Home owners have financial advantages that renters do not enjoy. With a fixed rate mortgage, you know exactly what your payment will be for up to 30 years. Even on an adjustable rate mortgage, you have a cap on your rate, and you can figure out what your maximum possible payment would be. Renters do not have the luxury of knowing what their rent will be next year or twenty years from now. Another advantage is that your home is considered a financial asset that you can borrow against once you have built up enough equity. You also can use the interest and property taxes that you pay on your home to lower your federal income tax. If you are a first-time home buyer, you also may qualify for a tax credit. The most common types of loans used to borrow against equity include home equity loans, reverse mortgages and refinancing.
Home Equity Loan
A home equity line of credit allows you to borrow money against the equity in your home. The Federal Reserve has a web page that explains home equity loans and the risks involved. They also provide a worksheet that you can use to help you find the best deal. A home equity loan provides a convenient, low-cost, tax deductible source of extra funds. The downside is that your home is used as collateral on the loan and you risk foreclosure if you miss any of your payments. If you are having trouble making your monthly mortgage payment or home equity loan payment, there are steps that you can take to prevent foreclosure, but you must act quickly.
Reverse Mortgage
A reverse mortgage is a special type of home equity loan that allows older adults to use the equity in their homes without having to sell or pay back the loan as long as they live in the home. The lender gives the borrower a lump sum, monthly payments or a line of credit, which are usually are not repaid until the borrower moves or dies.
- How it works. In a “regular” mortgage, you make monthly payments to the lender. 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. The loan is repaid when your home is no longer your primary residence, and you never will owe more than the home is worth when it is eventually sold. The proceeds of a reverse mortgage usually are tax-free, and many reverse mortgages have no income restrictions.
- Types of reverse mortgages. The two most common types of reverse mortgages are federally-insured reverse mortgages, known as Home Equity Conversion Mortgages (HECMs) that are backed by the U. S. Department of Housing and Urban Development (HUD) and proprietary reverse mortgages, which are private loans back by the companies that make them.
- Do you qualify? You may be eligible for a reverse mortgage if you own your own home, use the home as your principal residence, have substantial equity in the home and you and your spouse/partner are at least 62 years of age. It is important to shop for a reverse mortgage as each loan program will have its own eligibility requirements, income amounts, timing of payments, interest rates, and/or initial costs. You may qualify for one program, but not another.
- Is a reverse mortgage right for you? AARP suggests that you consider other housing options before deciding on a reverse mortgage. AARP also provides independent information about reverse mortgages and other, less costly alternatives to help you decide if a reverse mortgage is right for you. Virginia Cooperative Extension also provides a worksheet and checklists that can help you sort through the advantages and disadvantages of reverse mortgages.
- How to get the best deal. If you want a reverse mortgage, there are several resources that can help you find the best deal. You need to shop carefully because the initial costs (application fees, points and closing costs) and interest rates are usually higher for a reverse mortgage than for other types of mortgage loans. Consumer’s union offers a tip sheet with questions to ask when shopping for a loan. Reverse-mortgage counselling is available online through the Department of Housing and Urban Development (HUD).
Refinancing Your Mortgage
Refinancing a mortgage is a process of taking out a new mortgage on your existing home in order to lower your interest rate, lower your payment, convert from an adjustable rate mortgage (ARM) to a fixed rate mortgage, convert to a loan with a shorter term, or use some of the equity in your home to make major purchases. Remember...refinancing is not always in your best interest. As a general rule, it takes at least three years and a savings of at least 2 percentage points below your current mortgage interest rate to recover the costs of refinancing. If you decide that refinancing is too expensive, ask your lender whether you can get some or all of the new terms you want by requesting a mortgage modification instead of taking out a new loan.
First-Time Homebuyers and the 2009 Economic Stimulus Package
First-time home buyers are eligible for an $8,000 first time homebuyer tax credit as part of the 2009 economic stimulus package. And unlike the $7,500 credit enacted in 2008, this one doesn't have to be repaid, unless you sell your home within three years. The credit is available to taxpayers who buy a primary residence between Jan. 1 and Dec. 1, 2009. The credit phases out for taxpayers whose adjusted gross income (AGI) exceeds $75,000, or $150,000 for married couples. The IRS provides online information and instructions for filing for the tax credit.
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