12/21/2011
Solid Finances Sponsors Mortgages:
• MSU Extension
• MSU Human Resources Refinancing & Reverse
• This program is made possible by a grant from the FINRA Investor Education Joel Schumacher
Foundation through a partnership with United Way Worldwide.
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Question A: My Age is Evaluating Refinancing Options
• Step 1: Why are you considering a refinancing?
1. Under 35
• Step 2: Understand your current loan
2. 36-49
• Step 3: Understand the possible “new” loan
3. 50-69 • Step 4: Compare 2 & 3
4. Over 69 • Step 5: Decision Time
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Question B: Do you currently have a
What is Refinancing?
mortgage?
• Defined:
1. Yes – Pay off an existing loan by using the proceeds of a
2. No new loan
• Common consumer loans that are refinanced
– Mortgages
– Student Loans
– Credit cards
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Reasons to Refinance Question C: Have you ever refinanced?
1. Save money over the life of the loan
• Lower interest payments over the life of the loan
2. Reduce monthly payments 1. Yes
• Longer term or lower interest rate 2. No
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.
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Question D: What was the main reason
Evaluating Refinancing Options
you refinanced?
• Step 1: Why are you considering a refinancing?
1. Save Money
• Step 2: Understand the specifics of your current loan
2. Lower Monthly Payments
3. Switch from an Adjustable Rate to a Fixed Rate • Step 3: Understand the specifics of the “new” loan
4. Pay off other debt • Step 4: Compare 2 & 3
• Step 5: Decision Time
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Monthly Payments Payment Example
• 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 12
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Mortgage Interest Tax Deduction Create a amortization schedule
• If no extra payments have been made:
• Interest on a mortgage can be tax deductible
– Use the one in your original loan paperwork
– You must itemize to take advantage of this tax deduction
• Online calculators:
– Check last year’s return to see if you itemized
– Easy to use, but need to know Loan Amount, Interest Rate,
– If yes, then determine your marginal tax brackets for federal and
Number of Payments Remaining
state income taxes
– www.choosetosave.org
– To determine the “value” of your deduction
• If not, www.powerpay.org can create one
• 5.5% x (1-21.9%) = 4.3% (After Tax Interest Rate)
– You need to know: Current loan balance, interest rate and
• 4.5% x (1-21.9%) = 3.5% (After Tax Interest Rate)
payment (Principal and Interest only)
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Evaluating Refinancing Options Refinancing Process
• Find a new lender
• Step 1: Why are you considering a refinancing?
– Fill out a new loan application
• Step 2: Understand the specifics of your current loan • Get an Appraisal*
• Step 3: Understand the specifics of the “new” loan • Estimate Fees
– Application, Loan Origination, Appraisal,
• Step 4: Compare 2 & 3 Inspection, Closing Fees, Private Mortgage
• Step 5: Decision Time Insurance, Title Insurance, Survey, Pre-Payment
Penalty
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• Estimate Interest Rate & Points 16
Loan Application Fees
• Fee Estimates
• Refinancing is a new loan – Application Fee $75-$300
• The lender will evaluate your credit worthiness – Origination Fee 0% to 1.5% of loan value
– Credit score – Appraisal $300 to $700
– Debt to income ratio – Title Insurance $700-$900
– Loan amount to property value ratio – Closing Fees $500-$1,000
– Co-Signer’s credit worthiness – Private Mortgage Insurance Varies
– Prepayment Penalty Rare
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Interest Rates What are points?
What does a rate quote look like?
30 years, Fixed Rate • A point is fee charged when a loan is issued
– 4.11% with no points
– 3.97% with 1.375 points • Higher points equal lower interest rates
15 years, Fixed Rate • How much does a point cost?
