Tightened Restrictions and Rising Interest Rates

In light of all of the problems being had by Fannie Mae and Freddie Mac, interest rates have risen rapidly in a relatively short period of time. Just last winter 5.375% was the going rate for a 30 year fixed loan and this week -- 6.75%. In the past interest rates have been in the double digits, so there isn't a lot to complain about yet, but I suspect a lot of people are wondering why they didn't refinance when they had the chance.

In other industry news Fannie Mae has changed its guidelines in order to prevent intentional foreclosures. You've probably already heard that guidelines have tightened so that anyone who has had a foreclosure in the previous five years will not be eligible for conventional financing. So some people have been tricking the lender.

What they do is they purchase a new home stating they will live in the new home and rent out the current home. This helps people qualify because it's more difficult to purchase a rental property, but it used to be relatively easy to convert an existing home into a rental. You could use the proposed rent on your current home to offset the mortgage payment and thereby more easily qualify for the new loan.

So what people were doing is buying the new cheaper, more affordable home under those guidelines and then once the new loan closed, simply walking away from the other house. As a result, you can forget about converting an existing house into a rental with ease (which used to be a great way to slowly build up a real estate portfolio - because you could buy each new house with a mimimal down payment and owner-occupied interest rate), because now everyone will have to both provide a rental agreement (meaning you'll have to rent your house out before you own the new house you'll be moving into) and also you'll have to be able to qualify with both payments.

I'm not as pessimistic as some of the news about FNMA/FHLMC -- they're government agencies and as you know the government takes care of its own (and big corporations), so most likely it's only a matter of time and this will change again.

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Better to Rent or Buy

The New York Times published a user-friendly graph that measures if/when it's better to buy rather than rent.

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Excitement Aside, Mortgage Rates May Not Decrease

Charles Schwab published an article that gives a nice clear break down of the reasons why we can’t bank on long-term mortgage interest rates decreasing further. They’re still low, historically speaking (about 6%), but they have actually increased over the past month or so compared to what they’ve been the past several months, (about 5.5%) even in the wake of all of the Fed discount rate cuts and the inflation scare.

Equity Line rates have decreased dramatically over the past year because they follow the Prime rate which is now down to 6%. Other adjustable rates seem like they should be nice and low too, given the performance of the bond markets they follow, but investors are weary from adjustable loan default rates and aren’t particularly eager to buy any more of them. So more often than not, these days the 3/1 and 5/1 ARMS (fixed for 3 and 5 years respectively) are more expensive, or at least as expensive as the 30-year fixed rate.

The 5/1 ARM used to be a popular mortgage both because the rate was slightly below the 30-year fixed and the majority of home buyers don’t expect to own the same home for longer than five years. In contrast to what happened with SubPrime loans (in which case people had low initial fixed rates that increased so high after the second year that they could no longer afford their mortgage payment), people who have existing Prime adjustable loans are probably happy to find their rates decreasing. Which makes it tempting not to refinance into a fixed rate – but when rates increase all around, those annual adjustments won’t be so pleasant.

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Your Home Equity Line Might Vanish

Last month we received a memo suggesting we inform our clients that many lenders were poised to freeze their HELOCS. So in our monthly newsletter we let everyone know that if they know they’ll need the money from their Home Equity Lines they might want to take it out now and put it into an interest-bearing account. But before we could even get the newsletters in the mail, I received a letter from my bank. My HELOC has not been frozen, but the maximum line has been decreased based on the bank’s belief that houses have decreased in value, generally speaking. So now I know firsthand – it’s happening. The bank told me I could pay for an appraisal to be done by THEIR appraiser if I wanted to dispute it, but I know that will likely prove to be wasted effort, time and money.

I’m not overly alarmed by it. According to Freddie Mac’s chief economist’s report the housing market probably won’t improve as a whole until 2010. In our favor, we are still experiencing job growth in Oregon at this point which offers hope in terms of recovery. But it’s a good time to create a short term budget if you were planning to leverage the equity in your home over the next few years. Here’s a very thorough and easy to navigate budget created by Dave Ramsey if you need help there.

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How Did We Get Into Such a Big Mess Anyway?

