Home Equity Loans: Why They're Back, and Better

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ShutterstockHave you gotten a pitch from your bank for a home equity loan?

By Vera Gibbons

Last year, homeowners recouped about $1.9 trillion in lost value, according to estimates from Zillow. That put more equity in our hands, and in turn led to a return in home equity lending. Granted, we’re not at pre-crash levels in terms of total home equity lending, but as values continue to rise in 2014, albeit at a slower pace, lending will continue to rebound.

Have you gotten a pitch from your bank? As the home equity lending business heats up, and banks step up their outreach, here are a few things you need to know:

You need equity: To qualify, you need to own more than 20 percent of your home. Lenders are going to want you to have at least an 80 percent loan-to-value ratio, which is the remaining balance on your loan compared with the value of the property. With almost 3.9 million U.S. homeowners freed from negative equity in 2013 and the rate steadily declining across the country, more people will qualify for these home equity loans. During the housing boom, you may recall that standards were just a little “different” … in some cases, non-existent.

Income, credit score important: Sure, banks are looking to speed up sluggish revenue growth by jumping back into the lending game, but they’re being cautious about who they lend to — and rightly so. Don’t expect the loan approval process to be easy. In addition to having ample equity in your home and a strong credit score, you must also have income to make your payments. Remember: you’re using your home as collateral. Fail to make your payments and you run the risk of losing your home. Banks are also making sure that you understand the repayment period.

Know what you want: Does your house need a new roof? Are you interested in consolidating high-interest debts or do you have a large, single expense you need to borrow money for? Then a home equity loan, which usually comes with a fixed monthly payment and interest rate, is best for you. If, on the other hand, you need access to money over a period of time for ongoing expenses (perhaps you have some long-term home improvement projects you’d like to work on), then a home equity line of credit, or HELOC, would make better sense. HELOCs usually have a variable rate that’s tied to the prime rate, plus or minus some percentage.

Shop around: While big banks used to dominate the home equity lending market (and you should certainly discuss your objectives with banks with which you currently have relationships), credit unions, regional banks, and others have emerged as formidable competitors. These players avoided much of the fallout from the housing bubble, and have been leading the way in granting new home equity loans and lines of credit to creditworthy borrowers. Plus, they tend to charge lower rates.

Vera Gibbons is a financial journalist based in New York City and is a contributor to Zillow Blog. Connect with her at http://veragibbons.com/.

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

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LOOK: Detroit Is Auctioning Off Homes For $1,000, But There's A Catch

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Want to buy an incredibly cheap house in Detroit? You’re in luck — just make sure you read the fine print first.

A new program introduced by Mayor…

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U.S. Counties Hitting the Highs (and Lows) in Property Taxes

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ZillowWhere does your county stack up? See the full chart below.

The second biggest cost of homeownership — following the mortgage — is usually property taxes. In 2012, U.S. homeowners paid an average of about $2,800 in property taxes, according to a recent Zillow study. And if you live in New York, New Jersey, or Colorado your taxes were in some cases five times more than the national average. The numbers are based on an average of real estate taxes paid on single family housing in 2012.

The residents of Westchester County in New York pay more in property taxes than the typical resident of any other major American county. The average property tax bill for a single family home in Westchester County comes to $14,829 a year.

Want to know how your county stacks up against the rest of the country? Check out our rankings below.

Adjusting for the average cost of single-family homes in each county, homeowners in Allegany County, N.Y. win the award for the highest property tax burden. The average tax obligation of $2,549 in Allegany County amounts to 3.8 percent of the average single family home value; in Westchester County, the average tax obligation is slightly lower, at 2.5 percent of the county’s average home value. Nationally, the typical homeowner is spending approximately 1.4 percent of their home’s value on annual property taxes. See the full rankings below.

Highest Property Taxes as a Percent of Home Value

  1. Allegany County, N.Y. (3.76%)
  2. Milwaukee County, Wis. (3.68%)
  3. Kendall County, Ill. (3.57%)
  4. Sullivan County, N.Y. (3.56%)
  5. Orleans County, N.Y. (3.49%)

Lowest Property Taxes as a Percent of Home Value

  1. Caroline County, Va. (0.17%)
  2. Catahoula County, La. and Randolph County, Ark. (0.2%)
  3. Iberville County, La. and Cumberland County, Tenn. (0.21%)
  4. Butler County, Pa. and Maui County, Hawaii (0.22%)
  5. Elmore County, Ala. and De Soto County, La. (0.23%)

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Reverse Mortgages: Weighing the Risks

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ShutterstockThe reverse mortgage is a seductively simple value proposition.

By Mitchell D. Weiss

You’ve seen them on TV and heard them on the radio. They may be yesterday’s screen stars, but they’re today’s pitchmen for one of the hottest financial products that baby boomers of a certain age and financial circumstance want: the reverse mortgage.

According to studies performed by Fidelity Investments and the Charles Schwab Corporation, 48 percent of the 10,000 boomers who are turning 65 every day of the week are woefully unprepared for retirement. In fact, 60 percent have less than $100,000 in the bank. What many of them do have, however, is a big, fat and typically underleveraged asset: their house.

