Monday, November 11, 2013

Almost Half of Baby Boomers Carrying Mortgages into Retirement


Is it Smarter for Seniors to Hold Mortgages or Pay them Off?

AARP reports that 
  • 53.6 percent of households age 55-64 carried a mortgage in 2010, compared with 37 percent in 1989
  • 40.5 percent of households age 65-74 carried a mortgage in 2010, compared with 21.7 percent in 1989
  • The median value of mortgage debt among the 55-64 crowd soared to $97,000 in 2010, up from $33,800 in 1989. 
  • The median value of mortgage debt among the 65-74 crowd soared to $70,000 in 2010, up from $15,300 in 1989.  
And the Joint Center for Housing Studies of Harvard University reports that

The media loan-to-value ratio among homeowners age 50-59 jumped from 10 percent to 38 percent between 1989 and 2010.

Are seniors just haphazardly going into retirement years with much more debt?  Is the additional debt due to increased home values, increased wealth, or a carryover from the boom bust cycle in real estate?  All of the above?  Or could it just be smart?

Not All Debt Is Bad

The first is, not all debt is bad debt.  Considering that you might be borrowing potentially hundreds of thousands of dollars for ten, twenty or thirty years, and you can lock that interest rate in today at around 4% or even lower.  Plus, the interest on that money is very likely tax deductible.  Therefore, if you are in a 25% tax bracket which is close to the national average, a 4% interest rate means your effectively borrowing at 3%.  Where else can you get debt like that?  Certainly not from your credit cards. Even at age 65, you are likely to live to 85 or longer.  A 20 year mortgage is not a crazy idea.

How Might You Use the Funds You Have Rather Than Paying Off Your Mortgage?

The second reason to consider not paying off your mortgage is this; think about the use of the funds.  Paying down the principle, which is to say increasing your equity in the house, feels like a good thing and I respect that a really good reason to do it something is merely that it feels good.

From a strict financial point of view, however, your house is an asset.  When you put money into any asset you want to see that the asset appreciates in value... that it grows.  It sounds somewhat counter intuitive until you realize no matter how much you put in to your house in terms of the equity, but whether you put down 100%, or you borrow 100%, the price of your home is established by the market.  Therefore, paying money into your mortgage is technically a zero rate of return.

With that in mind, the issue that comes up is the big one.   If you don't put it into your home by paying down principle, what else could you do with it?  Right now, the investments in the market are very poor.  CDs are paying on average 1.6% in the country, but that’s today.  Looking further down the road, we’ve been accustomed to five, six, seven, eight percent returns on investments.  So if you can borrow from the bank at three, four, or five percent, you can put it in stocks or even just very secure treasury bonds and end up with a positive result.   You are doing what a bank does,  borrowing low, and you’re investing high at a secure rate.
Another reason for holding on to your cash is this.  You might have been dutifully paying down your mortgage over the years.  Now you are sick and need cash, or have other reasons why the cash would be very helpful.  But for a variety of reasons you can no longer refinance. You are now in a situation where you don’t have cash in the bank, but have a ton of cash in your home's equity.  If the money that went into paying down the mortgage had gone into a savings account, it would now be readily available.

Think in Terms of Net Worth.  Paying Off the Mortgage Is Old School

The key words that you should be thinking about are net worth.  When you add up your home and all your other liquid assets, less your liabilities, that’s what your worth is.  So whether you own a $100,000 home of which you owe $90,000 and therefore you have a net worth of $10,000; or you have a $100,000 home of which you owe $100,000 but you have $10,000 in the bank, you still have a net worth of $10,000.  They are the same, except from my own recent personal experience, I couldn’t count the number of people that would have been better off having the cash outside the house. 

Home Equity Is A Tempting Asset If You Should Lose a Lawsuit

A third reason to consider not paying off your mortgage is to recognize that the more you own of your home, the greater your equity share.   Arguably the more visible that asset is to a potential creditor the more likely they are going to be looking to claim it.

There is a wonderful story from the 1930s, where Walt Disney owed Bank of America $7 million dollars that he had borrowed to finance Snow White.  He and his brother laughed, because they realized that the last thing Bank of America was going to do was foreclose on them.  In fact, the bank wound up giving them more money because they couldn’t afford to take the studio from them.  Luckily for both Disney and Bank of America, Snow White was a hit and they were able to pay the loan.

For you, it is similar.  Just imagine if you own a home that is completely paid off versus your neighbor who has the exact same home but owes the bank 90% of the money.  You both have some kind of financial problem.  I can’t promise you, but hypothetically I’ll promise you, if the bank has to choose who to go after, they’re coming after you because your house they could put on the market and sell and get their money back.  The person who owes the bank a lot of money, that house isn’t worth anything and they are more likely to keep the house. 

If You Want to Make Those Extra Payment, Here Are the Best Methods

If you decide that you have plenty of cash on hand to deal with emergencies, don't really want to use your cash to invest in other places, and want to feel good by paying the mortgage off faster, you have choices of how to do that.

One is to make extra payments.  Some folk decide to pay an extra payment every quarter.  Or you can just add money to each payment.  You can also just send a check any time you feel like paying off some principle.

Whatever your needs are with regard to your mortgage, please know that we are available to help in any way possible.  Refinance to lower cost?  Use equity in one home to purchase a rental property?  You tell us what you need done.  We have the resources to get it done.