This week David Leonhardt wrote a really excellent explanation of how the relatively miniscule segment of the mortgage industry known as sub-prime lending has managed to turn our entire economy on its ear.

“It really started in 1998, when large numbers of people decided that real estate, which still hadn’t recovered from the early 1990s slump, had become a bargain. At the same time, Wall Street was making it easier for buyers to get loans. It was transforming the mortgage business from a local one, centered around banks, to a global one, in which investors from almost anywhere could pool money to lend.”

Of course we all know what happened next. Too many people received too many loans that they couldn’t repay. Which leaves us in our current dilemma:

“So firms are now hoarding cash instead of lending it, until they understand how bad the housing crash will become and how exposed to it they are.”

“The conservatism has gone so far that it’s affecting many solid would-be borrowers, which, in turn, is hurting the broader economy and aggravating Wall Streets fears.”

But fear not, there is at least one optimistic voice in the roaring den.

“The best way to overcome fear is to look at the long run. The typical homebuyer keeps a home for 10 years or more, so there is time for those who bought in 2005 and 2006 to weather the current decline in prices. Those who bought at the top are unlikely to see any windfalls from house appreciation, but they will not necessarily suffer from buyers’ remorse. Owning a home has its advantages: the deduction on mortgage interest is substantial and too much of a sacred cow to ever be repealed, and there is a certain security and satisfaction to owning your own home.”

And that’s exactly what we’ve been saying all along. When the stock market hits a blip no one comes out saying that as a rule, it’s smarter to bury your money in the back yard than to invest it. They recognize that these things rise and fall and suggest the best ways to make money or at least not lose your shirt while waiting out the downturn. The same is true for real estate. Right now is not a good time to sell if you don’t have to, but it’s a good time to buy if you can.

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How Big is the Foreclosure Crisis?

Nothing excites the news media more than a big fat crisis. So I was surprised to read an actual honest analysis of the recent foreclosure data. If you follow the news regularly you'll probably be shocked to learn that most people are NOT, in fact, losing their homes. It's true no one is over the moon about their house's appreciation rate over the past year or two like they were in the good ol' days, but still.

This is not to minimize the stress and trauma of those who are struggling, only to point out that the collapse of western civilization is not necessarily at hand. We are in a down cycle -- it happens. It will turn around eventually.

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Of Course There's No Lull in Mortgage Pitches!

Naturally everyone is concerned about the current housing and mortgage lending trends, but some people really take their concern to the extreme, as in this article Monday from the New York Times. Of course lenders and realtor associations need to be held accountable and advise responsibly, but to suggest that they shouldn’t be advertising because we’re in a down market? That’s crazy. Here are a few reasons why:

1.The real estate market is cyclical. Just because home prices might fall a little bit over the next six months doesn’t mean that thirty years from now you won’t be glad you bought a home today.

2.A lot of people already have mortgages and if you think refinancing your loan to a 5% fixed rate (like a few lucky people did a couple of weeks ago) isn’t a good idea just because Countrywide Financial is having some difficulty right now – well, you can go ahead and pay too much if you want to.

3.The sky is not falling. There’s a lot of opportunity out there and the people who work in the industry are taking advantage of it if they have the means to do so. It’s unfortunate that some people are experiencing hard times, but that they have to get rid of their house is an opportunity for the people who have the money to buy them and for the companies who have the money to refinance them into something they can afford. If you want to hide under a rock because there’s a blip in the financial market, go ahead, but that doesn’t mean you’re the smart one.

Just like stock investors switch strategies to make money in a down market, so do real estate investors. As for what regular ma and pa homeowners and would-be homeowners should do? If history is an indicator, the odds are good that the sun will continue to rise every day for the foreseeable future and that Americans will continue to want to live in houses. Home ownership is not suddenly a “bad” investment, generally speaking.

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Happy New Year from the IRS

Einstein called our income tax system "the most difficult thing to understand." That can't bode well for the rest of us, can it? But this year as we start to think about tax time many of those who took out a loan with mortgage insurance in 2007 are in luck.

