments here.

(Photo credit: Getty Images)

How can I keep a duplex and buy a new home?

Q. I purchased a duplex from my father-in- law 2 years ago. I have been living in one side and renting the other since taking ownership and my father-in-law holds the
18-year-mortgage. I would like to keep this property and move out to rent it completely and buy a new home. I do not have any money to put down on a new home. My questions are what are my options as far as home equity, extending my mortgage and the possible taxes that I would incur and/or pitfalls?

A. In my opinion, your best bet is to raise the money for a 20 percent downpayment on your new home plus some extra cash as an emergency cushion by borrowing money against your duplex either as a total refinancing (paying off your father-in-law) or as a second mortgage. Once you know the cost of those options and the size of your future payments, consider whether it is reasonable to assume you'll be able to keep both sides of the duplex rented at a high enough rate to cover your mortgage(s), insurance, taxes and repairs. If not, I doubt that you can afford to own both a duplex and another home.

If the plan above proves financially feasible, then having a rental property could work out well for you. However, keep in mind that by moving out, you will be giving up two big tax breaks on the property. Since you have owned and lived in the property for at least two of the last five years, the capital gain on the part you've lived in would be tax free, assuming it's less than $500,000. The gain on the part that's rented is taxable. You could even convert the entire property to your residence and make the entire gain tax-free, except for recovery depreciation deductions. Also, by moving out, you lose the Save Our Homes cap on real estate taxes for the part that you live in.

(Photo credit: Getty Images)

Is an 80-20 mortgage a good idea?

Q. My son is shopping for a mortgage. Several lenders are offering 80-20 mortgages, which I have never heard of. Is this a good idea? He is not a first-time buyer. It would be the second home for him and his wife.

A. An 80-20 mortgage is a package of two mortgages, designed for people who do not have adequate cash for a down payment. The first 80 percent is pretty much a standard first mortgage. The other 20 percent is a second mortgage or equity credit line at a higher interest rate that essentially functions as the down payment. At least in theory, this route is cheaper than taking out a low down payment mortgage and being required to purchase mortgage insurance. Here is a Bankrate.com article discussing these mortgages at length.

If your son and his wife already a one home, perhaps selling it will leave them with enough money to put 20 percent down on the new house. In that case, they would not need an 80-20 mortgage.

Should I pay off my mortgage?

Q. I am 49 years old, single and have only a $50,000 mortgage at a very good rate. I have the money to pay it off. I still have 14 to 15 more years of working before I can retire with a full pension. I do max the percentage contribution allowed at work for my 401(k) and I do a Roth IRA every year. But if I pay off my mortgage I probably will not have anything big to deduct at the end of the year. Should I pay off my mortgage or not?

A. Congratulations on saving so diligently. You don't say how much you have accumulated in retirement savings, but I assume that you are on track to have more than enough income in retirement between your pension and your savings. I also assume that the after-tax cost of your mortgage is greater than the after-tax return you could get on a risk-free investment.

So here's what I would do if I were in your shoes: First, I would keep enough in cash reserves to cover six months of living expenses. Then I would put the excess toward the mortgage. If that's not enough to pay it off, I would make extra principal payments from income with the goal of paying the mortgage off early. Then I would take out a no-fee home equity credit line to have a backup source of emergency funds.

Being mortgage free by the time you retire provides both security and freedom. Yes, you probably will lose your ability to itemize, but remember that the only real benefit you get is from the amount your deductions exceed the standard deduction.

There are plenty of financial advisers who would disagree with me and they could be right. If you have the time and inclination to manage rental property, you might spend your extra cash to acquire property. Or if you have a particular interest in stock investing, you might set up a taxable investment account. But if thinking about either of those ideas gives you a headache, pay off your mortgage.

Is pulling the equity out of your house a good idea?

There's no question that home equity is a valuable asset for many of us. The question becomes when to use it. I share some of my views on the subject in today's column, but that's definitely not the last word. I tapped the equity in my previous home on three occasions. The first was a traditional home equity loan to build a swimming pool, back in the days of sky-high interest rates. We paid it off. The second was a loan we used to pay off the balance of our first mortgage when it got very low, allowing us to control our own escrow money and alternate years itemizing deductions. (Essentially our second mortgage became our first mortgage.) We paid that off too and briefly owned our home free and clear. Then we tapped a home equity credit line to help us through the transition of selling one house and buying another.

I think all three were good uses of equity. But other common uses, such as loan consolidation can be very dangerous if you use them because you are living beyond your means and are in precarious financial condition. If you can't make your payments, you lose your home. And if you simply run the balances on your credit card back up again. you end up in worse shape than you were before.

How have you used the equity in your home?