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Why do Reverse Mortgages have Insurance?

Question from our Reader:

Is it common for Reverse Mortgages to include an additional monthly fee for “Mortgage Insurance”?
What companies do not charge for Mortgage Insurance?

Hi Ronald,

The lenders do not charge for the Reverse Mortgage Insurance; HUD does on the Home Equity Conversion Mortgage (HECM or “Heck-um”) which is an FHA or government insured program. At this time, there are very few proprietary or private programs available that do not require this insurance as most disappeared when the market experienced all the difficulties in 2009 and 2010. The programs that have come out since the collapse of the market are mainly for Jumbo or high balance loans and I think you will find that the cost with the insurance is still typically less than what these programs have to offer.

The government insurance is what makes the program work. It protects borrowers, lenders, heirs and even the folks who buy the securities backed by the loans. Without the insurance, the viability of the program is very questionable and that is borne out by the fact that most of the programs that were not FHA-insured disappeared when the market collapsed and there are very few that have returned and those that have offer borrowers very few options and at higher rates.

Borrowers who do obtain the proprietary programs, typically because of the loan sizes and property values, currently have fewer programs
available to them. I am only aware of 2 proprietary programs at this time, both are fixed rate requiring a full draw of the funds available and both have interest rates in excess of 7% (greater than the HECM rates plus the insurance renewal of 1.25% of the outstanding balance). There are no guarantees on these programs by HUD, so growing balance lines of credit that they can access at later times would not be guaranteed and therefore borrowers would be open to the risk that something might happen to the lender before they accessed all of their funds, causing their line to close prematurely. Therefore, the fixed rate full draw option on the private programs is the only way to ensure that all funds are available to every borrower.

So Ronald, forgive me for taking so long to answer what is a quick question, but the HECM loans plus the insurance are still below the rate that accrues on the proprietary or private offerings that are available and I wanted to be sure you understood that this insurance protects you on future draws as well as gives you the availability of programs that offer a reverse mortgage line of credit, monthly payments, a full draw or a combination of these features instead of just the one lump sum that the private programs offer. If you need the higher balances that the private programs can give, they are the only way to get them but if not, even with the insurance, the HECM program still gives you more options.

Sources:
About Reverse Mortgage Insurance Premiums
HUD.gov
Upfront Mortgage Insurance Premium

No deposit home loans as a viable option for new homeowners in Australia

When moving out on your own, you’ll generally start out renting, perhaps renting a room in a friend’s house, sharing an apartment shared with one or more other people, or if you’re really lucky and find a good deal, a place that’s all your own. But while renting has many advantages like being able to move at any time, contract modification options, or not having responsibility for appliance repairs, there’s also something to be said for owning your own home. Home ownership is a dream for many renters, simply because home ownership, while often cheaper in the long run (and certainly more rewarding), can also be quite expensive at the offset. Typically buying a home requires that you provide a down payment on the home itself, and then there are closing costs and moving costs to consider. For many prospective buyers, home ownership winds up being delayed or put off altogether, due to the high cost of a down payment.

Fortunately for prospective home owners, there are such things as no-deposit home loans, though you’ll need to know where to look for them. It pays to let banks know right away that you want a no-deposit loan, so that if they do not have such a loan available, they can let you know right away – and thus you’ll both avoid wasting time and resources.

Banks and other lenders in Australia such as Homestart are able to provide no-deposit home loans that also have low interest rates. But despite these low rates, no-deposit loans are not always easy to find. So when you do find them, it’s important to fill out application paperwork accurately, and provide all requested documents. Saving on the cost of a down payment is a worthwhile investment, since having more money to start out with and just a monthly mortgage loan payment to make is always a good deal to have. So if you find yourself in a position of wanting to buy a home but not having savings or a personal loan from a family member or a friend to use for a down payment, do your best to seek out a no-deposit home loan.

Managing debt by expanding your assets

Previous articles have discussed various aspects of debt management, including changing one’s approach to debt. Those changes can included reducing the total amount of debt, reducing the number of debts, looking at different financing options, and understanding the difference between a positive debt that leads to long term positive financial results, and negative debt that only produces expensed and creates no benefits.

One of the golden rules of debt is related to the last distinction of a positive or a negative debt. A positive debt incudes debt that is finances an asset that produces income that exceeds the costs of debt service and the other costs associated with that asset. An investment in an apartment building that produces a positive cash flow each month is an example of a positive debt.

