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Retirement: Know Your Housing Options

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As you prepare for retirement, one of your challenges is going to be figuring out where to live. The process of aging means that you might need special care as you get older. Where you live can affect the sort of care you get, as well as your ability to access services that you need — especially in terms of health care.

What Are Your Preferences?

Before you end up in a position where you are forced into a decision, it's a good idea to determine your preferences ahead of time. Some people expect that, once their children grow up and move out, they will downsize to a smaller home. Others expect to remain in their house forever, particularly if they have bought the home and expect it to be a retirement asset. In some cases, a fixed domicile is unattractive, if the goal is to travel. My grandfather has a small trailer in a park in southern Arizona. It's a park populated by retirees escaping the winter. During the summer, he pulls out the truck, hitches up his camp trailer, and travels all over, visiting family, and going on hunting, fishing and camping trips.

Housing in retirement

Your first task is to figure out what living arrangement will work best for you. After you know that, you can begin to make plans for the future.

Considering Costs

Initially, your retirement housing is unlikely to cost very much. Chances are that you will be reasonably healthy, and have no special requirements. However, you will eventually need a transition plan for your living arrangements. You might decide to move into a retirement community, an assisted living facility, or even a nursing home. The bigger your health needs, the costlier your living arrangements will be. A properly structured long term care policy can help you prepare for the costs associated with assisted living, or with a nursing facility.

It is worth noting, too, that you can receive care at home. There are home care options available, in which health care specialists come to you, in order to ensure that you have the help you need. However, if you don't want to eventually rely on family members to care for you at home, you might have to eventually make arrangements for living in a more permanent facility.

Another possible cost has to do with a reverse mortgage. Some people choose these financial products in an effort to get a little more cash flow each month. If you die in your home, it usually works out fine for you — although your heirs will have to deal with selling your home to pay off the mortgage. If you end up moving, though, even if your health fails and you move to a nursing facility, your loan becomes due. Being stuck trying to pay off a reverse mortgage is the last thing you want to deal with as you are trying to transition to a new retirement living arrangement.

Bottom Line

Now is the time to consider your situation, and your preferences. Think about where you might want to live, and how much it is likely to cost. Then, create a plan that allows you to maximize your retirement so that you spend more living where you want.

Fixed Mortgage Rates Fall To Six Decade Low, But Few Can Take Advantage

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If you're looking to buy a home or refinance anytime in the near future you may have been happy to hear the news this past week that mortgage rates are now at the lowest levels in years. It is good news for those looking to buy, but there is a big caveat. Not everyone will be able to take advantage of the low rates because of a variety of factors.

We're currently looking to do one or the other – either refinance – or if we find the right situation – buy a new home.   So what is all the hub-bub?

Low Mortgage Rates

Fixed Mortgage Rates Lowest In Six Decades

Freddie Mac announced this week that the rates for a 30 year mortgage were at their lowest level in 6 decades – down to 4.12 pecent.

Fixed mortgage rates fell this week to the lowest levels in six decades. But few Americans can take advantage of the rates to refinance or buy a home.

The average rate for the 30-year fixed mortgage fell to 4.12 percent, down from 4.22 percent, Freddie Mac said Thursday. It's the lowest level on records dating back to 1971. And Freddie Mac says the last time rates were cheaper was 1951, when most long-term home loans lasted just 20 or 25 years.

The average rate on a 15-year fixed mortgage, a popular refinancing option, fell to 3.33 percent from 3.39 percent. That's the lowest on records dating to 1991 and likely the lowest ever, according to economists.

So rates are extremely low, down to the low 4 percent range. I know that's definitely lower than when we bought our home a few years ago.  That's great news if you're looking to buy or get a lower mortgage payment.  But even so most experts aren't expecting this news to energize the depressed home market.

Mortgage rates tend to track the yield on the 10-year Treasury note, which fell to an all-time low this week. An uncertain outlook for the U.S. economy has led many investors to shift money out of stocks and into the safety of Treasurys, lowering the yield.

Still, few expect record-low rates to energize the depressed home market. Over the past year, the average rate on the 30-year fixed mortgage has been below 5 percent for all but two weeks. That compares with five years ago, when the average 30-year fixed rate was near 6.5 percent. Yet prices and sales remain unhealthy and are holding back the overall economy.

