Avoiding foreclosure is not easy, but an FHFA loan modification can help (FHFA is the Federal Housing Finance Agency.) When you are struggling to meet your mortgage repayments it can take a great deal of work to avoid foreclosure and that dreaded eviction day. A recently federal announcement in March regarding a new loan modification program has given many people hope in their attempts to save their home.
The Home Affordable Modification Program (HAMP) has been in existence for some time, and was theoretically able to help mortgagees facing hardship. However, the bureaucracy needed to initiate financial assistance was counter-productive. Those in trouble had to provide documentary evidence of their hardship, and also documentation revealing their income and expenditure and other financial details.
This level of bureaucracy resulted in significant delays, which reduced the appeal and effectiveness of the program to those using it. In many cases the foreclosure was proceeding at a rapid pace while the bureaucratic process was grinding slowly along.
The FHFA Loan Modification Process
The recently announced FHFA loan modification process is friendlier and makes avoiding foreclosure a quicker and less stressful process. There is no need to provide documentary evidence of income, hardship or inability to pay. If that sounds too good to be true, then read on, because it all makes good sense.
First, there are qualifications that limit those able to apply for help under the FHFA loan modification program:
- The mortgages must be backed by Fannie Mae or Freddie Mac.
- You must be at least 90 days but no more than 2 years behind on your mortgage repayments.
- The mortgage must be a first lien – it does not apply to loans backed by your equity.
- The mortgage loan must be at least a year old.
- The amount owed must be a minimum of 80% of the value of the home.
Avoiding Foreclosure Requires Commitment
If you are only a month or two behind with your payments you cannot apply – yet! You must also display an ability to make the revised payments by making three payments by the agreed dates. If you can manage that, then you should be able to meet all your payments in a similar way.
Avoiding foreclosure takes a commitment from you, and if you fail to meet that commitment, foreclosure will naturally follow. Hence the trial period, after which you are on the FHFA program.
The FHFA loan modification program designed to make avoiding foreclose possible to many people begins on 1st July, 2013. It is due to end on August, 2015 but who knows how it may be extended if it proves a success. Those offering mortgages must identify those that are maintaining their payments, and make them a loan modification offer by July 1st, 2013.
How the Loan Modification Works
- Mortgage owners will be offered an interest rate the same or less than their current rate.
- The term will be extended to 40 years. This will significantly reduce monthly repayments.
- Those with negative equity will have no interest applied on up to 30% of the unpaid balance.
- These factors are expected to reduce the average monthly payment by up to 30%.
Avoiding foreclosure is the prime objective, and reducing monthly payments is one way to achieve that. A reduction in the monthly commitment of those defaulting on their monthly repayments is probably one of the best ways to avoid further problems.
The FHFA Loan Modification program does not lower the principal owed, so is fair to lenders while making avoiding foreclosure easier for borrowers with financial difficulties.
Reverse mortgages are forms of equity release. In the USA, they are available to homeowners aged 62 or over who are living in the property concerned as their principal residence. They can borrow money using the equity on their home as collateral. There is generally no fixed period on the loan, which is repaid when they sell their home or pass away. In the latter case, the lender has first call on the value of the home irrespective of any will.
Although reverse mortgages appear to be a good way for elderly people to make use of the equity while they are still alive, there are some potential reverse mortgage problems. In many cases, the elderly are hitting problems, particularly when they use the equity release to pay off other debts. Here are some of these problems.
Some Common Reverse Mortgage Problems
Fixed-Rate Lump Sum Loans: When the equity is taken as a lump sum, the interest is included in the loan. The interest is therefore compounded over time, and you are paying interest on the interest! Not only that, but increasing numbers of people are taking loans based upon their total equity. Should they have a need for emergency cash at a later date, they cannot get it because they have used up all their collateral.
The Problem of Small Lenders: Because most of the large mortgage lenders have stopped offering reverse mortgages, those that are still doing so tend to be smaller firms that are not what are known as ‘depository institutions.’ This means that the borrowers are at a greater with these smaller companies. They do not have the financial strength of the larger lending banks such as Wells Fargo and the Bank of America.
Problems with Younger Borrowers: When borrowers aged 62 or just over use their equity in this way, they have little or no finance available to use during their later years of retirement. A reverse mortgage works best for over 70s who are able to use the cash tied up in their home in the latter years of their life. To use that prior to retirement is to use up all your insurance for a relatively wealthy retirement in your later years: your 80s and 90s!