Another kind of positive debt would include an educational loan that allows someone to find employment that produces a higher income, even after taking the educational debt payment into account. These very same debts could become a negative debt if the investment has a negative cash flow or if the educational loan doesn’t lead to a job or a pay raise.

While managing or reducing debt can be a primary financial goal, sustainable financial stability is much more likely to happen when you have assets working for you. Your assets can range from cash in a savings account or other low-risk paper asset, or a business or real estate investment that provides a positive cash flow every month.

If you don’t have any assets at all, it is probably smartest to start with a low risk asset like a savings account or precious metals. If you are going to use some kind of paper asset, it may be best to put it into an account that is not easily accessed to keep you from being tempted to spend it quickly.

Precious metals may fit into this kind of strategy, since you can’t just take a silver bar or a gold coin 1 oz gold american eagle to the store and use it like a common currency. You have to first take it to a coin dealer and exchange it for regular money before you can spend it. Gold and silver have an additional advantage as it can be used as a hedge against currency fluctuations and inflation.

Even if your debts are far larger than your assets, having even a tiny amount of assets to your name could do wonders to make you feel better about your financial situation and your prospects for the future.

Is going to university really worth it?

There used to be a time when getting a degree from most public colleges was very affordable (sometimes with free tuition), and it helped young graduates get access the best paying jobs or professions.

Now, most students have to use one or more student loans to pay their fees, and after all that investment may graduate to a world full of job insecurity and high unemployment rates.

Many people ask the question – is university really worth it? The answer, however, depends on the circumstances of the individual, their aspirations and their access to money.

First, there are some professions where a university degree is essential. In these cases, students have no choice but to undertake further study and many will need one or more loans.

It is not unusual for medical or veterinary students to rack up debts, including student loans, of over one hundred thousand dollars during the course of their university education.

However, the status and potential earnings attached to these professions should mean that the suffering will be worthwhile eventually. In the US, doctors and veterinary surgeons are both highly paid and highly regarded professions.

Other industries also expect an undergraduate degree, such as in the legal profession. Although there are opportunities to access paralegal positions without a degree, to really have the opportunity of a high-flying career, a law degree is essential.

It is not unheard of for law companies and multinational firms in other areas to pay off the loans of graduates when they accept a job with the firm.

This fantastic opportunity only applies to the crème de la crème of candidates, however, so an outstanding academic record and evidence of potential and ambition is also needed.

Students who have difficulty with finance often take part-time work to supplement their income. However, if this is to the detriment of their studies, the end results may be less impressive.

It may be worthwhile to take some time out and build up financial resources before attending university, so that the student does not have to commit time to paid work.

There are numerous jobs, though, which do not require a university education and individuals may be better off by simply gaining work experience while earning a decent wage.

Some of the more manual professionals such as plumbers and electricians can bring significant financial rewards. Students generally gain an apprenticeship and may study at a local college to get the necessary qualifications.

Many highly paid individuals have taken this route through their working life and have built their fortunes and even empires this way, sometimes starting as a plumber, electrician, or carpenter before moving on to lucrative careers as construction managers or real estate developers.

So, university is really worth if for many people but it does depends on the individual’s professional aspirations. It is expensive but it may be essential. However, there are many ways to make a good living and that is only one route. If your talents lie elsewhere, investigate those options, as they may be just as lucrative and rewarding.

5 ways you can change your approach to debt

The word ‘debt’ has all sorts of connotations in contemporary America. In previous decades, debt was viewed as a wholly negative idea and some of this legacy unfortunately still remains.

Yet debt can be a way of negotiating life and if handled in the right way, can actually have many positive aspects. It can allow you experiences that may otherwise be unavailable to you.

There are different types of debt and many ways to deal with it in a responsible way, such as regular repayment to creditors and taking advantage of balance transfers when applicable.

Here are five key ways of changing your approach to debt that will help you understand debt and feel more empowered in decision making around money, loans, balance transfers and debt in general.

1. Appreciate the difference between positive and negative debt. Positive debt tends to be associated with long-term goals or commitments that will enhance your life or provide security.

Negative debt, on the other hand, tends to be associated with items for short-term pleasure and instant gratification that will affect your life for just a short period.

