5 common mistakes in a bad economy |
|
|
|
5. Obtaining cash from your home
They don't make home equity loans like they used to.
Tom Kelly, spokesman for JP Morgan Chase & Co., says that previously the bank had been originating loans at 95 percent to 100
percent of a home's value. But following the subprime mortgage meltdown, that threshold has dropped to 80 percent in most housing markets,
Kelly says.
"So on a $200,000 home, the most you can expect is $160,000," he says. "Our standards are probably in line with other lenders."
Marks says he hopes people's spending habits would change as a result of the limits on home equity loans.
But in some cases, tapping into a home's value may be the only option to get cash.
David Certner, AARP's legislative counsel, says he expects people over the age of 62 to become more interested in reverse
mortgages.
Living expenses will continue to increase, and seniors on fixed incomes and no assets other than their homes will need to
establish cash flow.
A reverse mortgage allows a homeowner to receive nontaxable
payments based on the value of a home with a mortgage that has been
paid. It is sometimes described as a house paying the homeowner
back.
Certner says the U.S. Housing
and Economic Recovery Act of 2008 makes reverse mortgages more attractive by:
- Raising the amount of equity homeowners can borrow against.
- Capping origination fees.
- Protecting seniors against inappropriate practices by lenders.
However, a reverse mortgage should remain a "last resort" for seniors because it is still an expensive proposition, he says.
The new housing law allows a maximum of $6,000 for an origination fee. The fee is based on the law's new scale of 2 percent
for the first $200,000 of home value, and 1 percent per $100,000 of remaining home value, Certner says. Previously, homeowners were charged 2
percent of the home's value.
A reverse mortgage could use up the entire value of a home, and the homeowner is responsible for property taxes and home maintenance,
which is why Certner suggests considering all options before using a reverse mortgage.
"It may be more appropriate to sell your home and move," he says.
Previously, seniors had fallen prey to being sold annuities, long-term care insurance and other inappropriate products by the
same agents who sold the reverse mortgages. The new housing law prohibits this practice, but Certner says seniors should remain on their guard.
"Those products are rarely in your interest," he says.
 |
| What to do: cash from your home |
|
|
|
|
|
