MYM Mailbag # 4

Posted by Frank

March 4, 2009

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Hi, I was looking over my school loans and had a quick question. I have a variable interest rate loan and the interest rate is 5.8%… I would really love to fix that loan to ensure the same monthly payments. Any idea how long the rate will stay this low and when/why it will go higher? Essentially, I would like to get another lender to fix this loan I have but would like to do so when I could get the best possible fixed rate. Thanks
- Brad

Great question, everybody should be examining their student loans every once in awhile to see if they should refinance with another lender. I’m assuming that your student loan follows the 3 month LIBOR index, which seems to be pretty typical for most student loans. The LIBOR rate is the interest rate the most credit-worthy banks around the world charge each other for loans. The rate fluctuates throughout the day based on the market, similar to stocks. Most Student loan lenders that set their rates using LIBOR will readjust their rates quarterly, based on the LIBOR rate + an additional percentage points, which is why yours is at 5.8% and not the current LIBOR rate of about 1.27%.

It’s difficult to determine where the LIBOR rate will be in the future, because in large part, it moves in an independent direction of the federal funds rate. Most likely, the loan you are referring is a private loan and not a federal one. If this is the case, I would strongly recommend holding onto your variable rate for the time being. When you refinance a private loan, banks usually will add a few percentage points to the prime rate, which is higher than the LIBOR rate. So unless you can lock yourself into a rate lower than you currently have, I would hold tight and pay additional on each payment if possible.

Hi,
Do you need equity to obtain a reverse mortgage? Since you have experience, I was hoping you could give me some clues as to what you look out for. Any help appreciated. Thank you for your help.
Kind Regards.

You do need equity in your home to acquire a reverse mortgage. Typically, reverse mortgages are for older adults who are in a pinch for money and don’t have a savings but instead they have lots of equity in their homes. A reverse mortgage is exactly what it sounds like, instead of the homeowner paying the lender for a mortgage, the bank pays the borrower via the homes equity. Reverse mortgages are similar to a basic home equity loan, only with a reverse mortgage the homeowner is not required to pay back the loan until they no longer use the home as their primary residence or they pass away. The loans are only available to those over the age of 62 and often times provide great ways for retirees, who find themselves in a financial pinch, to borrow against their home’s equity without being setback each month with a new payment. Often times, reverse mortgages are paid back when an older person can no longer live by themselves and consequently sell their home and move into assisted living. When the sale occurs, the bank is paid back for the loan when the house’s equity is actually realized.

You have to be careful with reverse mortgages because they can be costly. You can expect to pay around 2% of your homes total value to obtain the loan. There are upfront fees, which can account to an additional 2% of the value of your home, will also be applied to your loan. You will be required to pay mortgage insurance over the term of the loan. In total, you can be face with fees nearing 4.5% of your home’s value just to obtain a slice of your home’s equity. This is a significant number, consider the following: if a home is worth $300,000 and a homeowner wants to take out a reverse mortgage worth $50,000 the total fees could cost $13,500, which represents roughly 27% of the total reverse mortgage devoted entirely to fees. $

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