Bill Rayman Home Mortgage

12121 Wilshire Blvd
Suite 350
LA CA 90025


Friday, November 8, 2013

You Might Qualify for a 5% Down Home Loan

20% Down Might be a Good Idea, but if You Don't Have 20%, 5% Might Be an Option for You

According to, it is still possible to get a 5% home mortgage loan in Los Angeles in late 2013.

Good news for homebuyers who don't have a lot of cash on hand: Banks are offering loans with down payments of just 5%.

After the housing bubble burst, buyers needed to come to the table with as much as 20% down or they had to turn to the Federal Housing Administration for a low down-payment loan.

But now banks like TD Bank, Bank of America (BAC, Fortune 500), and Wells Fargo (WFC, Fortune 500) are loosening the purse strings, offering loans with down payments that are as low as 5%.
TD Bank's "Right Step" mortgage, for example, allows borrowers to secure a loan with a 5% down payment. It also allows them to receive as much as 2% of the sale price as a gift from a relative or other third party, so they would really only need 3% down.

Why the change of heart? Market opportunity for one thing.

FHA dominated the market for low down payment loans during the housing bust. Taking on all those risky loans, however, depleted the agency's reserves and has forced it to increase costs.

Over the past couple of years, the FHA has been raising premiums. And this year, it started requiring borrowers to buy private mortgage insurance for the life of the loan -- an expensive proposition that has sent many prospective borrowers looking elsewhere.

While the loans were far too risky for private lenders to take on before, rising home prices have made them less of a gamble. Plus, the banks think they can offer a better deal than FHA.

'I live in a bank'
"As the FHA selectively reduced market share by increasing premiums, we introduced a substitute for FHA loans," said Malcom Hollensteiner, the director of retail lending sales for TD Bank.

While the private lenders that are offering the 5%-down loans are also requiring borrowers to buy private mortgage insurance, they are only requiring them to do so until they build up 20% equity in the home.

The difference can really add up. Paying an insurance premium over the life of a $200,000, 30-year fixed-rate loan from FHA that carries an effective mortgage rate of 4.4% (5.75% when you tack on the insurance premium), can add up to nearly $60,000 over the life of the loan.

Of course, homeowners can always refinance to end their FHA insurance, but rates are so low that by the time an FHA borrower is able to refinance to a lower rate, it may not be worth it. To top of page
We have been reporting this fact for months.  See our blog post back in April:

Buy A Home with 5% Down - Low Down Payment Loans on the Rise Says

Refinance Up to 95% and Lower Your Interest Rate 

In fact, a strong argument can be made that it is smarter in this interest rate market to put down the least amount possible.  You can achieve all the same long term benefits of appreciation, tax deductions, and reduced expenses for your habitation with the lower down payment.  You then maintain a larger cash reserve for other investments, opportunities, or just rainy day funds.

We can help you sort all that out.  We are not merely a source of great rates and overall costs for mortgages, we also serve you with our years of experience in this market.  Call today.

Bill Rayman Home Mortgage

12121 Wilshire Blvd
Suite 350
LA CA 90025



Wednesday, November 6, 2013

The Great Home Ownership Rate Debate

What Is the "Right" Percent of the Population Who Should Own Their Own Home?

The Current Ownership Rate Is the Lowest in 18 Years.  Time to Panic?

Every president since FDR, at least, has attempted to stimulate home ownership in the US.  There can be little doubt that this emphasis on the positive aspects of owning a piece of America has benefited many individuals and families.  Note that there are those who think the huge emphasis is misplaced, and that families should not necessarily place such a huge percentage of their assets in one investment, most think property is a excellent hedge, providing good returns, and generating many side benefits. 

But after reaching historic highs of 69% in the first decade of the 21st Century, the bubble burst and we now find ownership rates to have returned to the norm of around 65% that has been in place of at least three decades.  The government is all in a tizzy at this point attempting to provide ways to turn around the falling rate of ownership, and not reinflate the bubble.  Most of the discussion turns around the issue of how tight or loose to make regulations around mortgage qualifications.  Ease the qualifications, and send ownership rates higher, but also create increased demand on limited supply, thus driving up prices. . . bubble.  Tighten regulations to reduce risks to mortgage holders and the banks and insurers, and you risk driving out potential solid buyers, thus lowering demand and hurting the housing market. 

One might ask the question, what would the market do if there was no government interference?  Is 65% about all we can expect.  There are entire segments of the population that probably shouldn't or don't want to own: 
  • Many seniors who don't want the responsibility any longer
  • Many singles (especially young singles)
  • Those with transient jobs
  • Unstable personalities inclined to risky behavior
  • Some who just prefer a simpler life
Interestingly the percent of white home ownership tends to be around 6% higher than the overall rate.  There could be an argument that the "right" rate would be the white rate.  If 70% ownership among whites was sustainable over that 30 years, at least a good goal might be to do that for the entire population.

Two excellent articles on the subject have recently appeared in Bloomberg and in US News.  These articles delve more deeply into the pros and cons of the overall social policy and the government's role in that policy. 

In California home ownership has been a remarkable vehicle to wealth for many.  There are few areas of the country that are more likely to maintain value and offer the opportunity for appreciation that Los Angeles and Orange County.  If you are interested in purchasing a home for your family or for investment and you need the services of a mortgage professional to help you find the best possible mortgage product to help you secure that dream, please give us a call.  We are now a part of Guaranteed Rate, and have resources that can help you find a perfect mortgage for your needs.

Call now:

Bill Rayman Home Mortgages
12121 Wilshire Boulevard, Suite 350
Los Angeles, CA 90025
Phone: (424) 354-5325