Among the most economical lending solution available today are home equity loans and home equity lines of credit. Depending on your personal financial situation, some of the interest can be used as a tax deduction. They are generally flexible and generally offer you the best rates available. There are a lot of advantages to a home equity loan. However, be sure to refinance with extreme caution.
There are two different types of home equity loans. The actual loan usually has a fixed rate with a precise period of time in which the loan needs to be paid off. Also fixed is the payment. This type of loan is ideal for someone who has a precise amount in mind. When consolidating your debts, such as student loans, credit cards, car loans or doing some home improvements, a homeowner will obtain a home equity loan to consolidate their entire payments inro one easy to pay bill. Often times, this creates a lower overall monthly payment.
A more flexible option is a home equity line of credit. This is an open ended loan meaning the payment and rate usually tends to be lower and is variable. A line of credit is generally used like a credit card, with tax benefits. Interest is only paid on the portion of the line you use. The rest is available for when and if you need it. Whenever you make a payment, that portion that is applied to the principle and is then available to use again if need be. Some lenders will offer a card for easier access. This option is great for when you do need to use the money immediately or would like to have the flexibility to keep using the money without going through the loan process over and over again.
If you have equity left over, when you refinance your current mortgage, often times you will be offered a home equity line of credit or home equity loan. If you have other debts that are above and beyond your original mortgage, a good way to go is a home equity loan. You are probably wondering why you wouldn’t include all of your debt in your original loan. Well, often times, in order to keep the loan amounts under 80%, debt is split into two different loans. This allows people to take advantage of the best rate available. If you are able to keep the loan amount under 80% of the home appraisal value, then you can easily avoid paying Private Mortgage Insurance, or PMI.
Whenever you do not have a need for a second loan when you are refinancing, you can then just put the money towards a line of credit. It is a good thing to have, should an emergency arise. When the need arises, the money is ready for you to use. This will save you the hassle of going through the entire loan process time and time again.
Another great benefit is the loan company can simply use the same credit inquiry for this loan that they used for the first loan. One note of precaution though, a line of credit usually has an annual fee attached to it. Be sure to ask your bank about specials they may be running in order to offset the cost. Sometimes they are willing to negotiate with you so that you will take the offer.
As you can clearly see, there are a lot of benefits to both a home equity loan and a home equity line of credit. Before making a decision, be sure to weigh all of your options. So that you are able to make a more informed decision, talk about the cost and ask if there are any hidden fees
Joshua Suffie is the expert behind the website www.refinancingright.com http://www.refinancingright.com Mortgages are a cut throat industry. Our information will give you the upfront knowledge to deal competently with mortgage brokers and get the best deal possible. Our site is www.refinancingright.com http://www.refinancingright.com
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Monday, June 2, 2008
Sunday, June 1, 2008
Shift to Reverse
By Donald Jay Korn
June 1, 2008
¦AdvertisementAs the population ages, financial planning is moving from the age of accumulation into the dawn of distribution. Planners explore the nuances of how to tap a portfolio in retirement. Insurance companies promote the virtues of immediate annuities as a way to lock in lifelong cash flow.
Insurers are now searching for alternative ways to turn equity into income, and some are turning to a product that many planners have previously ignored: reverse mortgages. Despite the housing downturn, many major insurers see these mortgages as the next sure thing. MetLife Bank added reverse mortgages to its product portfolio in 2007. Early in 2008, the company acquired EverBank Reverse Mortgage (formerly BNY Mortgage, when it was co-owned by the Bank of New York).
"We expect to see a growing market for reverse mortgages," predicts Dan DeKeizer, vice-president of MetLife Retirement Strategies Group. "Baby boomers, who are moving into their retirement years now, are used to looking to home equity to maintain their lifestyle."
Growth Spurt
Recent statistics on reverse mortgages may help explain why MetLife is so upbeat. "About 85% of reverse mortgages are home equity conversion mortgages, known as HECMs, which are guaranteed by the federal government," says Tyler Kraemer of Kraemer, Kendall & Benson, a law firm in Colorado Springs, Colo. The number of reported HECMs grew from a minuscule 7,800 in fiscal 2001 to 107,000 in fiscal 2007. For the first half of fiscal 2008 (through March), while housing values fell and credit markets staggered, HECMs maintained the record pace of 2007, with 55,000 approvals. Of all HECMs now outstanding, 73% were issued since October 2005.
Current market developments may take reverse mortgage numbers to new highs, according to Kraemer, who is co-author, with his wife, Tammy Kraemer, of The Complete Guide to Reverse Mortgages: Turn Your Home Equity into Instant Income! "Traditional lenders are focusing more marketing energy on reverse mortgages as an alternative to the traditional mortgage market, which is in a slump," he says.
In addition, in today's market seniors who might have sold a house to raise cash may not be able to get the price they expected from the sale. "Such homeowners are more likely to consider a reverse mortgage," Kraemer says. "Rising healthcare costs also increase the need for reverse mortgages, as does the poor financial performance of many people's retirement accounts in today's difficult stock market environment."
Red Flags
As demand for reverse mortgages increases, along with lenders' marketing efforts, many planners express caution and skepticism. "Reverse mortgages have enormous fees and should probably be avoided when possible," says Bobbie Munroe, who heads Fraser Financial in Atlanta. Nevertheless, she is now working with a client who might take out a reverse mortgage in the future.
John LeBlanc, a principal at Back Bay Financial Group in Boston, agrees that reverse mortgages are expensive. In addition, he says, "the amount that you can obtain is generally smaller than consumers expect, especially in the Northeast, where the amount a person can borrow is relatively small in relation to the value of the property."
With a HECM, the property value on which a home loan can be based is capped at $362,790 or lower, depending on location. Moreover, Kraemer points out, "today's lower home values mean lower loan amounts, because one of the factors in determining the amount of a reverse mortgage loan is the appraised value of the home."
To help decide whether a reverse mortgage makes sense, planners and borrowers need to know the basics. Reverse mortgages are secured by the equity in a principal residence. They may be taken as a lump sum, a line of credit or a stream of payments. "We are seeing many hybrid loans," DeKeizer says. "A borrower will take out some cash to pay off debts, bills and so on. The balance of the loan might be set up as a line of credit that grows over time."
