Tuesday, August 9, 2011
Don't have drawers full of cash around when you need it? GCF Bank can help! Apply online for a mortgage, home equity loan or line of credit.
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The Key To Recovery
When a once-in-a-lifetime crisis occurs, a writer typically scours every resource he can devour for trends, history and statistics on how the last generation weathered the storm.
So you would think my job would be easy today. I only have to look back to 2008 to report on how we recovered from the last market crash.
Yet this is an entirely different scenario, a bailout will not help this time around.
In 2008/2009, the U.S. was plunged into a recession that we're still digging our way out of. Cheap credit, both the credit card and mortgage markets, spiraled out of control. The ability to repay was not nearly as important as everyone being granted an equal opportunity.
Even the least financial savvy among us could recognize the trend could not continue. The bubble burst, giving a specific cause and cure for the market's stability.
This time, the cause is not quite as succinct. Multiple factors are at play here.
Countries in the European Union have endured their own economic crisis. Problems rooted in Greece spread quickly to Ireland, Portugal, Spain, Italy, United Kingdom, Iceland and Belgium.
The Greek debt rating was decreased to 'junk' status, meaning the country could not refinance its debt. There were fears of default. World markets went into a decline.
Now it's our turn. Standard & Poor's (S&P) downgraded U.S. debt to AA+ status. Albeit a far cry from junk status, world markets still declined. The path was forged by our very own S&P index. Perhaps this was not by coincidence.
Unlike Greece, the U.S. was not in danger of defaulting on its debt. Despite what you may have heard on the nightly news. Our problem is much different.
The entire world watched as politicians representing the most powerful nation on the globe bickered like spoiled school children, each demanding they get their own way. Would you place your trust in anyone more interested in assigning blame than they are in the welfare of their own country?
The petty bickering was condescending to anyone with half of a brain. Republicans blamed Democrats who blamed the Tea Party who blamed everybody. The only thing learned from the debacle was that there is plenty of blame to go around.
We've yet to hear anybody offer a real solution. No wonder the world is skeptical.
Yesterday's stock market crash was not as much an indication of faith lost in American business as it was faith lost in America. And that is much harder to recoup.
Bank of America held roughly the same capital reserves on August 8th that it did the previous Friday. AOL did not lose 16 percent of their customers overnight. Neither made major changes to management structure. Yet both were among companies whose stocks slumped drastically.
We can't count on our government to bail us out of this crash, as it's the government itself that has crashed.
So what does this mean to Mr. Joe Average Citizen? Not a heck of a lot.
One writer from "The Daily Beast" compared the meltdown to "tsunami waves... (that) crash with destructive force against the shoals of investor confidence, institutional balance sheets, and collective investing psyche." And he may be more on target than his article reflects.
A tsunami wave wipes out everything in its path, requiring everything be rebuilt from the ground floor. When it comes to the way our legislators are behaving, this could be a good thing.
Stock portfolios will suffer short-term, but they will recover. Larger, stable companies remain that way. Those that have the stomach for risk will see this as an excellent time to buy on the cheap. In turn, they raise the value for all.
The downgrade in credit rating status can result in higher interest rates down the road. But remember, it was only S&P that reduced our credit status. Moody's and Fitch, the other major rating services, have maintained our AAA status while voicing concerns over our monetary policy. So we may not even face the threat of a rate hike.
If we do, the biggest impact will be on variable rate credit cards and student loans. Adjustable rate mortgages are also affected by short-term interest rate fluctuations.
As different as this crash is from 2008, it holds its similarities. Both were the result of those in power demanding personal interests be served over the ability of their respective systems to sustain it. Both saw the collapse of their respective systems.
But this time it's the American public who holds the key. We just need to use it in the election booth each November.
Put It In Reverse
The commercial shows a calm, carefree older couple. Their reverse mortgage has relieved all of their financial burdens.
Never forget that these are paid actors. And the television world seldom mirrors real life.
A reverse mortgage can be a lifeline for those over the age of 62 who are "house rich but cash poor." Making timely mortgage payments over the history of your note can pay you back in your later years when you no longer have a steady income. Without having to sell your home.
Homeowners draw the equity from their home as a lump sum, monthly payments, line of credit or combination of any of these with a reverse mortgage. Monthly repayment is not required. Repayment is not due until the last borrower dies, moves or sells the home. But real estate taxes and homeowners insurance must be maintained or the home will be foreclosed upon.
These loans can be extremely popular for those facing high medical costs, home maintenance repairs or even struggling to get by day-to-day.
But there are risks involved anytime you put your house on the line. More so with a product as complicated as a reverse mortgage.
The collapse of the mortgage market has made reverse mortgages more expensive and more complicated than ever. This was done to protect consumers but can also be their downfall.
Under most circumstances, neither the borrower nor the heirs will owe more than the home is worth. But recent changes in ruling require the full mortgage balance be repaid if the borrower or heirs want to pay off the loan and keep the home, even if it exceeds the current home value. This ruling is being challenged in court.
The vast majority of these loans are now fixed-rate with the borrower required to draw the full loan limit at closing. This can be more expensive for those who don't need the full amount. Interest rates are higher since it's due on the full loan limit from the moment of closing.
To offset, this type of loan typically does not have upfront origination fees or ongoing servicing fees.
Two new consumer protection laws have been passed in response to complaints filed against reverse mortgage lenders. The Housing and Economic Recovery Act of 2008 prohibits the required purchase of any financial product to secure the Home Equity Conversion Mortgage (HECM) - one of the more popular products. Originators are forbidden from having any financial interest in selling another financial product. Consumers previously had to buy annuities, long-term care insurance and other investment products in order to qualify for a HECM.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 called for a study to identify any practice as unfair, deceptive, or abusive with a reverse mortgage transaction. Consumers did not really understand how the compound interest caused their loan balance to grow over time.
A married couple must include both parties on the title to the house and the mortgage. The surviving spouse could have their home taken away should the one named on the documents be the first to die.
One poster at AARP.org shared his experience with a particular reverse mortgage lender. The lender stops in for a visit every month to confirm the home is still his principal residence. They even had agents contact his neighbors asking about his whereabouts.
Before you apply for a reverse mortgage, make sure you fully understand how the loan works and all costs associated with them. There may be less costly options. This is particularly true if you end up selling the house and moving within a few short years due to the high upfront costs with most products.
Any money you take now won't be available should an emergency arise somewhere down the road. Unless you're facing a financial emergency now, consider a home equity loan or line of credit instead.
Meet with a counselor before proceeding with a reverse mortgage. They can suggest the best product for your particular situation, loan alternatives and offer tips for negotiating with a lender. Find a list of counselors and other reverse mortgage consumer information on the Department of Housing and Urban Development website.
Read enhanced Financial News in today's 1st Flash.
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