Simmons & Schiavo Blog

‘No down payment’ mortgages are back

Remember “no down payment” mortgages? These were the kinds of loans that often led to foreclosures during the real estate bust a few years ago. They’re making a comeback – but in a different form.

In their new incarnation, home buyers put up their home and a portion of their investments as collateral. The amount of a portfolio that must be pledged depends in part on the nature of the investments – a larger amount must be pledged if they consist of stocks rather than bonds, for instance. The homeowner keeps ownership of the investments, although there are some restrictions imposed by the lender, and typically the investment account must be held at the lender’s institution.

The advantages for buyers are that they (1) don’t have to sell appreciated stocks and pay capital gains taxes to fund a down payment, (2) may get a larger mortgage interest deduction, and (3) may come out ahead if their investments return more than the mortgage interest rate.

Of course, there are dangers, too, since homeowners will have put their personal assets as well as their home at risk if anything goes wrong.

Want to build a second home next to your current one?

Many cities have liberalized their zoning laws in recent years to allow people who live in single-family homes to add a second home on their property. They can do this by creating a basement apartment, building an “add-on” apartment to the house, or even constructing a separate cottage in the backyard.

Cities are responding to requests from homeowners, many of whom are middle-aged couples whose children can’t afford to find their own apartment and want to live with them. Other owners want a nearby space to take care of aging parents who can no longer live on their own, or simply want to rent space to bring in extra income.

Laws have changed recently in Seattle; Vancouver; Salt Lake City; Silicon Valley; Missoula, Montana; and many other places.

Of course, these changes can be controversial, since nearby homeowners may worry that their neighborhoods will become more crowded and experience problems with noise and traffic.

New rules for reverse mortgages

The federal government has tightened the rules for reverse mortgages, making it harder for some seniors to get these types of mortgages and reducing the amount of a home’s value that can be tapped.

Reverse mortgages allow elders who are house-rich but cash-poor to use their housing equity. Homeowners who are at least 62 years old can obtain a loan that doesn’t have to be repaid until the homeowner moves, sells, or dies. The homeowner receives a sum of money from the lender, usually a bank, based largely on the value of the house, the borrower’s age, and current interest rates.

Homeowners can get the money in one of three ways (or in any combination): a lump sum, a line of credit, or a series of regular payments, called a “reverse annuity mortgage.” Seniors sometimes use the loans to pay for home care while they remain in the home.

Almost all such loans are insured by the U.S. government. The government says that in recent years, default rates have been rising, and many seniors are losing their home when they are unable to continue paying for insurance and property taxes. [Read more...]

Tenants with children can’t be limited to lower floors

Managers of apartment buildings sometimes want to require tenants who have small children to live on a lower floor, in order to prevent complaints from other tenants about noise in the apartment above them.

But the U.S. Department of Justice says this is illegal. The government announced that such a rule would violate the federal Fair Housing Act, which prohibits discrimination against tenants based on “family status.”

The Department recently filed a lawsuit against the owner of an apartment complex in Massillon, Ohio, claiming that the owner illegally refused to rent apartments on upper floors to families with children.

How to leave items of sentimental value to your heirs

Often, the issue that causes the most hard feelings among family members after a death isn’t how much money everyone received in the will, but who should get the plate on which Grandma served her famous Thanksgiving pie year after year.

Most people don’t think much about items of sentimental value when they do their estate planning. But they should, because doing so can avoid a lot of awkward situations.

For instance, you might plan to leave everything to your children in equal shares, but what about the piece of jewelry that you always promised to your eldest daughter, or the antique vase your cousin loved that no one else in the family liked? Or what if you have a valuable item such as a piano that can’t be divided equally?

It’s definitely a good idea to make provisions for items such as these in your will. [Read more...]

Mortgages for ‘do-it-yourselfers’ are spiking

There’s been a big increase recently in a special type of mortgage for people who are buying land and then building their own home on it.

These “hybrid” loans function as construction financing during the building phase. Essentially, they act as a line of credit, which borrowers can tap each time they need to make a construction payment. During this phase, borrowers must pay interest on the loan, but they don’t have to make any payments toward the principal.