Federally backed HECMs, the most common reverse mortgages, are available to homeowners who are 62 and older. Borrowers must have a home that is debt-free or nearly so in order to get these loans.
"HECMs are adjustable-rate, non-recourse loans that do not need to be repaid until the last surviving borrower dies, moves out or sells the home," Kraemer says. That's true even if the loan balance exceeds the home's value, he adds.
In some arrangements, cash flow will continue as long as the borrower is alive and occupying the home. The loan plus accumulated interest must be repaid when the owner dies or moves out of the house. In the majority of cases, the family will sell the home to raise cash for repayment.
Serving Septuagenarians
Given those ground rules, which clients might benefit from a reverse mortgage? Many experts feel the ideal reverse-mortgage candidate is someone in his or her mid-seventies who has substantial equity, plans to remain in the home for at least five years, and has no other source of needed cash Kraemer says.
Indeed, Munroe remembers discussing reverse mortgages with a 76-year-old client who lives with her 94-year-old partner in a $200,000 home that she owns free and clear. "The boyfriend pays her $1,400 a month for rent," Munroe explains. "My client's only other assets are a small annuity and a small amount of investments, while her only other income is a modest Social Security check. So when the boyfriend dies, she will be hard-pressed for income."
According to Munroe, the client had been approached by a reverse-mortgage salesman who was going door to door. "Thankfully she wasn't taken in and didn't sign on the dotted line right then and there," Munroe says. "For her, though, a reverse mortgage at some point in the future might be a good solution."
For now, things are on hold for Munroe's client; she doesn't need the money yet and isn't sure that she'll stay in her home much longer. She'll probably make a more lasting housing decision in the next few years.
"The current home is on multiple levels, so a change is probably in the works at some point," Munroe explains. "However, before we do anything, she will need to decide exactly what she does want in terms of housing."
Munroe would like to see this client wait until age 80 before taking a reverse mortgage. "Her payment would be higher then," she says. "At that time, we'll compare the benefits of the reverse mortgage versus selling and using the capital to pay rent and provide income."
This client's family has a history of longevity; her mother was 104 when she died. Since it's not unlikely that the client will live past her average life expectancy, a reverse mortgage with lifetime payouts may work well.
"Before choosing a reverse mortgage, we will certainly shop around for fees, payout and the company's ability to make the payments," Munroe says. "Hopefully, terms and conditions will become more consumer-friendly in the intervening years."
It's Better to Wait
Reverse mortgages are similar to immediate annuities in this respect: The longer one waits before originating the arrangement, the greater the amount of annual cash flow.
"An 80-year-old woman contacted me concerning using a reverse mortgage," says Carol Friedhoff, who heads Savvy Outcomes, a planning firm in Columbus, Ohio. "Her husband had died recently, and her income was cut in half due to pension and Social Security reductions. She wanted to live in her home for at least 10 more years and did not need to pass the home to her family."
After conferring with Friedhoff, this client chose to look into a Fannie Mae reverse mortgage. "With about $300,000 of equity in the home, she would receive approximately $800 per month," Friedhoff says. "Her adjustable rate would be 6% now, and her fees would be less than 4% of appraised value. When I spoke with this client recently, she told me she was planning to move forward with the reverse mortgage."
According to government statistics, the average age of HECM borrowers is 73. DeKeizer says that number may come down as boomers retire and tap home equity via reverse mortgages, but for now these loans tend to go to homeowners who are well into their Medicare years.
Scam Prevention
Products aimed at the elderly seem to lure predators, and that applies to reverse mortgages. "If you are interested in a reverse mortgage, beware of scam artists that charge thousands of dollars for information that is free from HUD," the U.S. Department of Housing & Urban Development warns elderly homeowners.
"Overly aggressive marketing by some lenders has led to situations in which seniors have been pressured into making bad decisions," Kraemer says. "As a result, regulators are starting to talk about the need to maintain and enhance existing consumer safeguards." Currently, he says, would-be borrowers must meet with a HUD-approved counselor before applying for a HECM.
Not only regulators but also legislators are eyeing reverse mortgages. Kraemer reports that both houses of Congress have passed versions of a bill that will replace the county-by-county loan limits with a single national loan limit, eliminate the cap on the number of HECMs that the Federal Housing Administration is authorized to insure, authorize HECMs for home purchase, broaden the types of qualifying properties, and limit HECM origination fees. Kraemer expects the House and Senate to finalize the bill soon.
These new regulations could be major changes, especially the idea that reverse mortgages can be used to purchase new homes, rather than requiring borrowers to age in place. "This provision, along with raising the loan limits and eliminating the cap on the number of HECMs that can be originated each year, will expand the market for reverse mortgages," Kraemer says. Limiting origination fees may also make the loans more appealing to borrowers.
All of these trends are converging to bring reverse mortgages into the mainstream—and into financial planners' potential plans for retired clients. But, warns Kraemer, "the planning that's involved in deciding whether a reverse mortgage is right for someone is surprisingly complex. You need to consider the origination fees as well as monthly servicing fees, the estimated term of the loan or the life span of the borrower, the borrower's financial needs over that time, the interest rate, the available loan amount and how the loan proceeds will be used."
A Fallback Income Stream
What's more, a reverse mortgage need never be consummated to play a valuable role in financial planning. Just the idea that one is available can keep clients on a recommended route.
"I remind my older, retired clients that they need to continue to bear the risks of the stock market with some of their retirement capital," says John Smartt, a CPA and RIA in Knoxville, Tenn. "I also tell them that if stocks go down and stay down for years, they will have two aces in the hole. The first ace is a reverse mortgage. Although a reverse mortgage will have high initial fees, there is no repayment obligation, and the money received won't be subject to taxes."
The second ace, according to Smartt, is an immediate annuity. As with reverse mortgages, the older a client is when making this arrangement, the more income he or she will receive. "This explanation helps clients to feel more comfortable taking stock market risk, even when-as in the past six months-stock markets don't look or act positively," Smartt says. "If it gets them off the sidelines, that's a positive outcome."
So far, Smartt says, stock markets have not dropped far enough or stayed down long enough that his clients have had to play these aces. Nevertheless, knowing they are there may enable people to stick with stocks long enough to realize the long-term performance that equities historically have provided.