Aggressive Marketing: Some companies use aggressive marketing tactics to persuade vulnerable elderly people that reverse mortgages are their best option. They stress the cash they will have to spend, but ignore the fact that they are using up all their equity. They will have nothing to leave their children, and no fall-back in the last years of their life. They fail to explain the effect of interest on their equity.
Are Reverse Mortgages Worthwhile?
Yes, reverse mortgages can be worthwhile if used correctly. You should be aware that they are loans and attract interest just like any other loan. This is often forgotten, since the interest is not paid as it accrues, but added to the reducing equity of the property.
You should first discuss a reverse mortgage with your family. If they finally agree that you should go ahead, the next step is to seek professional advice from a mortgage advisor. Your advisor will help you select the best company for the loan, and help you make sure you are leaving sufficient home equity for later use.
Keep in mind that you have other options to a straight home equity loan. An equity line of credit will charge you interest only on what you spend, not on the total amount of credit. There are also programs available for the elderly if you are having trouble paying for your medication or utility bills. A reverse mortgage should be your last resort – not the first.
Using a second mortgage for debt consolidation is one way of solving your debt problems. However, before opting to take this route you must consider the pros and cons. The pros might be obvious to you, but there are implications that might not be immediately obvious. Here are some of these.
Second Mortgage Subordination
When you take a second mortgage for any purpose and then pay off your first mortgage, the second mortgage automatically becomes the first. This means that if you have taken a second mortgage for debt consolidation, and repay the first while the second is still running, you cannot then take out another first mortgage.
However, the lender financing your second mortgage can agree to subordinate it to a new first mortgage. The latter then becomes your first mortgage and the former remains the second. Second mortgage subordination is not mandatory, and those that agree to it can charge whatever fees they believe appropriate. Technically, these can range from very low to extremely high.
Private Mortgage Insurance Issues
If you are paying private mortgage insurance (PMI), the insurance is legally terminated when the balance of your loan drops to 78% of the original. However, there is facility for you to request the lender to terminate at 80%. If you do so, the lender must terminate the PMI.
However, if you have a second mortgage, for debt consolidation or any other reason, the lender need not do this. You will then be paying a potentially costly PMI for an extra two years.
Keep an Eye on Interest Rates
When using a second mortgage for debt consolidation it is important to keep an eye on the interest rates. Some second mortgage rates are higher than the rates charged on many debts such as some credit cards. A second mortgage is really a secured loan, and is not subject to low rates.
So don’t think that you will be offered 5% – 6%. We are talking more in the region of 12% – 15% depending on the general lending rates for loans secured on property. There is little point in borrowing money on your home to pay a debt that is being charged at a lower interest rate!
By shopping around, you may find rates lower than your credit card rates. The rate you are charged will depend on your credit score. A FICO score of 700 will give you lower rates than a score of 600. The charges you have to pay upfront will also be lower with a higher credit score.
Second Mortgage for Debt Consolidation: Summary
There are pros and cons for using a second mortgage for debt consolidation. Make sure you are saving real money by doing this, and do not take out the loan just to extend the repayment period. A second mortgage should be repaid as quickly as possible, or it will limit your ability relocate and buy another property. This also means, of course, that if you fail to maintain your payments you could lose your home, just as with your original mortgage loan.
There are many types of home equity loans available to homeowners. Cash out refinance is popular where you can refinance your mortgage and get a lump sum of cash. However, you are committing your equity all at once with home equity loans, in return for a potential lifetime repayment! Another option is a home equity line of credit?
This is a rolling credit agreement where you use the credit when you need it, rather than take it immediately in a lump sum and then ask yourself “What next?”
Home Equity Line of Credit
With rolling credit offered by a home equity line of credit you can use your credit whenever you like. You pay no interest until you actually use it. With regular cash out refinance deals or home equity loans, you are paying interest immediately. Even if you don’t spend a cent for two months you will still be paying two months interest – not so with a home equity line of credit!
If you spot something you would like to buy, and then buy it using your line of credit. That is when you start to pay interest – when you actually spend the money, not when you are allocated it. So how would you use an equity line of credit? Here are some examples to show you how works.
Home Equity Loans
Some lenders will issue you with a debit card. When you visit a restaurant, you can pay with the card. When you want to purchase items from a store – likewise. Fundamentally, whenever you want to spend money, you use the card or checks that may be provided and your expenditure is charged to the line of credit.
You are charged interest on what you spend, and once you have spent the total credit associated with it you must continue with your repayment- just as with a credit card. Whether you take a home equity loan such as this, or seek another means of making use of the cash you have tied up in your equity, is immaterial.
