Monthly Archives: August 2016

Know More About The Dangers of a Reverse Mortgage

It’s difficult to turn on the television these days without seeing a slew of commercials for reverse mortgages. They feature past-their-prime celebrities such as Henry Winkler and Fred Thompson, extolling the benefits of “guaranteed tax-free income” for those 62-years-old and over. What they don’t tell you is that reverse mortgages can be dangerous and can put your biggest asset—your home—at risk.

A reverse mortgage really a misnomer. It is nothing more than a regular mortgage, except that the loan proceeds are paid out to you in installments, rather than all at once. These plans mortgage the existing equity in your home, bleeding it down while it accrues interest on the growing debt. This mortgage does not have to be repaid until you either sell the home or die. Then the loan balance, interest, and accrued fees are extracted from the sale proceeds. This type of loan can be beneficial in a very limited set of circumstances, such as allowing a senior to remain in his or her home, rather than having to sell it to pay for medical or other unexpected expenses.

In many circumstances, however, a reverse mortgage can be a risk to your financial security. Here are six dangers you should consider before signing on the bottom line.

Complexity
Each lender offers slightly different products under the reverse mortgage banner. The rules are often complex and the contract you sign can be full of hidden landmines. The program will outline fees and interest, along with rules for repayment or default. Regardless of what the salesperson says to you verbally, have a lawyer review the contract and explain it to you in plain English before signing.

Pressure
Like the sale of any product where the salesperson is being paid a commission, reverse mortgage pitches can be forceful and intense. Some financial planners tout reverse mortgages as a way to fund investments, such as annuities. The costs of the reverse mortgage, however, may completely erase any benefit of investing in other products, leading borrowers to risk losing their homes. Lenders cannot force you to use your reverse mortgage proceeds for any particular purpose. It pays to have some time to consider the product and the pros and cons of using it as a source of funding. Never sign a reverse mortgage contract on the spot.

Future Health
This is perhaps the largest risk of a reverse mortgage. You can’t predict the future. Reverse mortgages come with stipulations about which circumstances require immediate repayment or foreclosure on the home. Some outline how many days or months the property can sit vacant before the lender can call the loan. For example, if you have a heart attack and spend three months in the hospital and/ or residential rehabilitation, the lender may be able to call the loan and foreclose on the house because it is unoccupied. The same is true if you have to go into an assisted living facility. The reverse mortgage must be repaid, or the house must be sold.

Eligibility for Government Programs
Certain government programs, such as Medicaid, are calculated with reference to your total liquid asset base. If you have reverse mortgage proceeds that you haven’t yet spent, they may affect your eligibility for some of these plans. Before signing a contract, check with an independent financial professional to ensure that the cash flows from a reverse mortgage won’t impact other funds you receive.

High Fees
When considering taking equity out of your home in the form of a reverse mortgage, all of the loan origination and servicing fees must be taken into account. Many of these fees can be buried in the expansive loan documents and should be thoroughly reviewed before signing the contract. Reverse mortgages can be a very expensive way to tap into the equity in your home, so be sure to look at other alternatives, such as home equity loans, if you qualify.

Spousal Eviction
In cases where only one spouse’s name is on the reverse mortgage contract, the house can be sold out from under the other spouse if the borrower dies. All reverse mortgage contracts require immediate repayment on the death of the borrower. Federal law limits the amount due to the lesser of the total loan balance or 95% of the home’s market value. If repayment cannot be made from other estate assets or other assets of the spouse, the house must be sold to repay the loan, leaving the spouse homeless.

Tips to Buying a House Near an Airport

Is buying a house near an airport advisable? Suppose your real estate agent shows you a property that is virtually perfect in all other aspects. Does all that good outweigh the one bad point? And is it, indeed, a negative at all?

Things to Consider When Buying a House Near an Airport
Of course, any home purchase is inevitably fraught with questions. To help ensure that you’re making a good decision – you might be in that house for a while, after all – here are a few factors to consider before signing on the dotted line.

Noise Pollution
Without a doubt noise tops many people’s list of concerns when buying a property near an airport, but in reality it’s not always an issue. Zoning regulations near some airports allow for commercial, industrial and retail activities while restricting residential buildings, schools, childcare centers and the like. When a residential neighborhood does fall within an airport’s flight path, noise can certainly be a problem, but how annoying depends on how busy the airport is – and even the type of aircraft used.

The entire aircraft fleet at Dallas Fort Worth (DFW) airport, for example, meets Federal Aviation Administration (FAA) quiet noise requirements, and American Airlines is phasing out its noisier MD80 series planes and replacing them with quieter Boeing 737s. As the DFW airport website points out, “Tremendous strides in reducing noise at the source have occurred over the past three decades. Technologies to reduce aircraft noise have evolved over time through efforts of NASA, FAA and aircraft and engine manufacturers.” With advancements in technology, noise pollution could eventually become a non-issue for people living near an airport.

To see if noise will be a factor in a particular neighborhood, check out the FAA’s Airport Noise and Land Use Information page, where you can search by state and airport to view relevant noise maps. Note that some links are broken; if so, search “XYZ (e.g., Atlanta) Airport noise abatement” in your web browser to find helpful information.