– 3.48% with no points – Example: 1.25 points for a $100,000 loan
30 years, Adjustable Rate • $100,000 x 0.0125 = $1,250
– 3.3% with no points 19 20
Fees New Loan Payments
• Estimate all of your fees and points
• How are you going to pay for them? • Create a new amortization schedule
– Often they are added to the new loan balance – New Loan Payment
• Example: – Total Interest Charges
– Current loan balance $150,000
– Fees and points $ 2,210 • www.choosetosave.org
– New Loan Balance $152,210
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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
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Goal: Reduce Monthly Payments Reducing Monthly Payments
• Jill (age 64) has mortgage:
• Comparison: – $47,100 Balance
– Previous Monthly Payment – 6% Interest Rate
– New Monthly Payment – Payments of $910
– 5 years left on loan
• Does this reduction meet your needs? • Jill is considering retirement but won’t be able
to afford $910 payments
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Reducing Monthly Payments Evaluating Refinancing Options
• Jill could refinance to a 15 year loan • Step 1: Why are you considering a refinancing?
– $48,500 Loan (included fees & points)
• Step 2: Understand the specifics of your current loan
– 4.5% Interest Rate
– Monthly Payment of $371 • Step 3: Understand the specifics of the “new” loan
• Comparison • Step 4: Compare 2 & 3
– $539 less in monthly payments
• Step 5: Decision Time
– 10 extra years of payments
• Extra interest charges of $12,180 27 28
Decision Time House Price Decline Issues
• Does the refinancing meet your goals? • What if:
– John purchased a home for $250,000
– He paid 20% down payment
• How long do you intend to own this home? • 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
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• 88% of the value 30
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House Price Decline Issues
• What if:
– Holly purchased a home for $175,000
– She paid 5% down payment
Questions
• Private Mortgage Insurance was required
– She currently owes $165,000
– The new appraisal is $160,000
– Holly wants a new loan for $165,000
• 103% of the value 31 32
Reverse Mortgages What is a Reverse Mortgage?
• What are they? • A Reverse Mortgage (RM) is a loan
• RM is collateralized by your home equity
• When might you use one? • RM has an interest rate
• Must be age 62 or older
• What types are available? – Some programs require higher ages (65, 68, etc.)
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Who might benefit from
Different Types
a Reverse Mortgage?
• Single Purpose
• Elderly wanting to stay in their home.
• Elderly needing additional financial flexibility. • Federally Insured Reverse Mortgages
• Elderly that have home equity. – Home Equity Conversion Mortgages (HECM)
• Proprietary Reverse Mortgages
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How does it work? Reverse Mortgage Facts
• Homeowner receives a payment • Loan advances are not taxable
– Lump sum • Homeowner keeps the title to the home
– Payments for a fix term (10, 15 years) • Homeowner pays property taxes, insurance &
– Payments for life maintenance costs
– Line of credit • Loan balance increases over time
– Combination of these payments
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Fees Example:
• Origination Fee: 1%-2%
• Home Value $250,000
• Mortgage Insurance Fee: 2% initial & 0.5%
annually (HECM) • Current Mortgage $ 50,000
• Appraisal Fee: $300-$400 • Homeowner Age 70
• Closing, Title, Other: $400-$600 • Current Rates 3.5% to 5.5%
– These change just like regular mortgage rates
Total Fees
$100,000 Loan: $4,000-$6,000
$200,000 Loan: $8,000-$11,000 39 40
Lump Sum Example Monthly Payment Example
• Estimated lump sum: $159,000 • Estimated maximum lump sum: $157,000
• Less Fees: $ 10,000 • Less Fees: $ 9,000
• Less Current Mortgage Payoff $ 50,000 • Less Current Mortgage Payoff $ 50,000
• Net Available: $ 99,000 • Monthly Payment $ 606
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Loan Balance When does a RM end?
• Month 1: $50,000 + $9,000 + $606 = $59,606
• Month 1: $248 interest charge • When the home is not the owner’s main
• Month 1: $59,854 end of month balance residence.
– Owner moved
• Month 2: $606 monthly payment – Owner passes
• Month 2: $252 interest charge
• Month 2: $60,172 end of month balance
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What happens next?
• The mortgage becomes due.
– The owner (or family) can pay off the mortgage
and keep the home. Questions
– The home can be sold to pay off they mortgage.
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