The point is that finance such as home equity loans is available, and a home equity line of credit has earned through the equity you have established on your home. There is no reason why you should not use that equity as you believe you should.
Using automatic driveway gates at the entrance to your property and automated garage doors can significantly improve the attractiveness of your home to potential buyers. They can also improve your equity, and even attract a price higher than normal if you are lucky.
People like the idea of automatic driveway gates that can be opened from your car, either using a remote control handset or a button on the dash. There are few better ways to spend money staging your home than this. You don’t need a massively long winding driveway, just a gate to enter your property that can be electrically operated to swing them open or slide them to one side.
Automatic Driveway Gates: Sliding and Swing Gates
Sliding and swing gates are both popular for driveways, and if your entrance is particularly wide, you can use double gates, each operated by its own electric motor. If your drive is set on a slope, swing gates might be difficult to open. In this case a sliding gate would be appropriate. Such gates can either run on a rail across the width of the opening, or operate using a cantilever system, where the gate can be balanced on a rail set to the side of the entrance.
You can purchase automatic driveway gates made from cast iron or aluminum. Cast iron can be heavy, which is why aluminum gates are popular due to their relatively low weight. They can be operated by smaller motors which are therefore cheaper.
Aluminum can be used in its natural color, or powder coated to any color you prefer. It is a very durable metal, and the entire system offers a high degree of security to your home. You can keep out stray dogs and other animals, and prevent others from using your drive as a car park.
Automatic Garage Doors
If you also have automatic garage doors, either rising or swing doors, these too can be fitted with remote controlled electric motors. How good a sales pitch would it be to inform potential buyers that they can enter the driveway and park their car in the garage without leaving the vehicle – all by remote control!
This is particularly useful if your gate is close to a busy road. It can be a nuisance stopping your car to get out to unlock the gate. Simply press a button and it opens as you approach it. The gate closes behind you and your garage door opens up automatically to let you park.
If you are selling your home shortly, or even if not and would love this level of luxury for yourself, automatic driveway gates will improve your equity by considerably more than their cost. They are a good investment, fun to use and make selling your home easy.
A mortgage modification is otherwise known as a loan modification. Fundamentally, what is involved is that your lender agrees to a change in the terms of your mortgage. The changes made are intended to make it easier for you to meet your repayment obligations and so avoid foreclosure. In many cases, modifying your mortgage repayment terms is the only way for you to avoid losing your home.
Mortgage Modification: What is Involved
Here are some of the changes that can be made when your lender agrees to modify your mortgage:
Interest Rate Modification: It is possible to have your interest rate reduced so that you are paying less each month. The objective is that your monthly payment is no more than 38% of your income. In fact, the government has introduced a program stating this as part of the federal Home Affordability Modification Program (HAMP.)
Balanced Owed: In some cases the lender might reduce the amount that you owe. This is one of the options available to reduce monthly payments under the terms of HAMP. If this is done, the treasury will help the lender with the costs involved.
Extended Loan Period: If you are negotiating a mortgage modification, it will likely be possible to extend your loan period. If you are on 15 years, it could be extended up to 30 years. Your lender may also come to another arrangement with you.
In the final analysis it is to the benefit of neither you nor the lender for the next step to be foreclosure – you lose your home, and the lender also invariably loses out. You should be able to discuss a mutually agreeable mortgage modification that you feel confident of maintaining.
HAMP: Home Affordable Modification Program
Mentioned above, this is a program introduced by the Obama administration in 2009. To qualify, mortgage loans must have originated on or prior to January 2009. It is well worth while asking your mortgage adviser about this, because it can save a fair amount of money, both monthly and over the period of your mortgage.
There are specified qualifying terms, such as the mortgage must be a first lien on an owner-occupied property, you must be under provable financial hardship and all income stated must be provided with documentary proof. Credit records will be accessed to prove your claim.
The HAMP program is intended to help struggling homeowners come to terms with mortgage lenders that will enable them to maintain their monthly repayments. This invariably involves mortgage modification, the bulk of the costs of which the lenders can claim back from the government.
Among the terms of HAMP, lenders must work to bring interest rates down to a level that will reduce monthly payments to no more than 31% of the borrower’s income. A 3-month trial will then be carried out. If the borrower maintains payments, the mortgage modification will be implemented for 5 years at the same reduced interest rate.
If you are having problems maintaining your monthly mortgage payments, then first approach your lender for a mortgage modification. Ask about HAMP and whether or not you qualify. If in doubt, contact a mortgage professional.