June 1, 2008
¦AdvertisementAs the population ages, financial planning is moving from the age of accumulation into the dawn of distribution. Planners explore the nuances of how to tap a portfolio in retirement. Insurance companies promote the virtues of immediate annuities as a way to lock in lifelong cash flow.
Insurers are now searching for alternative ways to turn equity into income, and some are turning to a product that many planners have previously ignored: reverse mortgages. Despite the housing downturn, many major insurers see these mortgages as the next sure thing. MetLife Bank added reverse mortgages to its product portfolio in 2007. Early in 2008, the company acquired EverBank Reverse Mortgage (formerly BNY Mortgage, when it was co-owned by the Bank of New York).
"We expect to see a growing market for reverse mortgages," predicts Dan DeKeizer, vice-president of MetLife Retirement Strategies Group. "Baby boomers, who are moving into their retirement years now, are used to looking to home equity to maintain their lifestyle."
Growth Spurt
Recent statistics on reverse mortgages may help explain why MetLife is so upbeat. "About 85% of reverse mortgages are home equity conversion mortgages, known as HECMs, which are guaranteed by the federal government," says Tyler Kraemer of Kraemer, Kendall & Benson, a law firm in Colorado Springs, Colo. The number of reported HECMs grew from a minuscule 7,800 in fiscal 2001 to 107,000 in fiscal 2007. For the first half of fiscal 2008 (through March), while housing values fell and credit markets staggered, HECMs maintained the record pace of 2007, with 55,000 approvals. Of all HECMs now outstanding, 73% were issued since October 2005.
Current market developments may take reverse mortgage numbers to new highs, according to Kraemer, who is co-author, with his wife, Tammy Kraemer, of The Complete Guide to Reverse Mortgages: Turn Your Home Equity into Instant Income! "Traditional lenders are focusing more marketing energy on reverse mortgages as an alternative to the traditional mortgage market, which is in a slump," he says.
In addition, in today's market seniors who might have sold a house to raise cash may not be able to get the price they expected from the sale. "Such homeowners are more likely to consider a reverse mortgage," Kraemer says. "Rising healthcare costs also increase the need for reverse mortgages, as does the poor financial performance of many people's retirement accounts in today's difficult stock market environment."
Red Flags
As demand for reverse mortgages increases, along with lenders' marketing efforts, many planners express caution and skepticism. "Reverse mortgages have enormous fees and should probably be avoided when possible," says Bobbie Munroe, who heads Fraser Financial in Atlanta. Nevertheless, she is now working with a client who might take out a reverse mortgage in the future.
John LeBlanc, a principal at Back Bay Financial Group in Boston, agrees that reverse mortgages are expensive. In addition, he says, "the amount that you can obtain is generally smaller than consumers expect, especially in the Northeast, where the amount a person can borrow is relatively small in relation to the value of the property."
With a HECM, the property value on which a home loan can be based is capped at $362,790 or lower, depending on location. Moreover, Kraemer points out, "today's lower home values mean lower loan amounts, because one of the factors in determining the amount of a reverse mortgage loan is the appraised value of the home."
To help decide whether a reverse mortgage makes sense, planners and borrowers need to know the basics. Reverse mortgages are secured by the equity in a principal residence. They may be taken as a lump sum, a line of credit or a stream of payments. "We are seeing many hybrid loans," DeKeizer says. "A borrower will take out some cash to pay off debts, bills and so on. The balance of the loan might be set up as a line of credit that grows over time."
Federally backed HECMs, the most common reverse mortgages, are available to homeowners who are 62 and older. Borrowers must have a home that is debt-free or nearly so in order to get these loans.
"HECMs are adjustable-rate, non-recourse loans that do not need to be repaid until the last surviving borrower dies, moves out or sells the home," Kraemer says. That's true even if the loan balance exceeds the home's value, he adds.
In some arrangements, cash flow will continue as long as the borrower is alive and occupying the home. The loan plus accumulated interest must be repaid when the owner dies or moves out of the house. In the majority of cases, the family will sell the home to raise cash for repayment.
Serving Septuagenarians
Given those ground rules, which clients might benefit from a reverse mortgage? Many experts feel the ideal reverse-mortgage candidate is someone in his or her mid-seventies who has substantial equity, plans to remain in the home for at least five years, and has no other source of needed cash Kraemer says.
Indeed, Munroe remembers discussing reverse mortgages with a 76-year-old client who lives with her 94-year-old partner in a $200,000 home that she owns free and clear. "The boyfriend pays her $1,400 a month for rent," Munroe explains. "My client's only other assets are a small annuity and a small amount of investments, while her only other income is a modest Social Security check. So when the boyfriend dies, she will be hard-pressed for income."
According to Munroe, the client had been approached by a reverse-mortgage salesman who was going door to door. "Thankfully she wasn't taken in and didn't sign on the dotted line right then and there," Munroe says. "For her, though, a reverse mortgage at some point in the future might be a good solution."
For now, things are on hold for Munroe's client; she doesn't need the money yet and isn't sure that she'll stay in her home much longer. She'll probably make a more lasting housing decision in the next few years.
"The current home is on multiple levels, so a change is probably in the works at some point," Munroe explains. "However, before we do anything, she will need to decide exactly what she does want in terms of housing."
Munroe would like to see this client wait until age 80 before taking a reverse mortgage. "Her payment would be higher then," she says. "At that time, we'll compare the benefits of the reverse mortgage versus selling and using the capital to pay rent and provide income."
This client's family has a history of longevity; her mother was 104 when she died. Since it's not unlikely that the client will live past her average life expectancy, a reverse mortgage with lifetime payouts may work well.
"Before choosing a reverse mortgage, we will certainly shop around for fees, payout and the company's ability to make the payments," Munroe says. "Hopefully, terms and conditions will become more consumer-friendly in the intervening years."
It's Better to Wait
Reverse mortgages are similar to immediate annuities in this respect: The longer one waits before originating the arrangement, the greater the amount of annual cash flow.
"An 80-year-old woman contacted me concerning using a reverse mortgage," says Carol Friedhoff, who heads Savvy Outcomes, a planning firm in Columbus, Ohio. "Her husband had died recently, and her income was cut in half due to pension and Social Security reductions. She wanted to live in her home for at least 10 more years and did not need to pass the home to her family."
