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Mortgages:Refinancing & ReverseJoel Schumacher

Question A: My Age is • Under 35 • 36-49 • 50-69 • Over 69

Evaluating Refinancing Options • Step 1: Why are you considering a refinancing? • Step 2: Understand your current loan • Step 3: Understand the possible “new” loan • Step 4: Compare 2 & 3 • Step 5: Decision Time

Question B: Do you currently have a mortgage? • Yes • No

What is Refinancing? • Defined: • Pay off an existing loan by using the proceeds of a new loan • Common consumer loans that are refinanced • Mortgages • Student Loans • Credit cards

Reasons to Refinance 1. Save money over the life of the loan • Lower interest payments over the life of the loan 2. Reduce monthly payments • Longer term or lower interest rate 3. Switch from an Adjustable Rate to a Fixed Rate • Reduce uncertainty 4. Use the equity in your home for some other purpose • Pay off other debt, remodeling project, etc.

Question C: Have you ever refinanced? • Yes • No

Question D: What was the main reason you refinanced? • Save Money • Lower Monthly Payments • Switch from an Adjustable Rate to a Fixed Rate • Pay off other debt

Evaluating Refinancing Options • Step 1: Why are you considering a refinancing? • Step 2: Understand the specifics of your current loan • Step 3: Understand the specifics of the “new” loan • Step 4: Compare 2 & 3 • Step 5: Decision Time

Monthly Payments • Monthly Mortgage Payment Breakdown • Interest • Principal • Property Taxes • Home Owner’s Insurance • Private Mortgage Insurance • Typically, required if the down payment was less than 20%

Payment Example

Mortgage Interest Tax Deduction • Interest on a mortgage can be tax deductible • You must itemize to take advantage of this tax deduction • Check last year’s return to see if you itemized • If yes, then determine your marginal tax brackets for federal and state income taxes • To determine the “value” of your deduction • 5.5% x (1-21.9%) = 4.3% (After Tax Interest Rate) • 4.5% x (1-21.9%) = 3.5% (After Tax Interest Rate)

Create a amortization schedule • If no extra payments have been made: • Use the one in your original loan paperwork • Online calculators: • Easy to use, but need to know Loan Amount, Interest Rate, Number of Payments Remaining • www.choosetosave.org • If not, www.powerpay.org can create one • You need to know: Current loan balance, interest rate and payment (Principal and Interest only)

Refinancing Process • Find a new lender • Fill out a new loan application • Get an Appraisal* • Estimate Fees • Application, Loan Origination, Appraisal, Inspection, Closing Fees, Private Mortgage Insurance, Title Insurance, Survey, Pre-Payment Penalty • Estimate Interest Rate & Points

Loan Application • Refinancing is a new loan • The lender will evaluate your credit worthiness • Credit score • Debt to income ratio • Loan amount to property value ratio • Co-Signer’s credit worthiness

Fees • Fee Estimates • Application Fee $75-$300 • Origination Fee 0% to 1.5% of loan value • Appraisal $300 to $700 • Title Insurance $700-$900 • Closing Fees $500-$1,000 • Private Mortgage Insurance Varies • Prepayment Penalty Rare

Interest Rates What does a rate quote look like? 30 years, Fixed Rate • 4.11% with no points • 3.97% with 1.375 points 15 years, Fixed Rate • 3.48% with no points 30 years, Adjustable Rate • 3.3% with no points

What are points? • A point is fee charged when a loan is issued • Higher points equal lower interest rates • How much does a point cost? • Example: 1.25 points for a $100,000 loan • $100,000 x 0.0125 = $1,250

Fees • Estimate all of your fees and points • How are you going to pay for them? • Often they are added to the new loan balance • Example: • Current loan balance $150,000 • Fees and points $ 2,210 • New Loan Balance $152,210

New Loan Payments • Create a new amortization schedule • New Loan Payment • Total Interest Charges • www.choosetosave.org

Goal: Reduce Monthly Payments • Comparison: • Previous Monthly Payment • New Monthly Payment • Does this reduction meet your needs?

Reducing Monthly Payments • Jill (age 64) has mortgage: • $47,100 Balance • 6% Interest Rate • Payments of $910 • 5 years left on loan • Jill is considering retirement but won’t be able to afford $910 payments

Reducing Monthly Payments • Jill could refinance to a 15 year loan • $48,500 Loan (included fees & points) • 4.5% Interest Rate • Monthly Payment of $371 • Comparison • $539 less in monthly payments • 10 extra years of payments • Extra interest charges of $12,180

Decision Time • Does the refinancing meet your goals? • How long do you intend to own this home?

House Price Decline Issues • What if: • John purchased a home for $250,000 • He paid 20% down payment • Private Mortgage Insurance was not required • He currently owes $195,000 • The new appraisal is $220,000 • John wants a new loan for $195,000 • 88% of the value

House Price Decline Issues • What if: • Holly purchased a home for $175,000 • She paid 5% down payment • Private Mortgage Insurance was required • She currently owes $165,000 • The new appraisal is $160,000 • Holly wants a new loan for $165,000 • 103% of the value

Questions

Reverse Mortgages • What are they? • When might you use one? • What types are available?

What is a Reverse Mortgage? • A Reverse Mortgage (RM) is a loan • RM is collateralized by your home equity • RM has an interest rate • Must be age 62 or older • Some programs require higher ages (65, 68, etc.)

Who might benefit from a Reverse Mortgage? • Elderly wanting to stay in their home. • Elderly needing additional financial flexibility. • Elderly that have home equity.

Different Types • Single Purpose • Federally Insured Reverse Mortgages • Home Equity Conversion Mortgages (HECM) • Proprietary Reverse Mortgages

How does it work? • Homeowner receives a payment • Lump sum • Payments for a fix term (10, 15 years) • Payments for life • Line of credit • Combination of these payments

Reverse Mortgage Facts • Loan advances are not taxable • Homeowner keeps the title to the home • Homeowner pays property taxes, insurance & maintenance costs • Loan balance increases over time

Fees • Origination Fee: 1%-2% • Mortgage Insurance Fee: 2% initial & 0.5% annually (HECM) • Appraisal Fee: $300-$400 • Closing, Title, Other: $400-$600 Total Fees $100,000 Loan: $4,000-$6,000 $200,000 Loan: $8,000-$11,000

Example: • Home Value $250,000 • Current Mortgage $ 50,000 • Homeowner Age 70 • Current Rates 3.5% to 5.5% • These change just like regular mortgage rates

Lump Sum Example • Estimated lump sum: $159,000 • Less Fees: $ 10,000 • Less Current Mortgage Payoff $ 50,000 • Net Available: $ 99,000

Monthly Payment Example • Estimated maximum lump sum: $157,000 • Less Fees: $ 9,000 • Less Current Mortgage Payoff $ 50,000 • Monthly Payment $ 606

Loan Balance • Month 1: $50,000 + $9,000 + $606 = $59,606 • Month 1: $248 interest charge • Month 1: $59,854 end of month balance • Month 2: $606 monthly payment • Month 2: $252 interest charge • Month 2: $60,172 end of month balance

When does a RM end? • When the home is not the owner’s main residence. • Owner moved • Owner passes

What happens next? • The mortgage becomes due. • The owner (or family) can pay off the mortgage and keep the home. • The home can be sold to pay off they mortgage.

Questions

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