Sales of new homes are on pace to finish the year as the lowest on records dating back a half-century. The pace of re-sales is shaping up to be the worst in 14 years.

Most Can't Take Advantage Of Low Rates

While rates are low, the unfortunate thing for homeowners and buyers is that most can't take advantage.  The reason?  Either their credit isn't good enough after the last couple recessionary years, or they don't have enough of a down payment.

Many Americans can't take advantage of this rare opportunity. Some are in no position to buy. Unemployment is high, few Americans are getting raises and many are struggling to shrink their debt loads.

But others can't qualify for the lowest rates. Banks are insisting on credit scores above 700 and 20 percent down payments for first-time buyers.  Many repeat buyers have too little equity invested in their homes to meet loan requirements.

Studies have shown that about 40% of U.S. households have credit scores necessary to get a prime mortgage rate, but most people just don't have enough for a 20% down payment.   In fact a huge number of folks are now in an underwater mortgage, and won't be able to move any time soon.

So are you in a situation where you can take advantage of the low mortgage rates?  Why or why not?

Is Your Home Really Going To Be A Retirement Asset?

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Many of us were raised to believe that buying a home is the key to a stable financial future. It is true that your home is likely to be your biggest purchase, but it may not do to rely too heavily on your home's equity for retirement.

The theory is nice: You buy a house, pay it off over 30 years, and when it's time to retire you have this huge asset, which has appreciated in value, ready to be tapped. Before you get excited about the prospect, though, it's a good idea to take a step back and evaluate whether or not your home will really be the asset you think.

Home Equity

Will It Appreciate As Much As You Think?

The first thing you have to consider is whether or not your home will appreciate as much as you think. You will need to consider the costs of home ownership, including the interest that you pay, as well as maintenance and upkeep. You can expect to offset some of the costs of interest and property taxes with the help of tax breaks, but you can't expect those to last forever. You will have to consider the effects of inflation as well.

The other issue, of course, is whether or not a market crash happens just before you retire. Many people who had depended on their homes for retirement received a rather unpleasant surprise after the recent real estate bubble burst and home values plummeted. Suddenly, the expected value disappeared.

While your home can be an asset to draw on later, you might not want to rely too heavily on the expected equity in your home to fund your retirement. Like any other asset that we expect to appreciate in value, there is the risk of loss, and you can't predict what the market will do. A little diversity is usually in order.

Tapping Your Home Equity

One of the reasons that many buy a home is for the ability to tap the equity later. However, tapping your home's equity comes with its own costs. You will have to pay even more in interest, since you will have to borrow against the equity in your home to access it. If you are retired, you may have difficulty getting a traditional home equity loan, since you will need income. You might have to use a reverse mortgage. While you won't have to repay the mortgage until the house is sold, or you stop living in the house, many reverse mortgages have steep fees and interest rates, and can erode the amount you receive.

Of course, you can sell your home to downsize. If you have paid off your mortgage, you can sell, and then use the resulting capital to buy a smaller home, or invest the capital for income. (Or, if you have enough left over, you could buy a smaller home and invest.)

Bottom Line

If all goes to plan, it is quite possible that your home can be a place for you to live, as well as provide you with an asset to use to your advantage during retirement. However, it is important to understand that you might not end up with what you expect, and to consider making any real estate asset a part of your larger retirement portfolio, adding diversity.

Congress Considering Scrapping Mortgage Aid Programs Due To Ineffectiveness

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Over the past year or so I've written quite a bit about the Obama administration's Making Homes Affordable program, as well as other mortgage modification programs.

The programs were conceived of and put into place to help homeowners buy homes and prop up a floundering real estate market, in addition to helping homeowners already in their homes – to be able to stay there.  The Home Affordable Modification Program aimed to help homeowners facing foreclosure to stay in their homes.

End Or Revamp The Mortgage Programs?

While the heart of those programs may have been in the right place, the management of the programs hasn't been as good as could have been hoped, and now some members of congress are calling for the programs to be either killed or completely revamped.

A handful of foreclosure prevention measures run by the Obama administration are so ineffectual, inefficient and complicated that, according to Republicans in the House of Representatives, the programs should be killed outright.

