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					                                                                                                                                               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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