After conferring with Friedhoff, this client chose to look into a Fannie Mae reverse mortgage. "With about $300,000 of equity in the home, she would receive approximately $800 per month," Friedhoff says. "Her adjustable rate would be 6% now, and her fees would be less than 4% of appraised value. When I spoke with this client recently, she told me she was planning to move forward with the reverse mortgage."
According to government statistics, the average age of HECM borrowers is 73. DeKeizer says that number may come down as boomers retire and tap home equity via reverse mortgages, but for now these loans tend to go to homeowners who are well into their Medicare years.
Scam Prevention
Products aimed at the elderly seem to lure predators, and that applies to reverse mortgages. "If you are interested in a reverse mortgage, beware of scam artists that charge thousands of dollars for information that is free from HUD," the U.S. Department of Housing & Urban Development warns elderly homeowners.
"Overly aggressive marketing by some lenders has led to situations in which seniors have been pressured into making bad decisions," Kraemer says. "As a result, regulators are starting to talk about the need to maintain and enhance existing consumer safeguards." Currently, he says, would-be borrowers must meet with a HUD-approved counselor before applying for a HECM.
Not only regulators but also legislators are eyeing reverse mortgages. Kraemer reports that both houses of Congress have passed versions of a bill that will replace the county-by-county loan limits with a single national loan limit, eliminate the cap on the number of HECMs that the Federal Housing Administration is authorized to insure, authorize HECMs for home purchase, broaden the types of qualifying properties, and limit HECM origination fees. Kraemer expects the House and Senate to finalize the bill soon.
These new regulations could be major changes, especially the idea that reverse mortgages can be used to purchase new homes, rather than requiring borrowers to age in place. "This provision, along with raising the loan limits and eliminating the cap on the number of HECMs that can be originated each year, will expand the market for reverse mortgages," Kraemer says. Limiting origination fees may also make the loans more appealing to borrowers.
All of these trends are converging to bring reverse mortgages into the mainstream—and into financial planners' potential plans for retired clients. But, warns Kraemer, "the planning that's involved in deciding whether a reverse mortgage is right for someone is surprisingly complex. You need to consider the origination fees as well as monthly servicing fees, the estimated term of the loan or the life span of the borrower, the borrower's financial needs over that time, the interest rate, the available loan amount and how the loan proceeds will be used."
A Fallback Income Stream
What's more, a reverse mortgage need never be consummated to play a valuable role in financial planning. Just the idea that one is available can keep clients on a recommended route.
"I remind my older, retired clients that they need to continue to bear the risks of the stock market with some of their retirement capital," says John Smartt, a CPA and RIA in Knoxville, Tenn. "I also tell them that if stocks go down and stay down for years, they will have two aces in the hole. The first ace is a reverse mortgage. Although a reverse mortgage will have high initial fees, there is no repayment obligation, and the money received won't be subject to taxes."
The second ace, according to Smartt, is an immediate annuity. As with reverse mortgages, the older a client is when making this arrangement, the more income he or she will receive. "This explanation helps clients to feel more comfortable taking stock market risk, even when-as in the past six months-stock markets don't look or act positively," Smartt says. "If it gets them off the sidelines, that's a positive outcome."
So far, Smartt says, stock markets have not dropped far enough or stayed down long enough that his clients have had to play these aces. Nevertheless, knowing they are there may enable people to stick with stocks long enough to realize the long-term performance that equities historically have provided.
Cassidy: How Silicon Valley families are downsizing their lives
By Mike Cassidy
Mercury News
We're past the whining and the gallows humor. This is real now.
Food, gas, you name it - it all gets more expensive by the day. At every income level, save perhaps the very rich, the pain is radiating far beyond the family Quicken ledger.
We've all read the stories about people trading SUVs for hybrids or selling their jewelry on eBay or cutting back on juicy steaks. That's the surface stuff - the chit-chat on the fringes of a conversation that is much deeper and going on all around us.
For the past month, I've been talking to families and individuals about how rising prices and falling home values are changing their lives. It turns out the Big Squeeze of 2008 is prompting not only changes in lifestyle but changes in thinking, too. What have we done with our lives? Why these choices? Did I pick the right career? The right place to live in the country or the world?
Everything is shifting
It all lined up for landscape architect Dirk Moyer and his wife, Katie Miller, back in 2005.
Miller was working her dream job at Stanford University, providing technology research and support for the School of Education. Moyer was running his own business, and the couple had just followed the conventional Silicon Valley wisdom by buying as much house as they could in Menlo Park.
They ended up with a 1,200-square-foot fixer-upper on busy Willow Road. Moyer and Miller, both 43, took on a big
mortgage and a home-equity line of credit to help with the rehab. They tightened the family budget - eliminating subscriptions and health-club memberships.
And then they watched as the economy stumbled, Moyer's business slumped and, most recently, Stanford gave Miller notice that her 80-percent-time job would be slashed to half-time.
"So we did 'Austerity 2006,' " Miller says, "and here we are in 2008 and looking to cut costs more."
There is something about this downturn that seems unfair - as if families made reasonable plans and took fiscal precautions, only to have an invisible hand raise the bar. It is not always a question of survival - though for some it is - but of discovering that working hard at good jobs is no longer enough to guarantee a comfortable life.
Miller and Moyer - who have a son, Sean, 6, and a daughter, Louisa, 4 - had already been drawing on a family inheritance that provided retirement and rainy-day savings - money that was meant to grow for the future. Spending it today feels imprudent, Miller says, and irresponsible.
Moyer says the family's income was just under $120,000 last year. The cut in Miller's hours will cost the family about $20,000.
It's easy to sit back and say they've got plenty - 100K, nice house, cute kids. And Miller and Moyer both talk repeatedly about how fortunate they are.
"Most people would laugh. What do you want?" Moyer hears them ask. "It just feels like we're chasing this American dream that's not really a dream. It's more like a nightmare."
Think of it this way: Moyer and Miller built a life based on Moyer's business as it was and Miller's hours as they were. Their life aspirations were fairly stock: Get married, have kids, buy a house. And now, everything is shifting underneath them.
