Solid Finances Sponsors MSU Extension MSU Human Resources This program is made possible by a grant from the FINRA Investor Education Foundation through a partnership with United Way Worldwide. 1

Mortgages: Refinancing & Reverse Joel Schumacher 2

Question A: My Age is 3 1.Under Over 69

Evaluating Refinancing Options Step 1: Why are you considering a refinancing? Step 2: Understand your current loan Step 3: Understand the possible “new” loan Step 4: Compare 2 & 3 Step 5: Decision Time 4

Question B: Do you currently have a mortgage? 5 1.Yes 2.No

What is Refinancing? Defined: – Pay off an existing loan by using the proceeds of a new loan Common consumer loans that are refinanced – Mortgages – Student Loans – Credit cards 6

Reasons to Refinance 1. Save money over the life of the loan Lower interest payments over the life of the loan 2. Reduce monthly payments Longer term or lower interest rate 3. Switch from an Adjustable Rate to a Fixed Rate Reduce uncertainty 4. Use the equity in your home for some other purpose Pay off other debt, remodeling project, etc. 7

Question C: Have you ever refinanced? 8 1.Yes 2.No

Question D: What was the main reason you refinanced? 9 1.Save Money 2.Lower Monthly Payments 3.Switch from an Adjustable Rate to a Fixed Rate 4.Pay off other debt

Evaluating Refinancing Options Step 1: Why are you considering a refinancing? Step 2: Understand the specifics of your current loan Step 3: Understand the specifics of the “new” loan Step 4: Compare 2 & 3 Step 5: Decision Time 10

Monthly Payments Monthly Mortgage Payment Breakdown – Interest – Principal – Property Taxes – Home Owner’s Insurance – Private Mortgage Insurance Typically, required if the down payment was less than 20% 11

Payment Example 12

Mortgage Interest Tax Deduction Interest on a mortgage can be tax deductible – You must itemize to take advantage of this tax deduction – Check last year’s return to see if you itemized – If yes, then determine your marginal tax brackets for federal and state income taxes – To determine the “value” of your deduction 5.5% x (1-21.9%) = 4.3% (After Tax Interest Rate) 4.5% x (1-21.9%) = 3.5% (After Tax Interest Rate) 13

Create a amortization schedule If no extra payments have been made: – Use the one in your original loan paperwork Online calculators: – Easy to use, but need to know Loan Amount, Interest Rate, Number of Payments Remaining – If not, can create onewww.powerpay.org – You need to know: Current loan balance, interest rate and payment (Principal and Interest only) 14

Evaluating Refinancing Options Step 1: Why are you considering a refinancing? Step 2: Understand the specifics of your current loan Step 3: Understand the specifics of the “new” loan Step 4: Compare 2 & 3 Step 5: Decision Time 15

Refinancing Process Find a new lender – Fill out a new loan application Get an Appraisal* Estimate Fees – Application, Loan Origination, Appraisal, Inspection, Closing Fees, Private Mortgage Insurance, Title Insurance, Survey, Pre-Payment Penalty Estimate Interest Rate & Points 16

Loan Application Refinancing is a new loan The lender will evaluate your credit worthiness – Credit score – Debt to income ratio – Loan amount to property value ratio – Co-Signer’s credit worthiness 17

Fees Fee Estimates – Application Fee $75-$300 – Origination Fee 0% to 1.5% of loan value – Appraisal $300 to $700 – Title Insurance$700-$900 – Closing Fees $500-$1,000 – Private Mortgage InsuranceVaries – Prepayment Penalty Rare 18

Interest Rates What does a rate quote look like? 30 years, Fixed Rate – 4.11% with no points – 3.97% with points 15 years, Fixed Rate – 3.48% with no points 30 years, Adjustable Rate – 3.3% with no points 19

What are points? A point is fee charged when a loan is issued Higher points equal lower interest rates How much does a point cost? – Example: 1.25 points for a $100,000 loan $100,000 x = $1,250 20

Fees Estimate all of your fees and points How are you going to pay for them? – Often they are added to the new loan balance Example: – Current loan balance$150,000 – Fees and points$ 2,210 – New Loan Balance$152,210 21