2. Realize that almost everyone in the United States has some level of debt and so you are in good company. Unless you are from a wealthy background, you will need to borrow money at some point in your life.

You may be surprised at some of the people you know who also have debts. Remember, even daily living can be expensive and most people need a helping hand with finance.

3. Two of the main reasons for borrowing money include paying for a house and for your education. These are long-term investments that will add value to your life, so the debt is a positive one.

Think about the purpose of the money you are borrowing. Having a College degree is almost essential when it comes to getting a well-paid job, so incurring debt for this reason is very different to simply using it for frivolous purposes.

4. Research different finance options when purchasing a car. Choose a reliable, but not necessarily top-of-the-range, model so that you can manage repayments without any problems.

Keep organized records of your finances and repay each statement on time. If you use credit cards, take advantage of lower or 0% interest rates on balance transfers.

5. Remember that actually having debt can work in your favor when applying for a mortgage or other type of financial product. Managing debt can show you are a reliable consumer and this will make it easier for you to get credit.

Most people are surprised that they can be turned down for credit on the basis that they have never borrowed money. Being able to show a record of responsible borrowing can give you access to better financial products.

Changing your approach to debt can allow you to access opportunities that otherwise will pass you by. An education or a home is hard to fund without financial help.

Stick to the golden rule of borrowing for long-term benefits rather than simply to pay for the latest trendy gadgets. Make regular repayments, keep records and allow positive debt to help you achieve your goals.

Managing Your Debts

For most of us, debt is just one of those things that we will have to deal with at one time or another, but successfully managing your debts is a totally different story.

If you don’t keep on top of your debt repayments then it’s very easy to lose track of how much debt you actually have – not knowing who you owe money too is a very scary thought.

To successfully manage your debts you need to first monitor your expenses. Probably the most important personal finance rule is never spend more than you earn, but if you don’t monitor your expenses then you won’t know how much you actually spend.

To collate all of your expenses together I would collect all the bills you have from the previous month and all of your bank statements. Split up all of your expenses into regular and irregular, e.g. regular payments could include your phone bill or credit card statement, where as irregular could be clothes shopping.

More often than not your regular payments will be the payments that you have to make, but with your irregular payments you should have some room to cut down to give you some breathing space.

Once you know how much money you pay back on a regular basis it’s time to work out how much you owe in total. I know this can be a daunting prospect but it’s vital to get it done as soon as you can. If you don’t have this information at home, then give your creditors (the people you owe money to) a quick telephone call to find out, once you know the total figure you have to pay back then you then have something to aim towards.

Now you know your debt figure, you should list your debts in order of priority, which debts do you think you should pay off first and why? The debts you should aim to pay off first are the ones with high levels of interest as these will be the most damaging to you financially.

If you feel like your level of debt is too high then try to think of ways that you can make it easier to manage. Do you have any savings that you could use? For example in a cash ISA or an equivalent account. Could you consolidate your credit card debts using a balance transfer credit card? Think of ways to give you more time to make your repayments.

To try and make a dent in your overall debt figure, set yourself some short term and long term debt goals. Having financial objectives help to keep you motivated and focused. When you set your financial objectives it’s important to be realistic and also set yourself a time limit, you’ll then have something to aim towards and it will keep you motivated.

It’s important to remember to always monitor your progress, if you’re doing well then great, if not then try to see why and work on rectifying the problem.

When managing and dealing directly with debt it’s important not to give in, some people think that making small progress doesn’t really have an impact but it definitely does, so remain focused and you will get there in the end.

VA or Military Home Loans

The LA Times recently featured a story on VA Loan Benefits. For military members coming home and looking to purchase a home there are some tremendous benefits. Without putting up any of their own money veterans can borrow up to 417k with a GI loan. The limits increase in other areas such as California and Colorado where home prices are higher than the rest of the nation. There are some pretty specific items you need in order to qualify

You Are Eligible For A VA Home Loan If:

  • You have had 90 days or more of active duty service during wartime
  • You have had 181 days or more of active duty service during peacetime
  • You were discharged for circumstances that were not dishonorable
  • You are currently active duty personnel and you meet the above service requirements
  • You are the surviving spouse of a Veteran who died during service or because of service-related injuries and you have not remarried.

You will also need to show work history and ability to make payments for the loan you are applying for. Lastly, there are three other reasons these loans are good for veterans.