"We're spending more than we're making, even with two good-paying jobs," Moyer says. "The math doesn't work."
In an odd way the bad math has given Miller and Moyer the freedom to re-examine almost everything they've done. The cockeyed calculus has led to big questions, chief among them: What the hell are we doing?
"A lot of the economic pressures that we in particular are under," Moyer says, "are self-imposed: the home we own, the cars we drive and the fact that we both have to work in order to support that, which means we have to have day care."
For Miller and Moyer, it's gone way past cutting out Whole Foods, buying less meat, considering ways to cut back on day care, consolidating errands. They are contemplating the "no-fear option": Sell the house and take to the road in a camper. Spend months traveling nationwide looking for a new home and then take the time to find jobs there.
"Quite frankly," Moyer says, "I'm ready for exploring the options.
"Staying put is still one," he says, "but I think it's becoming less of one."
Tipping point
I didn't set out to find the most desperate cases in economic hard times. Instead, I talked with people in diverse circumstances to get a sense of what sort of options they were considering in the face of uncertainty.
And what I found was a tipping point, a world where the price of beans is not the real issue, but rather a trigger for families who have much bigger questions on their minds.
I think of the single mother of four who opted for a home birth with no midwife in part to save on medical expenses.
"A lot of our medical care I've brought home," says Celestia Brown, a Berryessa neighborhood resident who's alternated between public assistance and work as a personal assistant. "I use the Internet a lot."
Or Sal and Michelle Alaimo, San Jose parents who don't believe in handouts, but would sure take one if it would mean their kids could again join the sports leagues they used to play in.
"All their friends do it," says Sal Alaimo, a butcher who picks up shifts between duties as a stay-at-home dad.
And even those well beyond middle class, like computer scientists Radha Chandika and Ravi Duvvuri, are discovering they've got it good, but not nearly as good as they once had it. Chandika and her husband, Duvvuri, moved to Silicon Valley in 1994 and joined the successful tech crowd.
By early 2007, they had two kids and a house in Cupertino. Duvvuri was a software architect at Blue Coat Systems, and Chandika was a software engineer at Google. Their household income was about $300,000.
Duvvuri left his job to start an Indian social-networking company with a friend and former business partner, reducing the family income by about half. He says he would have done it no matter the economic conditions, but with rising prices the family has cut spending more than they anticipated.
Duvvuri, who draws no salary, says he's concluded the Bay Area is no place to live as a family on one income. At the end of the year, he and Chandika plan to move their family back to India, where their lives and prospects will be better.
"I have more reasons to go back," he says, "than to stay."
But more than all that, the Big Squeeze has Chandika and Duvvuri thinking about how lucky they are and how difficult tough times must be for those who have much less.
Not enough hours
The increasing cost of food and fuel have Pablo Buenrostro and Victoria Aguirre grappling in a very real way with the idea that there are simply not enough hours in the day.
Buenrostro picked up a second job in February to try to keep up with increasing expenses. He typically works 12-plus-hour days, six days a week in the meat departments of two area groceries. The couple rents an addition to Aguirre's parents' house, where they live with their 14-month-old daughter. But they are still falling behind.
Sitting on the family's front porch as her mother, Maria Aguirre, grills beef for dinner, Victoria Aguirre says maybe Buenrostro will have to find a third job.
"How?" her mother asks. "The day only has 24 hours."
There aren't many expenses to cut when you don't spend much in the first place. So the knee-jerk solution is more time at work and more time apart.
"We hardly see each other now that he has a second job," Victoria Aguirre says. "On the weekend, I only see him between jobs."
Like many young couples, Buenrostro, 23, and Aguirre, 21, have dreams - a better life, a place of their own, a happy and healthy child. With that in mind, Aguirre spends her days taking accounting classes at the Center for Employment Training in San Jose.
And so in the afternoon when Buenrostro comes home between jobs, Aguirre is at school. When Buenrostro comes home after his evening shift, his baby is asleep.
"Hopefully, after I graduate and get my certificate and get a good job," Aguirre says, "as a family we'll be more stable."
Their struggle is a heroic one. More jobs, more education. They are ready to do what they have to do to make it. But sometimes it's hard to figure out just what it is they should do.
"We don't know right now a solution," Aguirre says.
In the meantime, the family is living on about $29,000 a year. They rely on the food bank at the Center for Employment Training and Aguirre's parents help with food and gas. Her parents also care for the baby, a girl named after Victoria, when her mother is at school and her father is working.
"My husband, he feels bad," Aguirre says. "He says, 'I wish we could pay your mom,' but we can't."
Aguirre has become an incredibly careful shopper. She knows where all the bargains are: It's FoodMaxx for milk, Lucky Seven for eggs, produce and soda - unless soda is on sale at Mercados Suvianda.
Buenrostro says his gas costs have increased by $100 a month for his commute to the Mi Pueblo in Hayward. He's started going longer between haircuts and has stopped sending money to his mother in Mexico as frequently as he once did. The couple now hauls the family's cans and bottles to recyclers to collect the deposit.
"He has a lot of pride," Maria Aguirre says of her son-in-law. "He has to take care of his family."
And so Buenrostro takes care of the family he never sees. It's just one more sliver of heartbreak in the face of the Big Squeeze of 2008.
--------------------------------------------------------------------------------
Read Mike Cassidy's Loose Ends blog at blogs.mercurynews.com/cassidy. Contact him at mcassidy@ mercurynews.com. or (408) 920-5536.
Mercury News
We're past the whining and the gallows humor. This is real now.
Food, gas, you name it - it all gets more expensive by the day. At every income level, save perhaps the very rich, the pain is radiating far beyond the family Quicken ledger.
We've all read the stories about people trading SUVs for hybrids or selling their jewelry on eBay or cutting back on juicy steaks. That's the surface stuff - the chit-chat on the fringes of a conversation that is much deeper and going on all around us.
For the past month, I've been talking to families and individuals about how rising prices and falling home values are changing their lives. It turns out the Big Squeeze of 2008 is prompting not only changes in lifestyle but changes in thinking, too. What have we done with our lives? Why these choices? Did I pick the right career? The right place to live in the country or the world?
Everything is shifting
It all lined up for landscape architect Dirk Moyer and his wife, Katie Miller, back in 2005.