New Loan Payments Create a new amortization schedule – New Loan Payment – Total Interest Charges 22

Evaluating Refinancing Options Step 1: Why are you considering a refinancing? Step 2: Understand the specifics of your current loan Step 3: Understand the specifics of the “new” loan Step 4: Compare 2 & 3 Step 5: Decision Time 23

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Goal: Reduce Monthly Payments Comparison: – Previous Monthly Payment – New Monthly Payment Does this reduction meet your needs? 25

Reducing Monthly Payments Jill (age 64) has mortgage: – $47,100 Balance – 6% Interest Rate – Payments of $910 – 5 years left on loan Jill is considering retirement but won’t be able to afford $910 payments 26

Reducing Monthly Payments Jill could refinance to a 15 year loan – $48,500 Loan (included fees & points) – 4.5% Interest Rate – Monthly Payment of $371 Comparison – $539 less in monthly payments – 10 extra years of payments Extra interest charges of $12,180 27

Evaluating Refinancing Options Step 1: Why are you considering a refinancing? Step 2: Understand the specifics of your current loan Step 3: Understand the specifics of the “new” loan Step 4: Compare 2 & 3 Step 5: Decision Time 28

Decision Time Does the refinancing meet your goals? How long do you intend to own this home? 29

House Price Decline Issues What if: – John purchased a home for $250,000 – He paid 20% down payment Private Mortgage Insurance was not required – He currently owes $195,000 – The new appraisal is $220,000 – John wants a new loan for $195,000 88% of the value 30

House Price Decline Issues What if: – Holly purchased a home for $175,000 – She paid 5% down payment Private Mortgage Insurance was required – She currently owes $165,000 – The new appraisal is $160,000 – Holly wants a new loan for $165, % of the value 31

Questions 32

Reverse Mortgages What are they? When might you use one? What types are available? 33

What is a Reverse Mortgage? A Reverse Mortgage (RM) is a loan RM is collateralized by your home equity RM has an interest rate Must be age 62 or older – Some programs require higher ages (65, 68, etc.) 34

Who might benefit from a Reverse Mortgage? Elderly wanting to stay in their home. Elderly needing additional financial flexibility. Elderly that have home equity. 35

Different Types Single Purpose Federally Insured Reverse Mortgages – Home Equity Conversion Mortgages (HECM) Proprietary Reverse Mortgages 36

How does it work? Homeowner receives a payment – Lump sum – Payments for a fix term (10, 15 years) – Payments for life – Line of credit – Combination of these payments 37

Reverse Mortgage Facts Loan advances are not taxable Homeowner keeps the title to the home Homeowner pays property taxes, insurance & maintenance costs Loan balance increases over time 38

Fees Origination Fee:1%-2% Mortgage Insurance Fee: 2% initial & 0.5% annually (HECM) Appraisal Fee: $300-$400 Closing, Title, Other:$400-$600 Total Fees $100,000 Loan: $4,000-$6,000 $200,000 Loan: $8,000-$11,000 39

Example: Home Value $250,000 Current Mortgage$ 50,000 Homeowner Age70 Current Rates3.5% to 5.5% – These change just like regular mortgage rates 40

Lump Sum Example Estimated lump sum:$159,000 Less Fees:$ 10,000 Less Current Mortgage Payoff$ 50,000 Net Available:$ 99,000 41

Monthly Payment Example Estimated maximum lump sum:$157,000 Less Fees:$ 9,000 Less Current Mortgage Payoff$ 50,000 Monthly Payment$

Loan Balance Month 1: $50,000 + $9,000 + $606 = $59,606 Month 1:$248 interest charge Month 1:$59,854 end of month balance Month 2: $606 monthly payment Month 2:$252 interest charge Month 2:$60,172 end of month balance 43

When does a RM end? When the home is not the owner’s main residence. – Owner moved – Owner passes 44

What happens next? The mortgage becomes due. – The owner (or family) can pay off the mortgage and keep the home. – The home can be sold to pay off they mortgage. 45

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