No PMI Insurance is required.

VA Loans require no money down and you will see no penalty rates

VA Loans have lower rates than conventional loans.

Given the current economic environment this is a great option for those who have dutifully served our country.

Student Loans

As soon as I graduated college I wanted to know how to repay student loans quickly. I definitely didn’t want them hanging over my head. Another reason is that after the passage of the 2005 bankruptcy reform bill student loans are no longer fall under bankruptcy protection. In other words, if you go broke you still have to pay back your student loan. You would think that interest rates would be lower since the lender has more protection from bankruptcy.

If you are in the early stages of looking for a student loan before going to college be sure to look into alternate sources of student funding. Not to say that all schools may engage in bad behavior, but in 2007 Andrew Cuomo (Attorney General of New York State) investigated several schools that had preferred lenders. Most of these preferred lenders actually charged higher interest rates and were giving kick backs to financial aid staff.

There are also many different types of loans to consider for college. Even within the category of Federal Student Loans there are numerous types.

  • Federal Perkins Loan – Need Based
  • Stafford Loan – No payments while the student is in school. Can be unsubsidized which means you can have a loan not based on need?
  • Federal Family Education Loans – Private loans backed by the government

Lastly, it definitely is to your advantage to shop around and try to find the best rates for yourself. It could save you a large sum of money.

Loan Fraud – What to Look for

I’ll never forget the first spam I received involving an African prince who would send me oodles of money. Unfortunately, these types of loans continue to proliferate the Internet and take advantage of people. The trend has only gotten worse as people are more desperate in these hard economic times. They prey on people desperate to get student loans and other types of financing. The most common type of fraud is called an advance fee loan scams. In this situation the person is told that they have been guaranteed a unsecured loan for a large sum of money. They simply need to pay the processing fee.

Here are a few of the signs that the company may not be legitimate.

  • A lender who isn’t interested in your credit history
  • Fees that are not disclosed clearly or prominently
  • A loan that is offered by phone
  • A lender who is not registered in your state

Do business with licensed companies. Ask your state banking or finance department about the licensing requirements for lenders and loan brokers, and find out if the company has complied.

If you are the victim of a fraudulant crime you can visit https://www.ftccomplaintassistant.gov/. This site helps people who have been victimized by credit card theft. It helps the government to aggregate data and ultimately apprehend those responsible for the fraudulant crimes.

Debt Consolidation – How it Works

Debt Consolidation

Debt Consolidation

Every day I hear ads for debt consolidation. I was always curious how these loans are able to take existing interest debt and turn it into a lower payment. The primary way debt consolidation programs work is by transferring unsecured debt into secured debt. Which brings up the next question, what are the difference between the two? An unsecured debt does not have an underlying asset associated with it. A good example is a credit card. Usually, there isn’t a specific asset that you own tied to the credit card. An example of a secured debt is a home mortgage. If you don’t pay back the mortgage the bank can take possession of the home (secured asset).

Lenders are usually able to offer a lower rates since the debt is now secured with an asset. There is less risk to the lender.

Additionally, programs can do things like extend the term of your loans to increase the payback period and decrease the monthly payment. This makes it easier to meet your monthly payment. Many debt consolidation experts have the ability to work with multiple lenders. This can save a great deal of time and frustration as these agents are experts and can navigate the maze of creditors while minimizing payment.

Compare Rates in Australia

One of my favorite financial sites is bankrate.com. When I was looking for a mortgage I scoured that site on a daily basis watching rates change and thinking about who I would place my mortgage with. Interestingly for me it wasn’t all about the best rate. I also wanted someone who wouldn’t sell my mortgage and who had an office close by. I was able to find it and get a decent rate easily. I am amazed at the difference between the advertised rate and the rate you end up with though.

Even though bankrate is the 800 lb gorilla in the market there are a growing list of sites specializing in financial niches as well.

Anyway, there is a new site that seeks to help Australians with their rates as well. The site is called GoodWithMoney. They compare traditional items like credit cards and cheap loans, but what I also found interesting is that you can compare rates on items like insurance and broadband services. They have most of the major items that you need for your financial being on their site specifically geared to those living in Australia. They also have a section dedicated to financial Australian news.

If you have any other interesting sites that help to compare rates for a given niche let us know in a comment.

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