Reverse Mortgages

reverseBecause of Remembrance Day tomorrow, I’m posting about real estate today.

You see these commercials once in a while: happy older couple who are able to stay in their home because of the magic of a reverse mortgage. But what is a reverse mortgage?

Basically, it’s a mortgage that you don’t pay until you die or sell your home….but that you can’t refinance either. These mortgages can be extremely restrictive, and so it is particularly important that you read through the fine print to ensure that you are comfortable with the terms. You could end up in a mortgage with fairly high interest compared to the average market rates that you can’t pay out as long as you’re staying in your home. They can be beneficial to a person who has very low cash flow because of a fixed income, but significant equity in a home that has recently increased drastically in value. However, it is critical that you read all of the details. If you are going ahead, you need to go ahead with full knowledge.

Don’t waive a condition until you know for sure

House drawingI’ve had this situation happen a few times lately when I have acted for the seller: the buyer waived the financing condition, or didn’t put in a condition of financing at all, and found out shortly before closing that their financing was not actually approved. How does this happen?

It comes down to pre-approvals. When you are pre-approved for a mortgage loan, they are just looking at you: what your income is, what other debts you have, what other assets you have. That gives you a rough range of how much you can afford. However, it doesn’t tell you whether you could buy any specific house.

In order to be specifically approved for a particular house, the bank will want to see how much you paid for that house, and determine whether you overpaid. If they think you did, they can refuse to give you the loan, which leaves you on the hook for the house with no mortgage in sight.

Real estate is starting to pick up with the warmer weather arriving. Unless you know that the house you are offering on has been appraised, be very careful before waiving (or eliminating) a financing condition unless you know that bank has actually looked at that house.

Are you ready?

StartI’m stealing today’s post from Ask Ross, a blog about all things mortgages. Here are his top 5 signs that you are ready to buy a house:

  1. You have a reliable source of income. Home ownership requires paying regular bills, and being prepared for unexpected expenses. If your income fluctuates wildly, you may want to save up a significant reserve fund before thinking about jumping into the market.
  2. You have saved a down payment. Do not – I repeat, do not – borrow your down payment. You should not be thinking about buying until you have saved up at least 5%, plus closing costs.
  3. You have a low debt load. A mortgage is a significant debt to take on. Be sure that other debts are paid out, or at least significantly paid down, before buying a house; at the very least, this will get you a better interest rate.
  4. You understand the numbers. You should budget for your mortgage payment, insurance, property taxes, utilities, and a maintenance fund, and add on more for emergencies. You always want to have more money than month, and home ownership can be more expensive than you think.
  5. You can get the mortgage on your own. If you need a parent or other relative to guarantee the mortgage, at least have a plan to get them off the mortgage quickly. Sometimes, especially if you are young, lenders aren’t sure if you are able to handle a mortgage. If you know that it’s just for the first five years, that is one thing, but don’t plan on having mom on title for 20 years so that you can have a house. That’s not fair to anyone.

You can find the original post here.

Helping out your children

FamilyMost parents work hard to protect and help their children as they grow, and continue to do so when their children become adults. One aspect of helping is often assisting their children in buying a home, often through co-signing a mortgage.

Acting as a co-signer or guarantor on a mortgage often seems like a simple thing to do. You have equity in your home and likely a much longer work record; your child has saved a down payment but is having trouble getting approved on his or her own. What you need to be comfortable with, however, is that, by signing, you become equally responsible for the mortgage. If your child stops paying the mortgage for any reason, the bank will go after you. In my experience, it is far more acrimonious when there is a fight between parents and children than between strangers.

It’s great to be able to help your child make such a major purchase. Before you do, you always want to be comfortable with your child’s financial status. A lack of employment history is easily dealt with; poor money management is a bigger problem. Be sure your child truly is ready to buy a home.

Bridging

Last week, I blogged abouBridget timing. This week, I wanted to touch on something related: bridge financing.

From a legal standpoint, bridging makes your move go much more smoothly. If you have bridge financing in place, I can close your purchase before your sale is closed, which means that you can move into your new home straight from your old home, without having to wait around after your sale closes while we get your new house bought. You can even do a same-day bridge if you don’t want to close a day or more earlier. While the decision to bridge is dependent on a lot of factors, it is something you should bring up with your mortgage broker and realtor so that your move is a lot happier.

Co-signing

I see a lot of clients who are unable to get financing on their own, and so one or both of their parents will co-sign the loan. Before you decide to go ahead and do this for your child, however, be sure that you are fully prepared for the possible consequences.

Even if you are only going on title to 1% of the property, if you are on the mortgage, you are responsible for 100% of the payments if your child stops making them. This has the potential to cause friction in the relationship. Before signing on the dotted line, be absolutely certain you are prepared to go down that road if necessary – or ask your child to wait to qualify on his or her own.

Some what-ifs

I read this interesting article earlier this week in the Globe and Mail. The basic premise is what might happen if the federal government decided to make purchasing a home more expensive by requiring much higher down payments – essentially, getting rid of the five per cent down payment. The author goes through the scenarios, imagining tumbling house prices as first-time buyers are pushed out of the market, climbing rental rates, less lender choice and higher mortgage rates.

Ultimately, the government is unlikely to raise the minimum down payment any time soon. It can, however, be interesting to contemplate what might happen.

Cooling the market?

The Globe and Mail published this article a few weeks back about proposed new rules from the Office of the Superintendent of Financial Institutions regarding refinances and new mortgages. Essentially, the Office is proposing that banks be required to take a much closer look a a home’s value and a borrower’s ability to repay a mortgage before lending money.

The primary target is secured lines of credit, because these allow homeowners to load up their properties with consumer debt after the mortgage is registered. Because of the rapidly approaching spring rush in real estate, most of Canada’s major banks have cut their rates. This move by the Office is likely happening now because of those slashed rates, in an attempt to rein in the market.

It remains to be seen if any changes will take effect.

Locking in a decade

Roma Luciw, a columnist for the Globe and Mail, published an article on Monday about the recent surge in popularity of the ten-year mortgage. There are distinct benefits to locking in for an extended period of time, especially now, with historically low rates that won’t stay low forever. Before choosing a mortgage product you should always see a professional to determine what is right for you, but the ten-year mortgage may be a good option – for now.

Mortgage wars!

The Globe and Mail published an article last week about the latest round of price cuts on Canadian mortgages. Bank of Montreal has reduced its rates again, offering low five- and ten-year mortgages. In response, the other big banks in Canada have followed suit, offering major discounts as well and keeping rates incredibly low. With the spring rush coming in the real estate market, it is no surprise that all of the banks are chasing business. It will remain to be seen if BMO’s tactic will keep rates at these historically low levels for a while to come.