Mortgage insurance will be tax-decuctible through 2010 assuming the following conditions:

1. A 100% deduction for households with an adjusted gross income of $100,000 or less. The deduction is reduced by 10% for each additional $1,000 of AGI, phased out entirely after $109,000.

2. Deduction applies to primary residences and second homes only -- so no help to investors.

3. The deduction only applies to loans closed in 2007. If you have a loan from 2006 with MI, there is no deduction available to you.

I'm a mortgage advisor, however, so don't take my word for it. Be sure to check with a tax accountant.

Happy New Year!

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The Changing Face of Reverse Mortgages

Reverse mortgages are becoming more common and varied, if not more simple. As this article points out, more and more retirees are taking reverse mortgages not out of desperation, but out of a desire to spend their last years enjoying the money they've worked so hard to save.

“Jumbo” reverse mortgages — for houses valued at as much as $ 10 million — are becoming more common.

Even though the new variety of reverse mortgage products creates confusion and the necessity of education for the consumer, there's also potential to reduce the cost of what has traditionally been a very expensive mortgage. As with all mortgages, lower rates mean higher fees and vice versa.

But a customer may pay higher interest rates in exchange for lower fees, said David Certner, legislative-policy director at AARP, the Washington-based advocacy group.

Not "may" David, will. Banks have to make money if they're going to be able to continue loaning it -- they either make their money from interest or from fees, no exceptions. It's important for customers to consider their longterm objectives when deciding which way is best for them to pay for a loan.

Use this calculator to see if a reverse mortgage can help you enjoy your golden years.

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A Good Way to Purchase Investment Property

Here is an interesting article about options and considerations when purchasing a property for your college student to live in. In addition to helping your kids build a good credit rating early on, you can put them to work for you, and they’ll receive a crash course in home maintenance and being a landlord!

This can be a particularly good way to go if you have a student at Oregon State, as Corvallis real estate is relatively inexpensive, but still has a healthy appreciation forecast. The median price of a home in Corvallis is only $153,000! (Go Beavs!) And remember, if you purchase with the student as a co-owner, you’ll obtain an owner-occupied rate and won’t have to pay capital gains taxes when you sell four (or five or six?) years later.

I wonder if it's too early to send my six-year-old to college…

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Rent Versus Buy Calculator

Millionaire Mommy put a link to this fantastic calculator to help you decide if it's in your best interest to continue renting or to buy a home. For her, it makes more sense to continue renting, but every situation is unique.


I just bought a new home a year ago, and I input my information based on that, using actual taxes, fees and insurance, to see if it would have been smarter for me to rent. Not that it does me a lot of good now, but hey, knowledge is power, right? The first time I did it, it said it would take me five years to break even, which is fine since I expect to own it for fifteen years. But then I realized that the default rent amount they're using is ridiculous. I could probably rent something for that much if I lived alone, but I sort of like my husband and kids, and for all of us to live in something comparable to our house, it would cost almost twice as much as the amount I initially used.

One other thing, obviously Millionaire Mommy is a savvy stock investor -- I'm not so comfortable with the stock market. I understand how the real estate market and financing works, and have been able to invest wisely over the years. My stock market investment strategy is more akin to "hoping for the best," so I didn't give myself as generous of a return as she did.


Anyway, when I re-ran with actual figures and a 7% stock return rate, it said I'll break even in 2.1 years (I also used a conservative 4% real estate appreciation rate). But what's more interesting then that is that after 13 years my monthly housing expense will be less if I own than if I rent. Furthermore, over 30 years the equity in my home will be worth triple the amount that I might have earned in the stock market. At which point my mortgage would be paid in full and I could either live monthly payment free, sell, invest the equity elsewhere and use it to pay rent, or live in my house for free and obtain a reverse mortgage to support me until I can no longer live independently.

The bottom line is there are many ways to make money and build wealth. Being a doctor is a good way to make a lot of money unless you're a germophobe and can't stand to be around sick people. Being an engineer is a good way to make a lot of money unless you're not very analytical or good at math. Investing in the stock market is a good way to make money, but it doesn't hurt to diversify with a home or two either. To paraphrase Warren Buffett, the best way to make money is to invest in something you understand.

