The Wall Street Journal recently printed a piece on reverse mortgages. Its writer relayed the story of his ailing grandmother, diagnosed with bladder cancer and unable to afford the expenses involved in her care. With neither Medicare nor Medicaid an option she was left, like many Americans, in a real and dire quandry.

We all know that our homes are supposed to be our greatest asset, so there had to be a way that someone in such a situation could use their home to stave off what could easily become an unbearable liability. And, in fact, for the above-mentioned grandmother,  her home turned out to be her saving grace. She got a reverse mortgage.

In essence, a reverse mortgage is exactly what it sounds like: instead of the homeowner making monthly payments to the bank, the bank instead makes payments to the homeowner – whether monthly, in a lump sum, or as a line of credit. Why would banks do such a thing? Because the loan is paid off, with interest, when one of the following conditions is met:

• the house is sold
• the borrower permanently moves out of the home
• the borrower passes away

While this option eliminates the possibility that the homeowner can leave her home to her heirs, it also means that she can acquire the funds she needs to sustain herself through the trials and tribulations of old age. And her heirs won’t get saddled with sudden payments on a home they can’t afford.

The funds obtained through a reverse mortgage can be used for anything the borrower wants – retirement costs, medical care, a child or grandchild’s education, travel and recreation, etc. The current mortgage on the home does not need to be paid off in order for a person to apply for a reverse mortgage. And there are no credit, income, or loan repayment qualifications.

There’s a trade-off with a reverse mortgage: an elderly person or couple (over the age of 62) can give themselves a needed new and regular income, but to do so must accept the slow draining of equity built up in the home. It’s therefore wise to discuss the pros and cons of a reverse mortgage with a financial counselor before deciding to apply for one.  

To learn more about reverse mortgages, click here.
To begin the process of applying for a reverse mortgage click here.

A conventional loan is essentially any type of lender agreement that is not fully protected by the FHA (the Federal Housing Administration) or fully backed by the Veterans Administration. Potential homebuyers who have at least 3% of the purchase price available to make as a down payment may be eligible for this most popular type of loan program.

Several categories of conventional loans exist, the most common and familiar being the fixed rate mortgage. In the cases of fixed rate mortgages, the borrower will lock in an interest rate, and pay down both the principal and interest on the loan at that interest rate every month until the mortgage is paid off. The most typical term of a fixed rate loan is 30 years, though fixed rate mortgages can also be obtained for much shorter terms, the primary difference being in the size of the monthly mortgage payment.

To refinance is to pay off an existing mortgage with funds obtained from a new mortgage loan. There are numerous great reasons to refinance your mortgage, among them the following:

• Lower Interest Rates
  A prime time for many people to choose to refinance is when interest rates drop lower than the rate they’re currently paying.
• Fixed Rate
  If you currently have an adjustable rate mortgage, you may seriously want to consider refinancing to a fixed rate mortgage.
• Build Equity Faster
  Buy refinancing to a loan with a shorter loan term, you pay off your loan faster and therefore build up equity in your home faster.
• Own Your Home Free-and-Clear
  A shorter loan term generally involves larger payments, but if you can afford to make them, it could be a wise and rewarding decision to refinance your current mortgage to one with a shorter loan term.
• Get Cash in Hand
  If you already have equity built up in your home, then you can refinance for a larger amount than you currently owe and take that additional amount out in cash. This is also known as a cash-out refinance.
• Consolidate Debt
  As home mortgages generally carry far lower interest rates than other forms of debt, many people choose to refinance their home loan in order to consolidate their higher interest debt into a lower interest mortgage.

If one or more of the following applies to you, debt consolidation may be in order:

• You pay for normal living expenses with credit
• You transfer balances around from one credit card to another
• You can only afford the minimum monthly payments on your credit cards
• You have maxed out one or more credit cards
• You find yourself spending more than half your income to pay your monthly credit card and auto loan payments
• You're looking to open yet another line of credit in order to better manage your current debt, expenses, and lifestyle

Some of the most common ways to consolidate debt include:

• Debt Consolidation Loans
• Debt Settlement
• Home Equity Loan of Line of Credit
• Cash-out Refinance

Whichever option you choose to consolidate debt, just be sure that the new debt is cheaper than your current debt. In other words, after fees and finance charges are taken into account, will you be paying less to borrow the same amount of money through debt consolidation than you currently do with your debt dispersed as it is.

 

Once you’ve gotten a handle on your debt, the next step to financial freedom (and to keep you from winding up in the same position again), take the money you’ve freed and start building up an emergency fund.

Your home equity is the appraised value remaining in your home after you subtract the remaining balance you owe on your existing home mortgage(s). It can be thought of as the part of the home you actually own instead of the bank: the part you’ve paid for so far.

 

It isn’t difficult to build equity in your home, and chances are if you’ve owned your home for a while and have been making your regular mortgage payments, you probably have built a considerable amount of home equity already. Though the housing market rises and falls in cycles, the overall tendency is consistently upward. In other words, property values tend to rise over the long term.

The Federal Housing Administration (FHA) does not directly make loans to borrowers but rather provides insurance on loans made by approved lenders. FHA-insured mortgages can be obtained for single-family, multi-family, manufactured and mobile homes, and hospitals.

 

The FHA was created in 1934 by congress to help Americans to obtain a mortgage and purchase a home. Until the FHA came into being around 60% of Americans rented their homes, and most mortgages had high monthly payments, short loan terms, and stringent approval requirements. In 1965, it became part of the U.S. Department of Housing & Urban Development (HUD).

 

FHA loans differ from conventional loans in a number of ways. The down payment required for a conventional loan is typically much higher than for an FHA-insured loan. FHA loans also have lower credit requirements than conventional loans, making them more available to a wider range of potential homebuyers.

 

FHA loans offer borrowers several other valuable benefits, not least of which is those aforementioned smaller down payments. Unlike a conventional loan, which ordinarily requires 10-20% down, FHA-insured loans only require down payments as low as 3-5%. The FHA is also more flexible in calculating factors to determine whether or not to approve the loan, factors such as household income and repayment ratios. 

These days that's been the more prevailing question over whether subprime lending will return and, as it would happen, the answer to both questions are related. Many prognosticators assert that the worst of it is still ahead of us. Others believe the tide is turning.

But all agree that if we do have a recession, it will be in part due to the subprime mortgage crisis, and that we would not emerge from either a recession or the subprime mortgage crisis until and unless we emerged from both.

That is why so many people in finance and government are working to try and pull us out of this subprime mortgage crisis so that we can better avoid a recession.

Recession or no recession, a couple of things seem certain, though. Housing prices aren't likely to rise until prospective homeowners can start qualifying for less risky and expensive mortgages. And the tide of foreclosures isn't likely to ebb until people can afford to meet their current loan agreements. Both of these situations require an increase and improvement in employment and a tight leash on inflation.

Who knows if subprime lending will return? Not us. But together we can take an educated guess.

The common sense answer to the question of whether or not subprime lending will return is "Of course it will". Housing (including home lending) is cyclical, and all things cyclical ebb and tide, fade out and return.

As with securities and other forms of investment, the waxing and waning popularity of various loan instruments is most heavily dependent upon demand. The money is there to lend. The only question is how to lend it.

A lender with no borrowers is no lender at all. To stay in business, a lender has to offer instruments that have lending criteria which borrowers can actually meet. Otherwise, with no qualified borrowers, it can't do what it's in business to do - make loans.

All this is to say that as long as there is a demand for subprime loans, subprime lending will eventually be made available.