Money Talks, LLC         
 
April 2013
In This Issue
Reverse Mortgages
Home Equity Line of Credit

 

Money Talks - We listen

 

Money Talks, LLC

 Susan Hammitt

AFC, CDFA, Mediator,

Life Planning Specialist

 

511 SW 10th Ave.

Suite 805

Portland, OR  97205

 

Phone: 503-233-8142

 

Email: Money Talks

 

Website: 

Financial Life Planning  

 

Divorce Settlement 

  
  
It's been a while since I wrote a newsletter. It's not lack of material. I most enjoy writing about trends that I am witnessing. With the permission of clients I share actual case experiences.  

"Talk About Money" continues to be my most important message in personal financial sustainability.

Talking to peers about mutual concerns and experiences helps strengthen 'common sense' financial skills.

This newsletter offers several important financial topics to talk about:

How do we make financial decisions? When a friend is making a case for spending money they really don't have or can not afford, do we talk about it?  Maybe, a simple conversation, "Well the economy may be getting better but my paycheck just took a hit with higher healthcare premiums" And, "You know, I've had my car for 12 years and it's still pretty reliable." 

Are reverse mortgages a valuable retirement planning tool?  What other options might be considered?  How does a reverse mortgage work?

Home Equity Loans have maturity dates. What happens when the loans mature? 

Any financial plan that involves going into debt requires thoughtful decision making, sometimes with a little help from our friends. 


With warm regards,
Susan Hammitt
Money Talks, LLC
 


Start Your Own Money Talks Circle of Friends Meeting
 
I am offering a new service to clients who prefer a low cost, group experience to strengthen skills for Personal Financial Sustainability.

Clients create a group of (up to) 15 participants and I will host monthly Money Talks meetings in my downtown conference room or other location.

The two hour meetings will be structured to meet the needs and expectations of the group. 

There will be no charge for the first meeting to determine the priorities, appropriateness, and commitment of prospective participants.

Call or email for additional information:

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Personal Financial Sustainability 

Making Financial Decisions

 

Don't be distracted by economic trends and abstract statistical data when making personal financial decisions. What is the most reliable information required to make well informed financial decisions?  

 

A client recently said, "The economy is improving," to support an argument for buying a new car. 

 

I responded with a question, "How's your personal economy?" Every month for the last year she had spent more than she earned.

 

"I can lease a car and it will only  cost a couple hundred dollars a month. My car is 8 years old and will be needing repairs."

 

Um, two abstracts - the economy is improving and 8 year old cars will need repairs. Add to the argument, lower payments of a lease rather than a purchase - and the deal is closed!  

 

She blocked the real conversation about her personal economy. When she left my office I was pretty sure of two things, first she would lease a new car and second, I would not see her again, for a while.

 

What is the most important information required for well informed financial decisions?  

 

The current state of your personal economy.

  

 
Make a Plan That Works For You!

 

 

I am surprised to hear fifty and sixty somethings with high mortgage balances refer to reverse mortgages as an option for income supplement in retirement.  The most they will secure is enough to pay off the mortgage. However, they will continue to have all  other costs associated with taxes, insurance, maintenance and repairs.  In the cases I have analyzed, the prospective borrower is relieved of the mortgage payment. However, they continue to experience high housing costs.
  
In one case a sixty-five year old homeowner had a $200,000 mortgage and his home appraised for $300,000.  Based on the origination expenses, terms of the reverse mortgage, age of borrower, current property value, and the compounding affect of interest and FHA insurance premiums: the homeowner was left with no equity after a few short years. 
  
Reverse mortgages will undoubtedly play a role in household economies as boomers move into retirement. However, the underlying question at the time homeowners consider reverse mortgages, "Is this a temporary fix or a sustainable plan?"  
  
When homeowners consider a reverse mortgage it flags a significant change in their personal economy. If the homeowner needs the additional cash flow it is possible that their lifestyle is unsustainable and a reverse mortgage will be an expensive and potentially disastrous temporary fix. Reverse mortgages are not a cure for high debt and under-funded retirement savings.
  
Ironically,  reverse mortgages make the most sense for seniors who do not need the money. Retirees who wish to tap into home equity for travel and luxury expenses, while still living in their home as long as they wish. Meanwhile they preserve and grow other assets for their future income.   

 

Make a Plan That Supports Your Future!
CaseStudy   

 

Do you know what happens to the terms of a home equity line of credit (HELOC) once it reaches the maturity date? Most people don't. 

 

Unless a home equity loan is fully amortized it probably has a maturity date.  On the maturity date the loan terms will change.  Some HELOC's require a balloon payment at maturity, others convert to fully amortized 5 or 10 or 15 year fixed or variable rate loans.

 

The contract terms are not likely to be competitive at maturity.  Fully amortized fixed or variable rate conversions may not be affordable. If the borrower and/or the property cannot qualify for refinance balloon payments may force foreclosure or sale of the home. 

 

If you have a HELOC and do not know the terms of the loan, do not wait - call your lender and review the terms so you can make a plan.

 

 

Case Study: 
HELOC and Reverse Mortgage

 

Wells Fargo was the  lender. The first mortgage had been paid in full, early. The HELOC, roughly 15% of the value of the property, was secured for the purchase of an SBA commercial loan 10 years earlier. The homeowner had impeccable credit. Wells Fargo acknowledged his excellent qualifications throughout their 40 year business relationship.  

 

When the homeowner was forced into retirement with a heart condition, his income dropped but was stable. He was never late or delinquent making a HELOC payment.

 

Wells Fargo sent the homeowner a demand for full payment at the maturity date of the HELOC.  The borrower was in the process of trying to sell his business and did not have the cash to make the balloon payment . However he did continue to send Wells Fargo regular monthly payments, which they accepted and credited to his account. However, Wells Fargo would not extend the loan or offer any option for refinance.  Instead they assessed late payments and threaten foreclosure if the balloon payment was not made. 

 

The borrower went to another lending source and they approved a loan to pay off the HELOC. After all documents were signed and the loan was ready to fund, the new lender updated the borrowers credit report, Wells Fargo had reported the balloon payment in default, and the new lender cancelled the loan.  Prior to this event the borrower had never had a late or delinquent payment in his life.

 

This was the first time I recommended a reverse mortgage. For the sake of paying off a $75,000 loan, the borrower was forced to pay more than $8,000 in fees and expenses for a reverse mortgage. And, he will continue to incur interest and mortgage loan insurance expenses until the loan is paid off.

 

Be a good friend, talk to your friends who may have a home equity line of credit (HELOC).  Encourage everyone to investigate the terms of their loans before they face the surprise of balloon or high interest loan payments.