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Why Do People Believe Robert Kiyosaki Has a Clue?

Several of the people I meet who want to become real estate investors, have been reading Rich Dad Poor Dad, and they’d like me to tell them how to hurry up and get rich off real estate. Usually I refrain from telling them that not even Kiyosaki, himself, got rich overnight in real estate. He got rich giving seminars and writing books about how to get rich overnight in real estate (and once he had a lot of money to invest, he was able to make some nice real estate investments too – just like anyone with several thousands of dollars burning a hole in their pocket can do).

But some of his investment advice isn’t really so bad, if you have the time, the wherewithal and the cash to do it. However, there's one piece of advice that he gives that is so false and ridiculous, I’m surprised when I hear people believing it. He says that his (nonexistent) “rich dad” told him that his personal residence is not an asset, but a liability.

So let’s first put this nonsense to the Accounting 101 test. Accounting 101 says that anything you own is an asset, and anything you owe is a liability. Therefore the mortgage against your house is a liability, the house itself is an asset. With any luck the house is worth more than you owe, so that you have a positive net worth. If that’s not the case, it doesn’t turn the house into a liability, it just means you, unfortunately, have a negative net worth. Even your car is an asset, though a deprecating asset and therefore not really a sound investment - your car loan is still the liability.

Furthermore Kiyosaki only considers real estate an “asset” if it’s paying you cash every month. This is not the definition of an asset. If it’s making you money every month, it’s generating positive cash flow in accounting-speak. But even if you’re feeding it because the payment is higher than the rent or because it's vacant, it is still your asset. It’s just not a money-making asset – yet. In this marketplace, unless you have about a 35% down payment, the odds are slim that you’ll be able to buy an investment property that will generate a positive cash flow. That doesn’t mean that real estate is not a good investment. You’ll still have an appreciating asset, and over time rents will increase with inflation while your mortgage payment will remain fixed.

The bottom line is twofold. First,a real financial advisor is a far better bet for good information on investing than a clever infomercial creator. And second, real estate investing is part of a long-term investment plan, not a get-rich quick scheme.

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Dave Ramsey's Mortgage Calculator

I've received several e-mails from people wondering why I don't recommend paying off (or paying down) mortgages. But actually I neither recommend that people do nor do I recommend they don't. I think this is a personal preference. Either investment strategy can work out well for people. For those who want to put themselves on a plan to pay their mortgages off early, Dave Ramsey has a great and easy calculator here.

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Could the Writers For Money Magazine Catch a Clue?

Do they just let anyone write for Money Magazine? I have never seen more misinformation in one article than I saw in this one today. The gloom and doom days are over, it would be nice if the media would get with it. A few months ago, it was true that each day lenders were getting rid of programs and tightening their standards. But now, lenders are coming back with the same programs they've always had. There are a few changes, the most important (and one that I'm proud to say does not affect my company) is that lenders are making it more difficult for people to commit fraud.

Here's a short list of errors in this article:

1."What's happening: Several species of exotic mortgages are headed for extinction, including the 2/28, the 3/27 and those requiring no proof of income"

Wrong. There are still loans available (purchased by Fannie Mae and Freddie Mac) that do not require a borrower to even have income or verify where their down payment is coming from. The rate today is 7.125% and requires 20% down. Additionally, there are plenty of "Stated Income" loans still out there, but now they're mostly only available to self-employed people. Which is just as well, because there's no reason for a wage earner to be unable to prove their income unless they're lying or being paid under the table.

2."You'll find lenders stingier on appraisals, more persnickety on documentation and far less likely to finance 100 percent."

Wrong. There are still a lot of 100 percent loans available, and there are only added restrictions on appraisals for people in soft markets (which Oregon is not).

3."If it's [your adjustable rate] coming due and will end up above 7 percent, consider refinancing to a fixed rate. You'll need 10 percent equity and a credit score over 660."

On what planet? Because on Earth, you can do a conventional refinance with 5% equity. If you don't have a high credit score, you can do an FHA refinance with 3% equity.

4."Home-equity loans and lines of credit - What's happening: These are generally holding at about the prime rate, now 8.21 percent if your credit score is above 680 and you can prove income. But you can't tap 100 percent of equity anymore; you'll be lucky to get 80 percent."