Miller was working her dream job at Stanford University, providing technology research and support for the School of Education. Moyer was running his own business, and the couple had just followed the conventional Silicon Valley wisdom by buying as much house as they could in Menlo Park.
They ended up with a 1,200-square-foot fixer-upper on busy Willow Road. Moyer and Miller, both 43, took on a big
mortgage and a home-equity line of credit to help with the rehab. They tightened the family budget - eliminating subscriptions and health-club memberships.
And then they watched as the economy stumbled, Moyer's business slumped and, most recently, Stanford gave Miller notice that her 80-percent-time job would be slashed to half-time.
"So we did 'Austerity 2006,' " Miller says, "and here we are in 2008 and looking to cut costs more."
There is something about this downturn that seems unfair - as if families made reasonable plans and took fiscal precautions, only to have an invisible hand raise the bar. It is not always a question of survival - though for some it is - but of discovering that working hard at good jobs is no longer enough to guarantee a comfortable life.
Miller and Moyer - who have a son, Sean, 6, and a daughter, Louisa, 4 - had already been drawing on a family inheritance that provided retirement and rainy-day savings - money that was meant to grow for the future. Spending it today feels imprudent, Miller says, and irresponsible.
Moyer says the family's income was just under $120,000 last year. The cut in Miller's hours will cost the family about $20,000.
It's easy to sit back and say they've got plenty - 100K, nice house, cute kids. And Miller and Moyer both talk repeatedly about how fortunate they are.
"Most people would laugh. What do you want?" Moyer hears them ask. "It just feels like we're chasing this American dream that's not really a dream. It's more like a nightmare."
Think of it this way: Moyer and Miller built a life based on Moyer's business as it was and Miller's hours as they were. Their life aspirations were fairly stock: Get married, have kids, buy a house. And now, everything is shifting underneath them.
"We're spending more than we're making, even with two good-paying jobs," Moyer says. "The math doesn't work."
In an odd way the bad math has given Miller and Moyer the freedom to re-examine almost everything they've done. The cockeyed calculus has led to big questions, chief among them: What the hell are we doing?
"A lot of the economic pressures that we in particular are under," Moyer says, "are self-imposed: the home we own, the cars we drive and the fact that we both have to work in order to support that, which means we have to have day care."
For Miller and Moyer, it's gone way past cutting out Whole Foods, buying less meat, considering ways to cut back on day care, consolidating errands. They are contemplating the "no-fear option": Sell the house and take to the road in a camper. Spend months traveling nationwide looking for a new home and then take the time to find jobs there.
"Quite frankly," Moyer says, "I'm ready for exploring the options.
"Staying put is still one," he says, "but I think it's becoming less of one."
Tipping point
I didn't set out to find the most desperate cases in economic hard times. Instead, I talked with people in diverse circumstances to get a sense of what sort of options they were considering in the face of uncertainty.
And what I found was a tipping point, a world where the price of beans is not the real issue, but rather a trigger for families who have much bigger questions on their minds.
I think of the single mother of four who opted for a home birth with no midwife in part to save on medical expenses.
"A lot of our medical care I've brought home," says Celestia Brown, a Berryessa neighborhood resident who's alternated between public assistance and work as a personal assistant. "I use the Internet a lot."
Or Sal and Michelle Alaimo, San Jose parents who don't believe in handouts, but would sure take one if it would mean their kids could again join the sports leagues they used to play in.
"All their friends do it," says Sal Alaimo, a butcher who picks up shifts between duties as a stay-at-home dad.
And even those well beyond middle class, like computer scientists Radha Chandika and Ravi Duvvuri, are discovering they've got it good, but not nearly as good as they once had it. Chandika and her husband, Duvvuri, moved to Silicon Valley in 1994 and joined the successful tech crowd.
By early 2007, they had two kids and a house in Cupertino. Duvvuri was a software architect at Blue Coat Systems, and Chandika was a software engineer at Google. Their household income was about $300,000.
Duvvuri left his job to start an Indian social-networking company with a friend and former business partner, reducing the family income by about half. He says he would have done it no matter the economic conditions, but with rising prices the family has cut spending more than they anticipated.
Duvvuri, who draws no salary, says he's concluded the Bay Area is no place to live as a family on one income. At the end of the year, he and Chandika plan to move their family back to India, where their lives and prospects will be better.
"I have more reasons to go back," he says, "than to stay."
But more than all that, the Big Squeeze has Chandika and Duvvuri thinking about how lucky they are and how difficult tough times must be for those who have much less.
Not enough hours
The increasing cost of food and fuel have Pablo Buenrostro and Victoria Aguirre grappling in a very real way with the idea that there are simply not enough hours in the day.
Buenrostro picked up a second job in February to try to keep up with increasing expenses. He typically works 12-plus-hour days, six days a week in the meat departments of two area groceries. The couple rents an addition to Aguirre's parents' house, where they live with their 14-month-old daughter. But they are still falling behind.
Sitting on the family's front porch as her mother, Maria Aguirre, grills beef for dinner, Victoria Aguirre says maybe Buenrostro will have to find a third job.
"How?" her mother asks. "The day only has 24 hours."
There aren't many expenses to cut when you don't spend much in the first place. So the knee-jerk solution is more time at work and more time apart.
"We hardly see each other now that he has a second job," Victoria Aguirre says. "On the weekend, I only see him between jobs."
Like many young couples, Buenrostro, 23, and Aguirre, 21, have dreams - a better life, a place of their own, a happy and healthy child. With that in mind, Aguirre spends her days taking accounting classes at the Center for Employment Training in San Jose.
And so in the afternoon when Buenrostro comes home between jobs, Aguirre is at school. When Buenrostro comes home after his evening shift, his baby is asleep.
"Hopefully, after I graduate and get my certificate and get a good job," Aguirre says, "as a family we'll be more stable."
Their struggle is a heroic one. More jobs, more education. They are ready to do what they have to do to make it. But sometimes it's hard to figure out just what it is they should do.
"We don't know right now a solution," Aguirre says.
In the meantime, the family is living on about $29,000 a year. They rely on the food bank at the Center for Employment Training and Aguirre's parents help with food and gas. Her parents also care for the baby, a girl named after Victoria, when her mother is at school and her father is working.