The House is scheduled to vote this week on getting rid of a refinance program for Federal Housing Administration loans and another program, scheduled to begin next month, that would help homeowners with delinquent payments.

The House Financial Services Committee is expected to vote Wednesday morning on ending two other measures: One of them is a massive effort that was designed to adjust up to 4 million mortgages but so far has tackled just half a million successfully. The other is the Neighborhood Stabilization Program, which steers money to communities hit hard by foreclosures.

Republicans point out that the programs thus far haven't reached the goals that were set out for them, and because they're so complicated and convoluted, the programs really haven't helped as many as they should have.  Given recent economic developments, they also say we just can't afford the program anymore.  Democrats don't think they should be killed, and some like Barney Frank suggest that the program should be funded by the big banks.

The Treasury Department and many Democrats argue, though, that the programs – though flawed – are fixable, and consumer advocates say the measures offer the last, best hope for many struggling families.

“It's all we have,” said Hazel Mack-Hilliard, the director of the mortgage foreclosure project with Legal Aid of North Carolina. “To have nothing and just say let the lenders do it, that's worse than nothing.”

The bills' chances of becoming law are slight, because Democrats control the Senate and the Obama administration supports the programs. But Republicans say their effort will shine a light on inefficient programs that they say aren't working and, in the worst cases, do more harm than good.

Mortgage Programs Hurt More Than Help?

Ending the ineffective programs would save the government a few billion dollars.  While that is a worthwhile reason to end the program in my opinion, others are saying that another reason to end it is that it just isn't effective, and in the end what it mostly does is string people along and give them false hope. Too many homeowners have been strung along for months only to then be told they didn't qualify, or that they didn't send in the correct paperwork – even though they had.

Neil Barofsky, the special inspector general for the modification programs through the Troubled Asset Relief Program, told Congress last week that “HAMP has been beset by problems from the outset and, despite frequent retooling, continues to fall woefully short of meeting its original expectations.”

He blamed the Treasury Department for refusing to adopt “meaningful goals and benchmarks” for the program, but he stopped short of saying the Home Affordable Modification Program should be shuttered altogether.

The program was setup to fail from the start because it had no meaningful goals or benchmarks, and in many cases the banks had more incentive to foreclose, than to modify mortgages.

At this point it sounds like the bills to terminate the mortgage programs will have enough votes in the House, but the Senate and President Obama have signaled that they won't agree to end the mortgage programs.   If the programs aren't ended, however, let's hope they are re-tooled and started off fresh – and that they're not just delaying the inevitable for some struggling homeowners.

What do you think?  Have you had experience with HAMP or HARP programs?  Were you helped by them, or did you get strung along? Did you end up getting denied a modification or refinance despite following the rules? Do you think the programs should be ended?

Number Of Underwater Homes Declines, But Foreclosures Are Up

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A while back we wrote several posts about how millions of homeowners (more than 11 million of them) were finding themselves in a situation where the values of their homes had dropped, and they found themselves underwater in their homes – with negative equity. In other words, their homes were now worth less than they paid for them. We asked if it was morally ok to stop paying the mortgage on an underwater home, in addition to exploring the tax implications of defaulting on your underwater home.

My wife and I unfortunately bought at the height of the market as well – back in 2006 – and if we hadn't put down 20% on our new home, we'd be underwater now as well.  We've lost over $40,000 of equity in our home.    While that stinks, at least we weren't buying our home as an investment, and we weren't banking on it going up.  We were simply buying our home as a place to live.

Since I wrote those posts, what has been going on in the market?  Have the number of underwater homes improved?

Number Of Underwater Homes Declines

The 3rd quarter of 2010 saw the number of homeowners were were underwater in their mortgages fall.   But what was the reason?

The number of U.S. homeowners who owe more on their mortgages than their homes are worth fell in the third quarter, but the decline stemmed from banks getting more aggressive on foreclosures, not from home values going up, according to trade-industry data released Monday.

The total of so-called underwater mortgages fell to 10.8 million at the end of September, down from a peak of 11.3 million at the beginning of the year, according to CoreLogic, a real-estate data firm. The latest total accounts for nearly 22.5% of U.S. homeowners with a mortgage.

So the number of underwater mortgages fell from11.3 million earlier this year to 10.8 million – or 22.5% of homeowners.  But the reason wasn't necessarily a good one. Home values have not gone up.  Instead, it's because the banks have become more aggressive in moving forward on foreclosures.