Getting a cash out refinance is the process of refinancing a mortgage for cash. It is based upon the equity in your home, and you can either take it as a single cash sum or as a line of credit. If you have owned your home for a number of years, and a combination of inflation and mortgage repayment has resulted in your home being worth a lot more than you owe on it, you can refinance it to release some of that equity.
Here is what s involved in refinancing a mortgage for cash. Many people prefer to make best use of the equity on their home by arranging refinance on their existing mortgage in this way.
Cash Out Refinance
With a cash out refinance, you receive a lump sum cash payment for the value of your home. This leaves you having to renegotiate your mortgage which is part of this process. Your existing mortgage is cleared from the proceeds of your payment, and you keep the equity as a cash sum.
You must then enter into a new loan agreement for the balance to pay on your mortgage when the agreement was made. When you were paid the cash sum, the mortgage company is not buying your home from you, but simply paying the equity. That is the value of your home less the amount you still owe.
Example of Cash out Refinance
Let’ say you purchased your home for $200,000 and its value is now $250,000. You paid a $40,000 deposit and have cleared $25,000 of the principal. You now owe $135,000 and your home is valued at $250,000. Your equity is $115,000. The maximum cash out refinance you can get is for $115,000.
You will theoretically receive $250,000, but $135,000 will be taken to pay off your mortgage. During this process, you will come to a new mortgage agreement based upon the sum that was left to pay. This will be re-amortized over a revised payment period and at an agreed interest rate. In other words, you are in effect cancelling the first mortgage agreement, and setting up a second for the same property.
You are not obliged to take the full amount of your equity, but can retain some as a deposit on the new loan. In the example above, if you take $75,000 in cash, you can use the balance of $40,000 to reduce the amount of the new loan.
Summary on Refinancing a Mortgage for Cash
You get a loan for the full value of your home, and then repay what is left of the existing mortgage from part of the loan proceeds and keep the rest yourself. You then refinance based upon the amount of your loan. This gives you cash to spend, and a new mortgage agreement.
Cash out refinance is based upon the equity of your home: its appreciation in value since you purchased it + your original deposit + the amount of capital you repaid. You take out a proportion of the equity of your property as cash, and pay off what is still owed on the mortgage with the rest. When refinancing a mortgage for cash, you then set up a new agreement to pay the loan which can be less than your original mortgage.
Making extra mortgage payments might seem worthwhile when you can afford them, but is it really the best way to use your money? What benefit does making extra payments to a mortgage offer to you? Here are some of the pros and cons of making extra payments over and above the regular monthly mortgage payments you must make.
Extra Mortgage Payments: Benefits
Reduced interest: Your regular payments pay all the interest plus some of the principal. What you would pay in extra mortgage payments would all be deducted from the principal. That means that next month the interest on the reduced principal would be less, and so on. Over time you could pay a significant amount less interest to the lender. This is assuming that you continue your payments over the entire period of your original mortgage agreement.
Private mortgage insurance: Not all extra payments have to go towards your mortgage. If you are paying private mortgage insurance, you can make extra payments to pay off your PMI earlier. Having done that you can then assess whether you want to continue and reduce your mortgage – and its interest as above.
Peace of mind: Everybody feels better when they are paying their mortgage faster than they need to. They feel protected against foreclosure in the event of them hitting bad times. They think that they are doing better than most people with mortgages by paying extra – more than then need pay.
These are just three benefits of extra mortgage payments, although none are genuine benefits. Here are some reasons why, and arguments against paying your spare cash to your mortgage account.
Disadvantages of Making Extra Motgage Payments
Do you gain: What do you actually gain by making extra motgage payments? Mortgage interest rates are very low right now in comparison to what they once were. You could make more by investing your spare cash. Not only that, but what mortgage interest you do pay you can claim against tax. You can practically deduct 1% from your mortgage interest rate that way.
Best to Invest: Would you be paying all you spare cash in extra mortgage payments? How about saving for emergencies? What if you lost your job? It is always wise to have several months mortgage payments tied up in an investment, quietly gaining in value for the day that you might need it. It could pay your mortgage and other expenses for two or three months while you found other employment. Without it, you could face foreclosure!
Lenders don’t care: Your lender would not care if you had paid extra to your mortgage – they want this month’s payment, and the next, and the next! It’s better in your bank than reducing your term from 30 years to 25. Then you could pay the next few months and give yourself time to get back on your feet.
