You’ve surely heard about how the credit crunch has made it harder for many types of buyers to afford a home or qualify for a mortgage.
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The evening before their home purchase was to close, Gary Becker and his wife, Amy Dacus, learned their Washington mortgage to buy a Woodinville residence had evaporated.
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Fallout from the subprime lending crisis is pushing up rates on numerous large loans. Those taking on debt greater than a certain size to buy or mortgage refinance will feel the sting.
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From the living room of her home, Jean Ingram enjoys sweeping views of pristine California wetlands and, off in the distance, Catalina Island.
According to Business Week, she and her late husband paid $135,000 for the 2,200-square-foot Huntington Beach, Calif., home in 1978, and it’s valued at about $1.2 million now.
Yet until last year, the 69-year-old widow, awash in home equity but light on monthly income, feared she would have to sell.
Ingram was able to hold on to it by taking out a jumbo reverse mortgage on the property - called “jumbo” because the amount was $388,000. Conventional reverse mortgages would not offer as much on a $1.2 million home.
Either way, these financial deals allow homeowners 62 and older to take the equity out of their houses without having to make monthly payments to the home loan lender.
The balance comes due when the homeowner moves out or dies. Then, the mortgage holder or the heirs have to sell the property or use other funds to pay off the loan if they want to keep it.
Financial Freedom Senior Funding, based in Irvine, Calif., has been the main source of the supersize California mortgage loans since 2000. More providers are entering the field, offering variations on these loans as well as increasing competition.
BNY Mortgage, based in Newburgh, N.Y., plans to offer the first fixed-rate reverse jumbo mortgage in February. It will be available initially in 10 U.S. states and later in other states through collaborating lenders.
Ingram’s mortgage, like most of its kind, is variable, with the interest rate tied to the widely quoted London Interbank Offered Rate (LIBOR). Her rate is currently 8.42 percent and the mortgage rates can adjust every six months, to a maximum of 14.92 percent.
The 8.42 percent rate is about two points higher than a regular adjustable-rate mortgage. What significance is the interest rate if you’re not making monthly payments? A mortgage calculator will tell you it’s the basis for calculating how much Ingram or her heirs will eventually have to repay the lender.
Because she chose to take all the money up front, rather than in a home equity line of credit, the mortgage company waived its regular fees and closing costs. With cash from the reverse mortgage, Ingram paid off her original California home loan, upgraded her roof and patio, and stashed $150,000 in certificates of deposit.
She hopes to buy a condominium that will throw off rental income.
How much do the jumbo mortgages really cost? Suppose you took a $700,000 reverse mortgage on a home valued at $2 million, with a fixed interest rate of 8.85 percent. Depending on how fast you took money out, the debt could balloon to between $915,000 and $1.7 million in 10 years.
The final bill would include accrued interest, service charges of $20 a month, and the original closing costs. If the home appreciated 4 percent a year during the 10 years, it would be worth nearly $2.7 million. You or your heirs could sell it, pay off the home loan, and have a tidy profit.
Plans can go awry if you become ill and need to move out and sell the home immediately. If mortgage rates have skyrocketed and the property value has remained flat, your equity could be wiped out. But at least the amount you owe would never exceed the market value of the home.