"My husband, he feels bad," Aguirre says. "He says, 'I wish we could pay your mom,' but we can't."
Aguirre has become an incredibly careful shopper. She knows where all the bargains are: It's FoodMaxx for milk, Lucky Seven for eggs, produce and soda - unless soda is on sale at Mercados Suvianda.
Buenrostro says his gas costs have increased by $100 a month for his commute to the Mi Pueblo in Hayward. He's started going longer between haircuts and has stopped sending money to his mother in Mexico as frequently as he once did. The couple now hauls the family's cans and bottles to recyclers to collect the deposit.
"He has a lot of pride," Maria Aguirre says of her son-in-law. "He has to take care of his family."
And so Buenrostro takes care of the family he never sees. It's just one more sliver of heartbreak in the face of the Big Squeeze of 2008.
--------------------------------------------------------------------------------
Read Mike Cassidy's Loose Ends blog at blogs.mercurynews.com/cassidy. Contact him at mcassidy@ mercurynews.com. or (408) 920-5536.
Know pros, cons before signing reverse mortgage for extra cash
By Carrie Schwab Pomerantz
Money & You
With all the news about the housing crises, loan defaults and home foreclosures, borrowers are definitely becoming aware of the pitfalls of overextending themselves. I'm continuously receiving questions about the best way to approach a mortgage and how handling debt, particularly mortgage debt, fits into an overall financial plan.
TodayThis WeekSportsCommentsPolice seek 3 men in abduction, attack at...
OSU pitcher Andrew Oliver out
Toddler dies after fall into swimming pool...
A&M star awaiting her due
Alligator found outside Shawnee restaurant
Grieving father had a bad feeling about trip...
Thief steals Edmond woman's wallet from...
Woman dies after hit-and-run accident in...
Plane makes emergency landing in Logan County
What promise does Ohio hold for autistic boy...
8 twisters: big storms, small toll
Mourners remember Jack Mildren
Drowning victim's body found at Arcadia Lake
Aubrey McClendon tells how to make $100,000
Charges against OU signee Jarboe reduced
OU baseball team makes NCAA Tournament
Chesapeake Energy scraps new W.Va. headquarters
Projected Sooners' TV schedule
Recovering from fire-pit burns, city boy has...
Seedings leave the Cowboys disappointed
OSU pitcher Andrew Oliver out
A&M star awaiting her due
Kellen Sampson hired as graduate assistant
Frankly, Cowboys' coach darned good
Softball's super fans
Stoops expects Jarboe to be on roster after...
Sooners beat Vandy to bolster their case
Aggies take advantage of error again
Drownings take 4 lives in 3 days
WCWS Notebook: Getting 'Pearl'sonal
Josh Jarboe coming to Norman
What promise does Ohio hold for autistic boy...
Seattle wants results of survey excluded...
Partisan divide: Invitation out of Obama's...
Charges against OU signee Jarboe reduced
What do you do in Oklahoma for action and...
Where do you shop for groceries?
Fueling frustration
Wagoner's Gus Jones commits to OU
Alligator found outside Shawnee restaurant
View More Most Popular Categories... One question that seems to be coming up more frequently is whether a reverse mortgage makes sense for older homeowners who want to increase cash flow. Apparently, reverse mortgages — first introduced in 1988 — are becoming increasingly popular. According to an AARP study, consumer awareness is up and the median age for borrowers is down from 76 to 73. And as the boomer generation reaches 62, the age of eligibility, the market for reverse mortgages is expected to increase dramatically.
On the surface, a reverse mortgage can seem like a low-risk way for homeowners to tap into their equity for retirement needs, long-term care costs, or even to avoid foreclosure. Dig a little deeper and you'll find there are many factors to consider, from high fees to family inheritance issues. If you or someone you're close to is thinking about a reverse mortgage, I strongly suggest you start with these general facts and carefully consider the pros and cons before making a decision.
The upside
A reverse mortgage is a loan against your home that you don't have to pay back as long as you live there. Instead of making payments to a lender, the lender pays you. Since the money you receive is a loan, not income, it's income tax-free.
The amount you qualify for depends on your age (you must be at least 62), the interest rate and, of course, the equity you have in your home. Other factors include the location of your home and the borrowing limits set by vendors. But all things being equal, the older you are when you take out the loan, the more money you can receive.
You can take the cash from a reverse mortgage in a lump sum, monthly payments, a standby line of credit or a combination of all three, and you don't have to repay the loan as long as you live in the house. If you move - whether you sell or keep your home and rent it out - or when you die, the reverse mortgage loan must be paid off. However, the amount owed, including interest, will never exceed the value of the house. If there's any money left over, say your house appreciates faster than the cost of the reverse mortgage, you or your estate can keep the difference.
Sounds pretty good so far, right? So what's the catch?
The downside
One of the biggest drawbacks to a reverse mortgage is cost. The upfront closing costs and loan origination fees can be 8 percent to 10 percent of the loan limit. That's equivalent to paying 8 to 10 points on a conventional mortgage loan.
Plus, it's important to realize that, even though you don't have to repay the loan until you leave the house, you're still incurring debt. If your home value appreciates fast enough — a big "if” these days — that appreciation could offset some of your borrowing costs. But in most cases the amount you owe (your loans plus interest) grows over time, while your equity declines. And don't forget that you're still responsible for the ongoing costs of maintenance, insurance and real estate taxes.
Another possible drawback is family disharmony. Do the kids expect to inherit the house? If so, they might be upset to discover the bank owns a substantial portion, or even all, of your home. Be sure to talk to your heirs if you plan to take out a reverse mortgage. Granted, they'll want what's best for you in the long run, but it's always wise to avoid surprises.
The alternatives
A reverse mortgage should never be the centerpiece of your retirement plan, but it can make sense for some people. For instance, if you're older, intend to remain in your home for a long time and have limited retirement savings, it could be a good way to supplement your income. It also may serve as a viable option for cash-strapped seniors who might otherwise be forced to leave their homes.
If you or a loved one decides the benefits of a reverse mortgage outweigh the drawbacks, you have a few choices for loans. The loan limits and fees vary by provider, so be sure to research them thoroughly. Options to explore include:
•Federally Insured Home Equity Conversion Mortgage: This loan is insured by the U.S. government. Loan limits vary by county and currently range from $200,160 to $362,790.