Health Concerns
Noise is not just an inconvenience; it presents health risks as well. Airport noise can place nearby residents at a greater risk for cardiovascular disease. In one report, researchers found the risk was greatest in the 2% of the population who were exposed to the highest levels of noise. The authors, however, acknowledged that they could not completely control for confounding or ecological bias, calling for “further work to understand better the possible health effects of aircraft noise.”

Research has also indicated that heavy airplane traffic can pollute the air for up to 10 miles away – a wider area than believed previously. One study, for example, showed that the amount of pollutants produced by LAX is equal to the particle-matter pollution of 174 to 491 miles of freeway. To put that in perspective, there are 930 miles of freeway in Los Angeles County, where LAX is located. The scientists concluded that “LAX should be considered one of the most important sources of [particle matter] pollution in Los Angeles.” The danger? The particles can become embedded in the lungs and enter the bloodstream, which can worsen existing lung conditions such as asthma and chronic obstructive pulmonary disease (COPD), as well as contribute to the development of heart disease.

On the Plus Side
While noise pollution and potential health side effects are worrisome, it’s helpful to consider the advantages of living near an airport as well. Perhaps the biggest perk of all is that you will be – at the risk of sounding obvious – close to the airport. This means your travel time to any domestic or international destination will be reduced, something especially coveted by frequent fliers.

“People who have to travel often for work want to live next to the airport,” Mike Tesoriero, the publisher of Southlake Style Magazine, told Forbes.com. As an added bonus many neighborhoods that are close to airports are also convenient to public transportation lines (Atlanta’s MARTA, for example), which could make your trip even easier, because you won’t have to deal with traffic, parking and shuttles.

This convenience can be a boost to home prices. An example worth noting is Southlake, Texas, one of the nation’s wealthiest communities and home to high-ranking corporate executives, media personalities and professional athletes. Here the average home price is about $800,000, and the DFW runway – sitting a mere 230 yards away – is one of the community’s big draws. “These executive and other white collar workers are purchasing homes with quick access to the airport because they are air travel intensive,” John Kasarda, an airport business expert and consultant, also told Forbes. “People in finance, auditing, marketing, consulting, media, they’re the people that are clustering near the airport.”

Information About Effect of Fed Fund Rate Hikes on the Housing Market

The Federal Reserve has put its benchmark interest rate at close to 0% over the past ten years as a strategy to boost the economy. However, in December 2016, the Fed hiked interest rates up to 0.75%.

A rise in interest rates is a signal that the Federal Reserve believes the economy is healthy enough that borrowing costs should return to normal levels. This would help keep inflation in check. However, a rise in interest rates could cause some short-term volatility. Economic recovery could slow down; wages may decline, and borrowers would have to pay more for assets, such as houses.

Effect on Mortgage Rates
Increasing the interest rate does not necessarily result in a proportionate increase in consumer mortgage rates. From 2000 to 2017, there has been only a small amount of correlation between the short-term federal funds rate and the long-term 30-year fixed mortgage rate. In fact, it’s fairly common for 30-year mortgage rates to move on their own, independent of other economic factors.

For example, from 2004 to 2006, the Federal Reserve increased short-term interest rates from 1 to 5.3%. Over the same period, mortgage rates increased from 5.8 to 6.3%. While interest rates increased by more than 4%, it resulted in only a 0.5% increase in long-term mortgage rates.

Long-term mortgage rates move as a result of many factors, such as the federal funds rate. Other factors that affect mortgage rates include the inflation rate, the erosion of purchasing power of money, the budget deficit, and household savings rates.

Therefore, an increase in the federal funds rate will only have a small effect on long-term mortgage rates and the overall housing market. However, it’s assumed that the federal funds rate will increase fairly steadily over the next two years, reaching an estimated 2.5%. There is likely to be an announcement of an interest rate increase each quarter, and consumer confidence may waver.

Increasing Mortgage Rates
Similar to the federal funds rate but somewhat independent of its movements, some experts say the 30-year fixed mortgage rate is expected to increase over the next two to three years. However, the perception that the potential rise in the federal funds rate is causing mortgage rates to increase is incorrect. If inflation turns out to be higher than expected, it could be the cause of an increase in mortgage rates. Additionally, if the current housing shortage persists with new housing developments lagging behind population growth, it will increase apartment rents, owner-equivalent rents and mortgage rates.

With inflation rates and housing prices making up 30% of the consumer price index (CPI), they are the most significant factors in terms of whether mortgage rates increase in the future. If the Federal Reserve can contain the budget deficit and if home builders become more active, mortgage rates should only increase slightly, even if the federal funds rate increases significantly.

While currently 30-year fixed mortgage rates sit at 4.00% as of Jan. 10, 2017 even if 30-year mortgage rates increase above 6%, it shouldn’t alarm consumers. The average mortgage rate was 9% in the 1970s, 13% in the 1980s and 8% in the 1990s.

Also, increases in the 30-year mortgage rate are a signal that the economy is improving and the job market is strengthening. Underwriters will be more relaxed in writing loans, and the pool of homeowners will increase in size. Therefore, it’s economically possible for consumers to take on higher mortgage rates; the housing market will be fine, even in light of an increase in the federal funds rate.