Wrong. Actually, the rates on these keep going down. Today I can do a rate of Prime MINUS a half. Pretty good. Additionally, 100 percents are WIDELY available. It is true that you need really good credit for these.

Be careful when seeking information -- evidently even on CNN anyone can say anything on the internet.

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Myths About Mortgages & Home Ownership

Grad Money Matters' post about mortgage and homeownership is mostly self-explanatory, but I have a few disagreements. It's worth reading just for the commenter that prompted an author correction (I agree completely with the commenter). Here's what I would add:

Myth 1 - ISPF says that it's untrue that "If I can afford the mortgage payments, I can afford to own the house." It is true that owning a home comes with maintenance expenses and likely higher utility bills, but the property taxes, home-owners insurance and HOA fees are all considered part of the mortgage payment from the lender's perspective. So if you can afford your mortgage payment (according to the old fashioned method of qualifying for a loan), you can probably afford the house in general.

Myth 2 -- ISPF says that you might not benefit on your tax return from owning your home. I know that this is a possibility, but it is so remote that it's really not worth mentioning. It actually happened to me once though. My husband and I have always lived well below our means, and when we bought our first house way back when, it was a teeny tiny little house for $80,000, and we did an adjustable rate loan at 5% interest. The interest we were paying wasn't even close to enough to effectively itemize. Still -- if you can find a house for $80,000 these days, let me know -- I'll take it, tax break or no. Also, even though we didn't benefit tax wise, we had a $650 mortgage payment (PITI) for four years and then sold the house for $110,000. MUCH better ROI than if we'd rented.

Myth 3 -- ISPF says that 40 or 50 year loan terms are not a good idea. I completely agree. Neither are 20 year terms usually a very good deal.

Myth 4 -- ISPF says not to enroll in a bi-weekly payment program. Absolutely. Why pay someone to do something for you that you can EASILY do for yourself? A variation on the bi-weekly program, if you make ONE additional principle payment each YEAR on a 30 year loan, your loan will pay off in the 22nd year. Another option is ask your loan officer to calculate for you a 15 year (or 10 year or however many years you want to pay it off) amortization and just pay that much every month. It's not that complicated, don't pay anyone to do it for you. I'll do it for you if you e-mail me.

Myth 5 -- ISPF says that fixed rate payments don't equate to fixed rate expenses. Well duh. However, what do you have to show at then end of ten years of giving your landlord $1000 per month? The answer is: nothing. A home is an investment -- renting is carefree in comparison, but that doesn't mean it's always financially savvy.

Myth 6 -- ISPF says that you don't have to have private mortgage insurance even if you don't put 20% down. This is sort of true. Most people have been doing "piggyback" loans the last five years or so. However, many lenders have stopped funding second mortgages altogether. Since all of the chaos happened this summer, I haven't done a piggyback loan, but I'm sure they'll come back around. Also, for people earning less than $100,000 per year, mortgage insurance is now tax-deductible, so it's not always worth the hassle (or expense) of avoiding it.

Myth 7 -- ISPF says lenders can amortize your loan on a refinance so that you will still pay the loan off at the original date. This is true of a "streamline refinance," and it can be done on a regular refinance, but I've never had anyone ask to do it.

Myth 8 -- ISPF says shopping for a mortgage at multiple places only counts as one inquiry on your credit report for credit scoring purposes. It's the truth. Same is true if you've been all over town shopping for cars this week.

Myth 9 -- ISPF says you should get pre-approved for a loan FIRST, then shop for a house. YES! It's a rare real estate agent who will take you shopping for a house if you haven't been qualified by a lender anyway.

Myth 10 -- ISPF was spreading that tired old rumor that "the bank owns your house." But was big enough to retract when the error was pointed out.

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Don't Fall For Real Estate Investment Seminar Scams

Some of the real estate investment scams out there are so absurd you’d think there would be no possible way that anyone would fall for them. But they do – my, how they do!