•Fannie Mae "Home Keeper” Mortgage: Also federally insured, it offers a higher loan limit than an HECM, currently up to $417,000.
•A private lender: Costs may be higher, but you may be able to get a larger loan.
Reverse mortgages aren't for everyone. In fact, because they're often considered a "financial tool of last resort,” it pays to explore other ways to generate cash from your home. A home equity line of credit might be a practical alternative. Even though you'll have to repay the loan.
Money & You
With all the news about the housing crises, loan defaults and home foreclosures, borrowers are definitely becoming aware of the pitfalls of overextending themselves. I'm continuously receiving questions about the best way to approach a mortgage and how handling debt, particularly mortgage debt, fits into an overall financial plan.
TodayThis WeekSportsCommentsPolice seek 3 men in abduction, attack at...
OSU pitcher Andrew Oliver out
Toddler dies after fall into swimming pool...
A&M star awaiting her due
Alligator found outside Shawnee restaurant
Grieving father had a bad feeling about trip...
Thief steals Edmond woman's wallet from...
Woman dies after hit-and-run accident in...
Plane makes emergency landing in Logan County
What promise does Ohio hold for autistic boy...
8 twisters: big storms, small toll
Mourners remember Jack Mildren
Drowning victim's body found at Arcadia Lake
Aubrey McClendon tells how to make $100,000
Charges against OU signee Jarboe reduced
OU baseball team makes NCAA Tournament
Chesapeake Energy scraps new W.Va. headquarters
Projected Sooners' TV schedule
Recovering from fire-pit burns, city boy has...
Seedings leave the Cowboys disappointed
OSU pitcher Andrew Oliver out
A&M star awaiting her due
Kellen Sampson hired as graduate assistant
Frankly, Cowboys' coach darned good
Softball's super fans
Stoops expects Jarboe to be on roster after...
Sooners beat Vandy to bolster their case
Aggies take advantage of error again
Drownings take 4 lives in 3 days
WCWS Notebook: Getting 'Pearl'sonal
Josh Jarboe coming to Norman
What promise does Ohio hold for autistic boy...
Seattle wants results of survey excluded...
Partisan divide: Invitation out of Obama's...
Charges against OU signee Jarboe reduced
What do you do in Oklahoma for action and...
Where do you shop for groceries?
Fueling frustration
Wagoner's Gus Jones commits to OU
Alligator found outside Shawnee restaurant
View More Most Popular Categories... One question that seems to be coming up more frequently is whether a reverse mortgage makes sense for older homeowners who want to increase cash flow. Apparently, reverse mortgages — first introduced in 1988 — are becoming increasingly popular. According to an AARP study, consumer awareness is up and the median age for borrowers is down from 76 to 73. And as the boomer generation reaches 62, the age of eligibility, the market for reverse mortgages is expected to increase dramatically.
On the surface, a reverse mortgage can seem like a low-risk way for homeowners to tap into their equity for retirement needs, long-term care costs, or even to avoid foreclosure. Dig a little deeper and you'll find there are many factors to consider, from high fees to family inheritance issues. If you or someone you're close to is thinking about a reverse mortgage, I strongly suggest you start with these general facts and carefully consider the pros and cons before making a decision.
The upside
A reverse mortgage is a loan against your home that you don't have to pay back as long as you live there. Instead of making payments to a lender, the lender pays you. Since the money you receive is a loan, not income, it's income tax-free.
The amount you qualify for depends on your age (you must be at least 62), the interest rate and, of course, the equity you have in your home. Other factors include the location of your home and the borrowing limits set by vendors. But all things being equal, the older you are when you take out the loan, the more money you can receive.
You can take the cash from a reverse mortgage in a lump sum, monthly payments, a standby line of credit or a combination of all three, and you don't have to repay the loan as long as you live in the house. If you move - whether you sell or keep your home and rent it out - or when you die, the reverse mortgage loan must be paid off. However, the amount owed, including interest, will never exceed the value of the house. If there's any money left over, say your house appreciates faster than the cost of the reverse mortgage, you or your estate can keep the difference.
Sounds pretty good so far, right? So what's the catch?
The downside
One of the biggest drawbacks to a reverse mortgage is cost. The upfront closing costs and loan origination fees can be 8 percent to 10 percent of the loan limit. That's equivalent to paying 8 to 10 points on a conventional mortgage loan.
Plus, it's important to realize that, even though you don't have to repay the loan until you leave the house, you're still incurring debt. If your home value appreciates fast enough — a big "if” these days — that appreciation could offset some of your borrowing costs. But in most cases the amount you owe (your loans plus interest) grows over time, while your equity declines. And don't forget that you're still responsible for the ongoing costs of maintenance, insurance and real estate taxes.
Another possible drawback is family disharmony. Do the kids expect to inherit the house? If so, they might be upset to discover the bank owns a substantial portion, or even all, of your home. Be sure to talk to your heirs if you plan to take out a reverse mortgage. Granted, they'll want what's best for you in the long run, but it's always wise to avoid surprises.
The alternatives
A reverse mortgage should never be the centerpiece of your retirement plan, but it can make sense for some people. For instance, if you're older, intend to remain in your home for a long time and have limited retirement savings, it could be a good way to supplement your income. It also may serve as a viable option for cash-strapped seniors who might otherwise be forced to leave their homes.
If you or a loved one decides the benefits of a reverse mortgage outweigh the drawbacks, you have a few choices for loans. The loan limits and fees vary by provider, so be sure to research them thoroughly. Options to explore include:
•Federally Insured Home Equity Conversion Mortgage: This loan is insured by the U.S. government. Loan limits vary by county and currently range from $200,160 to $362,790.
•Fannie Mae "Home Keeper” Mortgage: Also federally insured, it offers a higher loan limit than an HECM, currently up to $417,000.
•A private lender: Costs may be higher, but you may be able to get a larger loan.
Reverse mortgages aren't for everyone. In fact, because they're often considered a "financial tool of last resort,” it pays to explore other ways to generate cash from your home. A home equity line of credit might be a practical alternative. Even though you'll have to repay the loan.
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