Enter the reverse mortgage specialists with a seductively simple value proposition.

Your house has value today — probably a lot more than you owe against it — and barring another economic calamity, that value can be expected to increase over the years while you plan on staying put. Meanwhile, you have a life to live and bills to pay, and the three-legged stool of

The tough part is ballparking that future sale date and estimating the value of the house at that time.

retirement planning (personal savings + retirement savings in the form of 401(k) or pension + Social Security) is wobbly, at best.

Why not extract and use today the money that would otherwise head to your kids tomorrow? God knows, you’ve already spent enough of that feeding, clothing and educating them. It’s about time they do for themselves what you’ve worked hard to accomplish on your own.

Sound good? Now for the math.

What a $200,000 Home Will Get You: Reverse mortgage loans are like traditional mortgages in that the lender advances a sum of money at the start. But unlike a traditional mortgage, the borrower doesn’t remit interest and principal payments over 20 or 30 years in order to pay back the loan. Rather, it’s the collateral-the house in this instance-that pays off the mortgage when it’s ultimately sold.

The tough part is ballparking that future sale date and estimating the value of the house at that time. Both of these numbers are critically important to the lender because a wrong guess either way will make the difference between profit and loss.

For example, suppose I own my house free and clear, it’s worth $200,000 right now and houses that are similar to mine can be expected to increase in value by 3 percent year over year-slightly more than the projected rate of inflation. Also suppose that I’m 62 years old (the qualifying age for this type of loan) and I plan to stay in my house for another 15 years. If so, my property will be worth a little more than $300,000 in 2029, thanks to the magic of compound interest.

But that’s not what the lender will offer me upfront.

The going rate for reversible mortgages these days is about 5 percent. The lender will take that rate into effect as it mathematically translates tomorrow’s value into today’s cash — a process known as present value. As such, that $300,000 house in 2029 is actually worth only $140,000 in upfront loan proceeds in 2014.

How can that be? I just said that my house is worth $200,000 in today’s market. The answer is in the difference between the two interest rates: Although my property is expected to increase in value by 3 percent per year, the lender is charging 5 percent for the use of its money, hence the

This method of financing also has the potential to gum up even the best-laid estate planning efforts


So let’s say the lender agrees to advance all $140,000 upfront. And let’s also say that I end up staying in my house for 20 years instead of 15. If so, my property should be worth approximately $360,000 in 2034.

Good for me, bad for the lender.

That’s because its loan will have increased in value to a little less than $380,000 by then. That means a $20,000 loss, which could become even larger if the property needs fixing up or a commission is paid to sell it. Not surprising, lenders are treading more carefully these days — valuations are more conservative, fees are higher and it costs more to finance a reverse mortgage than it does a traditional one.

The Details You Shouldn’t Overlook: Valuations, rates and fees aside, prospective reverse-mortgagors have several other matters to consider before dialing that 800-number for the no-obligation DVD and free reading magnifier.

First, even if your intention is to toss the keys to your house when your time there is up, you’ll still have to maintain and insure your property, and pay the real estate taxes, too.

Second, taking an upfront, lump-sum payment can be harmful to your financial health. That’s because cash has a way of getting spent. And since, for many people, their house represents their most valuable asset, once that’s gone, there will be very little left to tap.

Third, when a reverse mortgage is set up as a line of credit, each drawdown will be deposited into an account against which the borrower can write checks. This isn’t an ordinary checking account, though — it’s a money spigot that’s attached to the remaining value in your house. Consequently, it’s imperative that you safeguard those checks — as in lock and key — because no different from any other account, if someone were to pull out a check from the middle of the book, write it to himself, sign your name at the bottom and cash it, the loss will be yours to bear. My wife’s late uncle lost nearly $10,000 of reverse-mortgage money that way to a caretaker.

Last, this method of financing also has the potential to gum up even the best-laid estate planning efforts, leaving the heirs to deal with the problems, as a recent New York Times article explains.

When all is said and done, reverse mortgages are a legitimate financial alternative for those who feel strongly about remaining in their homes but lack the cash flow to do so. Others, however, should give serious consideration to what is often a more economically favorable alternative.

If your mortgage is paid off, or, if there’s relatively little remaining, consider selling your house and investing the proceeds — even 10-year Treasury notes are yielding nearly 3 percent these days. The resulting income can be used to help pay the rent or upkeep on a more financially manageable property.

Frankly, I wish my mom had done that before the family was faced with a medical crisis that was triggered by an accident in a house that was beyond her ability to maintain. By the time we got it sold in order to pay for her care, I figured that she had yielded a roughly 4 percent compound annual rate of return for the 38 years that she’d owned the place — 1 percent more than the average rate of inflation for the same period of time.

My mom was lucky. But many others could end up sacrificing a good deal more of their wealth under similar circumstances or if they were to prematurely cash in the equity they’ve worked so hard to create.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its affiliates.

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