One day a sweet retired lady came to our office and told our Loan Officer, Norm, that she had just spent the only $23,000 she’d had to her name at a real estate investment seminar in Florida. But not to worry, she’d learned at the seminar that she could come to us and purchase investment properties anyway, since she didn’t need any money for that. For qualifying income she received $1,300 per month from social security. Even when we had 100% loans for investment properties, she couldn’t have qualified for one of them. She insisted that she could do it though, because the people at the seminar had said she could. If we hadn’t felt so sorry for her, we would have told her to go ask the seminar people for the money.

More recently, a previous client came to us in a panic, because they’d joined an investor network (All of these are not bad – we participate in one, but make sure you READ BEFORE YOU SIGN.). If you sign without reading or understanding you could end up like these people, owning three properties, with three mortgages and very little to no equity. One of the houses is vacant, and two of them are rented for much less than the payment. And our friends are obligated to make the payments for a full year or until the houses sell, whichever comes last.

At the end of them taking all the risk and making all the payments, they’ll have to pray that the houses sell in these crazy market conditions, and if there’s a profit, they get HALF of it. Not a good situation for them. Good for the realtor who conned them into it, however -- he gets a nice commission on the purchase and the sale, regardless of how the investor does. Sadly, there’s nothing we can do for them either, so we just referred them to a good real estate attorney. These are not dumb people, by the way – they were in good financial shape with perfect credit before this happened – hopefully they’ll get through this ordeal without completely destroying that.

I don’t know how people sleep at night, but seriously, be careful with those investment clubs and seminars. Make sure you understand how you’ll benefit and if the level of risk you’re taking is appropriate to the potential pay-off.

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Mortgage Debt -- Good or Bad?

Do you borrow as much money against your home as possible or make the largest down payment you can? Do you pay over 30 years or condense into 15?

The answer to those questions depends largely on who you ask. Due, in large part, to the number of people who are in debt up to their eyeballs these days, there’s no shortage of financial gurus who encourage people to shun debt of any kind, including mortgage debt. This can be a fine option, but tying up all of your cash in your primary residence also limits your ability to make other investments.

People who have grown businesses from the ground up understand the principle of leveraging. No matter how much new business owners make, (if they’re smart) they’ll be stretching all of that money to acquire more money-making business assets. What that means if you’re the spouse of said business owner is that you’re doing very well financially, but this is not the year you’ll finally be seeing Europe. Sorry.

Then again, most start-up companies fail. And, understandably, most people think of their homes as a place to keep safe from financial risk as opposed to a tool for achieving financial goals. But home equity, while certainly not a bad thing to have, has a zero rate of return.

What becomes important in terms of accumulating wealth is what you do with the money you didn’t use for a down payment (or the money you withdrew from that equity line of credit). More often than not, that money can be invested with a return that is greater than the cost of the debt against your house. But if you’re spending it all at the mall, obviously you won't be better off in the long run.

Having no debt can be liberating and free up cash flow for other investments, but it doesn’t give you a better return on your investment. So really, if you’re taking a disciplined approach, either way can work out well for you in the end, but you can build wealth more quickly if you leverage the equity in your home.

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Is Homeownership a Right?

Carol Lloyd's column in the San Francisco Chronicle this week reminded me of something my mother said to me when I graduated from college in the early 1990s. She said that “my generation” (I know, not very original) is the first to expect to live as well as our parents from the start. With regard to home ownership though, I’m not sure that it’s a generational thing, so much as it’s been viewed as a vehicle for general economic growth.

One of the things that has gotten us into the current lending crisis has been a determination on behalf of both the government and lenders to structure an economy in which nearly everyone can own a home. To that end I've put recently-settled Russian immigrants who used food stamps as qualifying income into homes; we also have programs that allow for the instability of migrant farm-workers' income so they can purchase homes. And of course, I don't have to tell anyone about the allowances made the past several years for people who have actively demonstrated an inability to make their existing payments, so they could buy homes too.

Once I went head to head with an underwriter who didn’t want to approve a loan application because the borrower’s only income was welfare -- she felt being on welfare actively demonstrated financial irresponsibility. The guidelines allowed for welfare to be used as qualifying income, she just didn’t like it. In the end we won, because she couldn’t discriminate against someone for being on welfare.