Foreclosures Are Increasing

It's amazing to me that this many people have gotten themselves into these types of situations where they end up getting foreclosed on.  If you were able to afford the house when you bought it, shouldn't you still be able to afford it now that the value has gone down?

Or is the problem more of one where people ended up buying homes they couldn't afford at inflated prices – because the prices were being artificially propped up by the homebuyer tax credit?

The drop in underwater mortgages hardly reflects a rebound in the housing sector because home prices didn't rise in the third quarter. Rather, the number of underwater homes declined as banks took back those homes and wiped out the debt through foreclosure.

Home prices, meanwhile, appear to be declining again after tax credits that spurred sales produced modest price gains during the first half of the year. Home values could drop by an estimated $1.7 trillion this year, a 40% increase from a year ago, according to Zillow.com, a real-estate website. Most of the decline is expected in the second half of the year.

The figures underscore how fragile the housing market remains. As home prices fall, more borrowers will sink underwater. Another 5% decline in prices would leave an additional 2.4 million homeowners underwater, according to CoreLogic.

The Real Estate Market Is In Trouble

So it really seems like our housing market is on the verge of catastrophe.   Things are pretty bad.

The underwater problem could also weigh on housing markets because homeowners without equity are less likely to act like traditional homeowners and spend money on their homes. While the homeownership rate during the third quarter fell to 66.9%, according to U.S. Census Bureau data, the effective homeownership rate, which excludes underwater homeowners, is just 56.6%, according to CoreLogic.

That problem is particularly acute in boom-to-bust markets such as Las Vegas. The official homeownership rate stood at 58.6%, but after excluding borrowers with negative equity, the rate fell to just 14.7% in August 2009, according to the New York Fed study.

While the homeownership rate has fallen back to 1999 levels, homeowners' equity as a share of household real estate is lower by one third and is below 40% for the first time since World War II.

Some markets, like Las Vegas, are a lot worse than other markets, particularly because they had such huge housing booms a few years back, with people buying homes, getting sub-prime financing or no down payment loans.  Now that they're finding themselves underwater, a lot of those folks are deciding that staying in those homes just isn't worth it.

What do you think of the crisis that we're having in real estate?  Do you think it will continue getting worse over the next couple of years, and that we'll see a return of stricter bank lending standards?  Will more and more people begin defaulting and being foreclosed on?  What are you thoughts?

Mortgage Rates Are Low, But Are The Homes Affordable? [Infographic]

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My wife and I are currently thinking about upgrading our home because the prices in our market are so much cheaper than they've been for years, it almost seems like it would be a bad idea not to jump in and buy the home of our dreams. After all, it'll probably never be this affordable again, right?

When I was looking around the web this week I saw a post over at GoBankingRates.com talking about how just how much the home prices have gone up over the past few decades.  It seems like they've been going up at an ever exponentially increasing rate.  In fact, median home values are 7 times higher than they were 70 years ago, when the first housing census was done in 1940.  That means in 1940 the median home value was $30,600 while in 2010 it is $219,700.  That's quite a jump.

But here's where the numbers get even crazier. From GoBankingRates.com:

Between 1950 and 1960, the median price of a home rose from $44,600 to $58,600–an increase of roughly 23 percent. However, from 2000 to 2010, the average home price went from $119,600 to $219,700, which is a jump upwards of 84 percent over a similar 10-year period.

So while mortgage rates are nearing all time lows this year, we're still seeing record numbers of foreclosures and people going into default. The reason?  So many of those people are still buying homes that they can't afford, and since the unemployment rates are hovering around 10%, many people have lost their jobs, and even if they could afford these homes in the first place – once they've lost a job it becomes unmanageable.

When home prices go up on average over 84 percent over a decade, the home prices are getting to a point where they're not really realistic anymore. In my opinion there needs to be a correction, and I think the real estate market may be in it for the long haul now.

Current State Of Home Affordability Infographic

Here's an infographic from GoBankingRates.com that looks in depth at our current housing situation. Lot's of interesting data here.  (click to enlarge)

The Current state of Home Affordability
Find the best bank rates at GoBankingRates.com. via: Credit Score Blog