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Is A "Zero Point Origination Fee" Mortgage Worth It? Plus: Dispelling The Misinformation Surrounding Home Equity Or Reverse Mortgage Loans And...Let's Talk Trash: Are You An Easy Target?
July 3, 2003
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Dear Ben: I have two mortgage-related questions. I've been offered a 5.25% rate on a 15-year conventional mortgage loan with $2,000 to $2,500 closing costs vs. 5.75% 15-year home equity loan with zero closing costs. Are there any security issues with the home equity loan such as one late payment and they foreclose and you lose all? I remember this as being a drawback when they first started the home equity loans in Texas a few years back. Which would be the better deal overall?
JL, via e-mail
Dear JL: I don't know where the bad information regarding the safety of home equity loans and reverse mortgages is coming from, but let me address that issue right out of the blocks. This fear of losing your home if you're late on a home equity loan is downright ridiculous. The rules for foreclosing on a defaulted mortgage are the same whether it's a "purchase money," or a home equity loan. The rules defining a default and the homeowner's ability to "cure" the situation (and avoid losing the home) are pretty clear-cut...and missing one payment won't put anyone out on the street (in most situations), especially since you never really "miss" a payment, but in reality would be 30-days late.
And there's a similar gross misunderstanding about reverse mortgages. The two biggest misconceptions? Number 1: "If you default on the (reverse mortgage) loan, you could lose your home." That's simply wrong, wrong, WRONG! Eligible homeowners (aged 62 and older) that take out a reverse mortgage loan can only "default" on the loan (for the most part) by failing to keep the property taxes and insurance current. Since reverse mortgages aren't due until the passing of the person (or people if it's a married couple) on title, or if they fail to occupy the property for more than 12 continuous months, there's simply no way they can "default."
That's the beauty of the reverse mortgage: It allows older homeowners to enjoy the equity in their homes without having to sell the property and move. I've seen enlightened homeowners use the money (available as either a lump sum or a stream of monthly payments) for things like paying off high interest rate/non-deductible credit card bills, pay for medical care, investing in long-term health care insurance, or even use the money to subsidize their wanderlust needs and travel around the world. (Good for them! It's their dough, they should enjoy it while they can!)
Misconception Number 2? "Taking out a reverse mortgage requires you turn the title to your home over to the bank." This simply isn't true, either. Reverse mortgage borrowers remain "in title" to their home at all times; they just have a mortgage where the balance goes up, not down. I've got a bunch of information about reverse mortgages on my website, www.bendover.com/reverse.asp as well as a "Q&A" streaming video interview with one of the state's top reverse mortgage experts, Clive Hambrook of www.austinreversemortgages.com.
Now, let's talk about "zero origination fee" loans: According to Susan Doane of W.R. Starkey Mortgage: "It depends on their needs and what will make the most sense. If JL was going to live in their house for only a few more years, I'd go with the higher interest rate and no (origination) fees. But if they're planning to stay in the house for awhile, I'd probably recommend going the other route. Assuming her balance is over $100,000, she'd be looking at zero origination fees and a 5.375% interest rate (as of today, since rate change frequently)."
Dose of Dover For The Week: Let's talk trash for just a moment. Remember to scrutinize everything you're throwing away. Once you "put the trash out" on the curb to be picked up, it's fair game for anyone that wants to go through it. With identity theft a continuing (and growing) problem, don't make it easy for the bad guys. Spend a few bucks on a decent (cross-cutting) shredder..and then use it!
By the way...you'd better think twice before throwing "junk mail" (or anything else with your name on it) away at a public facility like the Post Office, too. Their trash cans aren't any safer and in fact, are a rich resource for devious types out mining for identity gold.
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