May 14, 2008

Close to Retiring: Need a Home Equity Loan and Cant Get it.

Many banks are so damaged by the mortgage mess and how its morphed into all areas of operations. People that have had home inquiry loans and with good credit are beginning to receive notices that their revolving loans are no longer valid. A bank can withdraw its agreement, and many are beginning to suspect these equity lines are no longer the wise channel they once were.

If Your Equity has Declined

Many areas of the country can be designated risky markets using zip codes to outline declining home values. If your home equity HELO was based on a home whose value is no longer what it was, you may find yourself reading a letter that goes something like this.....

Because of declining home values in your area we no longer can provide any money based on home equity from this date forward. The lenders are using automated (computer driven) models to determine the new vcalue of your home and are declining to continue your revolving credit line with the home as collateral.

How it Works

When the value of a home is reduced, the amount of money you have as mortgage or HELO debt as a percentage of the value of a home rises. This is the loan to value ratio and the industry standard for a loan is a LTV of around 80%. That is 20% of the home is debt and the rest is yours. If your home value has declined your debt as a percentage of value has increased.

Reverse Mortgages: What is it

In a conventional mortgage, you make monthly payments to the lender. But in a “reverse” mortgage, you receive money from the lender and generally don’t have to pay it back for as long as you live in your home. Instead, the loan must be repaid when you die, sell your home, or no longer live there as your principal residence. Reverse mortgages can help homeowners who are house-rich but cash-poor stay in their homes and still meet their financial obligations.

To qualify for most reverse mortgages, you must be at least 62 and live in your home. The proceeds of a reverse mortgage (without other features, like an annuity) are generally tax-free, and many reverse mortgages have no income restrictions.

Reverse mortgage loan advances are not taxable, and generally do not affect Social Security or Medicare benefits. You retain the title to your home and do not have to make monthly repayments. The loan must be repaid when the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence.

What You Should Know

Reverse mortgages can use up all or some of the equity in your home, leaving fewer assets for you and your heirs. A “nonrecourse” clause, found in most reverse mortgages, prevents either you or your estate from owing more than the value of your home when the loan is repaid.
Because you retain title to your home, you remain responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses. So, for example, if you don’t pay property taxes or maintain home owner’s insurance, you risk the loan becoming due and payable.

Thanks for Reading
Howard Bell
A web site of over 450 articles related to real estate focused primarily on property management.

Your Property PathSF
A blog for San Francisco owners and managers of real property

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