Once the house is finished, the loan converts into a traditional mortgage secured by the home.

The loans can be very useful if a buyer is working with a smaller or specialty contractor who isn’t able to arrange its own financing for the project. And they enable the buyer to undertake just one loan, rather than having to navigate a standard construction loan while also trying to arrange a conventional mortgage on a house that’s still on the drawing board.

One bank that offers these loans, TD Bank, says its originations are up 110% so far this year.

Should life insurance be part of your estate plan?

Traditionally, the purpose of life insurance is to replace a person’s income for their family in the event they die before they stop working. For this reason, many people buy “term” insurance that ends when they reach retirement age.

However, there are also some very good uses for life insurance as part of an estate plan. For example:

  • You might want to make sure that your heirs won’t have to sell important assets (a business, real estate, etc.) after you die in order to pay estate taxes or because of a lack of liquidity in the period after your death. Life insurance can provide your heirs with ready cash to cover taxes and other expenses.
  • Suppose you have several children and you want to leave them equal inheritances, but your estate consists largely of assets that are hard to divide – such as a business, real estate, or an art collection. You could leave the assets to the children most likely to appreciate them, and use insurance to equalize inheritances for the other children. [Read more...]

Flood insurance rates are reduced by Congress

Most homeowner’s insurance policies don’t protect owners against flooding. For this reason, many people in flood-prone areas obtain insurance through the federal government’s flood insurance program.

This year, flood insurance premiums had been scheduled to increase dramatically for many people. But Congress has just passed a law that will eliminate or delay many of these increases – a move that not only will save homeowners money, but will also make it easier to put many properties on the market.

Here’s the background: For decades, flood insurance rates were held artificially low for many homeowners. The government in effect subsidized premiums by “grandfathering” many homes that didn’t meet revised construction standards or that were included in a newly redrawn flood zone.

But after the devastation of Hurricane Katrina and Hurricane Sandy, the federal program was left almost $25 billion in debt, and had to borrow money from the U.S. Treasury. So in 2012, Congress decided to eliminate most of the subsidies and to begin raising rates – often by a very large amount. [Read more...]

Is Your IRA and 401(k)s a ticking time bomb?

Americans have more than $12 trillion stashed away in IRAs, 401(k) plans, and similar retirement accounts. Yet very few people have given careful thought to what will happen to the assets in those accounts if they should pass away unexpectedly. In a surprising number of cases, what would happen is not at all what they would expect – or want.

Over the next decade, as the Baby Boomers continue to age, we will hear many stories of “inheritance disasters” as heirs are surprised by the laws surrounding these accounts. That’s why it’s important to make sure your retirement accounts have been considered as part of a complete estate plan for your family.

Many people assume that if they’ve written a will, then the people they named as heirs in the will are entitled to the assets in their retirement accounts.

Not true! Generally, a will has no effect whatsoever on a retirement account. Who gets the assets in an IRA or 401(k) is determined by a combination of state and federal laws and the “beneficiary designation” form that the owner filled out when the account was first set up, often many years earlier.

The problem with these beneficiary forms is that most people fill them out in a hurry when they’re starting a new job or rolling over an account. They’re not thinking carefully about estate planning considerations at the time. [Read more...]

Appraisal problems are causing home sales to fall through

The housing market has picked up steam lately, but one of the side effects of the sudden improvement is that home appraisals often take longer than they used to, and often come in with a much lower value than what everyone expected. This is causing a number of house sales to collapse.

Appraisals are taking longer because there’s suddenly more demand for them, at the same time that far fewer people are working as appraisers than during the boom years. This is understandable, but the problem with a slow appraisal is that it can sometimes cause a purchaser to lose an interest-rate lock, which can be a big problem at a time when interest rates are rising.

The main reason that appraisals are coming in lower than expected is that prices have risen so quickly lately. If an appraiser values a property by using “comparable sales” from a year or even six months ago, those sales might not reflect the most recent changes in the market, and might result in a surprisingly low value. [Read more...]