Extra Mortgage Payments: Conclusions
Extra mortgage payments are worthwhile in some situations. If you are not fully committing your income to such payments, and can also invest some to protect you from emergencies, then they can be worthwhile.
However, you should never leave yourself vulnerable to unexpected financial crises. Extra mortgage payments are not recoverable once paid. Investments are, and can see you through difficult times. Consult a mortgage advisor on this, because each person’s circumstances are unique, and the same solution does not apply to everybody.
Home accident statistics suggest that not enough is being dome to ensure safety in the bathroom. Your bathroom is the most dangerous room in the home according to the Centers for Disease Control and Prevention in America! It is not the kitchen as most Americans believe, but the room that most people feel to be one of the most innocuous. Why is that? What are the hazards associated with the bathroom that make it so dangerous and what can be done to improve safety in the bathroom?
Main Causes of Bathroom Injuries
Almost 33,000 people over 14 have to attend hospital after sustaining injury while using the toilet! That is an amazingly high number, although those aged 85 or over are particularly prone to injury this way. They are largely due to falls, and the lack of a safety grab bar at the toilet. In fact, 81% of all injuries in the bathroom or toilet are statistically due to falls.
Most of these falls occur in the shower or bathtub, particularly for those aged 15-24. These figures correspond with injury statistics for the home in general, in that most are caused by falls. This indicates a need for improved preventative action in the form of equipment designed to prevent such falls.
Most homes have insufficient grab bars in bathtubs and showers, and very few have these safety devices around the toilet. In some cases, people have slipped and fallen out of open windows, although there have been very few fatalities.
Improving Safety in the Bathroom
While around 63% of American households use non-slip strips or mats in the bathtub and shower, only 20% are fitted with a bar that people, particularly the elderly, can hold onto while getting out of the tub. This would certainly reduce the statistics of falling while getting into and out of the bath, particularly the latter when the tub can be very slippery. The same is also true of the shower, where grab bars are rarely fitted but could improve bathroom safety.
A grab bar or holding rail by the toilet would help elderly people sit and stand up, and it would also help them if the seat was raised to a higher level. This would enable easier sitting and standing.
Bathroom Safety and Lighting
Many people have been found to have tripped over bath mats and throw rugs in the bathroom. It would help if these were removed, and also if the lighting was improved. Many bathrooms are poorly lit, particularly at dusk when natural light is dropping but people are not yet using artificial light. It would help to have a light that comes on when the light level in the bathroom drops to an unsafe level.
The best overall solution would be to install walk-in bathtub with a watertight door, and a sit-down shower for the elderly. Price seems to be a factor here, but there is still a lot that can be done to improve safety in the bathroom and toilet, particularly for the elderly.
Whether or not financing closing costs when refinancing your mortgage is a good idea depends on your circumstances. Closing costs may include costs such as settlement fees, one-year homeowners insurance, escrow reserves, property taxes, legal fees and so on. You may refinance your home for a number of reasons, the most common by far being to cash-out your equity, or at least some of it.
Cash-out refinance can be used for debt consolidation, to finance school or college fees, or even to build an extension to your home. It is often possible to include the closing costs in the principal sum, and repay that at a higher interest rate over the term of the new mortgage. Is this wise or is it foolish?
Disadvantages of Financing Closing Costs
If you are allowed to include the closing costs in your mortgage, the price is generally going to be a higher interest rate and balance. Whether or not it is worth doing will depend initially on what the higher rate is. Lenders will not consider offering this with a first mortgage, your only hope then being if the seller agrees to pay some of the closing costs.
With refinance, however, you will still have equity in your home, so lenders are more amenable – along with that interest rate hike. It means you will be paying a higher interest rate for the whole term of the mortgage. This is a common reason for foreclosure: an inability to make the higher payment month on month over 30 years. After about 5 years you will have paid the closing costs and the rest is a net loss to you.
Benefits of Financing Closing Costs
If you don’t have the cash available to pay the fees at closing, then you either don’t get the refinance or you must apply to have them rolled into the new mortgage. Keep in mind you can only cash-out a proportion of your equity, so that the lender has the security of what is left. Whether you will be permitted to do this or not will depend on the amount of both the remaining equity and your new mortgage.
There are pros and cons to financing closing costs when refinancing a mortgage. It enables you make use of some of your equity even though you have no cash at all to close the new mortgage.
The best way to find out if financing closing costs makes sense for your situation is to speak to a mortgage professional so that they can run the numbers and give you the big picture. The length of how long you expect to be in your mortgage will play a role in whether or not financing closing costs makes the most sense for you.