These allowances have been made both due to corporate hopes of making more money and because homeownership is viewed as a stabilizing factor. It makes neighborhoods nicer when people care about the property they live in. When I bought my first house my boss joked that I should buy as much house as I could possibly afford – so I would really need to come back to work every day.

Of course when people wake up one day and realize they can no longer afford their house payment -- well, that's not exactly "stabilizing." Which is why now we’re cycling back slightly to the days when some people just couldn’t own a home. But corporations and governments tend to have bad memories, so it will probably come back around soon enough.

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Profit From Your College Student!

As the kids get ready to go back to school, we receive a lot of requests for information about leveraging home equity either to pay for college now or to save for college for later. Using the equity in your home, particularly in this time of excellent conforming rates, can be a good way to go, especially if you're in the planning stage.

As an example, let’s assume you’ll need $172,000 to fully fund one child through college in 15 years. You would need to save $451 per month in a 529 savings plan. Alternatively, you could take just $41,000 from your home equity and invest it as one lump sum into a 529 plan. You would pay $260 per month (the tax-adjusted payment would be just $204 per month), and your investment would grow to $172,000 in 15 years.

If you planned ahead and have that covered, you can also use your college student to make money!

(Maybe that doesn’t sound very nice?)

But seriously, FHA has a great loan program that we refer to as the “kiddie condo.” What you can do is purchase a single family residence near your child’s university, with as little as 3 percent down. You and your student are considered co-owners, making the purchase an “owner-occupied” transaction, so you get a nice low rate as well (today the 30 year fixed rate for FHA is about 6.5%).

Then they get some roommates, who make the mortgage payment for you, and when they graduate you sell. Or you can keep it as a long-term rental if you prefer – it only has to be owner-occupied for the first twelve months after you purchase it.

It’s a great deal – almost sounds as good as some of the crazy (non-existent) opportunities people tell me they learned about at those shady (and useless) real estate investment seminars!

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Reverse Mortgages -- Your Questions Answered

What does “Reverse Mortgage” mean anyway?

Traditionally, you borrow against the majority of your home’s value and as you make your payment each month you build equity. With a reverse mortgage, the opposite is true. Instead of using payments to gain equity, you use your equity to gain income. Throughout the life of the loan, the balance increases while the equity decreases.

I heard your house has to be worth a bazillion dollars to qualify?

No, to qualify you must be at least 62 years young and have at least 50% equity in the home you occupy. That’s it.

Is it true that “they” can take my house away?

No. When you die or live elsewhere for 365 consecutive days, the lender will expect to be paid. Your heirs have the choice of paying off the loan by selling the house or they can refinance if they prefer to keep it. Banks are in the money business, not the real estate business – they really don’t want your house.

But what if I end up owing more than it’s worth?

It’s impossible. You can never owe more than the house is worth at the time you take out the loan, let alone more than it’s worth after it's had ten years to appreciate in value. This is what's known as a “non-recourse” loan, meaning that it can never leave your heirs in debt.

How much money can I get?

The amount is calculated based on your age (and your significant other’s age if you own a home jointly), the value of your home, current interest rates and, in some cases, where you live. As a general rule, the older you are and the more equity you have in your home, the more money you’ll get. This handy little calculator will give you a ballpark idea (scroll down to "loan calculator").

I heard it’s outrageously expensive?

It’s expensive, but there are no out-of-pocket expenses for the homeowner.

How do I get my money?

There are usually three options. You can receive a lump sum payment if you need a significant amount of cash, like, today. Otherwise the bank will send you a predetermined sum of money each month. Alternatively you can set up an equity line of credit so that you take what money you need as you need it.

Great! So what’s the procedure?

You have to participate in a counseling session (which can now be done via telephone) with an independent third party, sign some applications and disclosure forms with the lender, and wait for your house to be appraised. You don’t have to “qualify” for the loan in the traditional sense of the word. A credit report is pulled to verify liens and judgments that will need to be paid from the proceeds of the loan, but your credit history, income or asset situation cannot disqualify you from the program.

But do you think I’m a jerk if I spend my kids’ inheritance?

No. You’ve worked hard – retire comfortably.

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