A reverse mortgage could keep Mom in her home
Dear Liz: My healthy and active 82-year-old mother is faced with having to sell her home this year because she’s running out of money. She has lived a very minimal lifestyle for many years as her savings dwindled, and her income is now basically Social Security. She owes $25,000 on a home worth more than $700,000 in a top school district. We don’t know if we are jumping the gun with this sale. I could move in with her and pay rent for a year or two, although that would mean a longer commute for me and would just put off the day she has to sell. There are things that must be done to the house for upkeep, and her being cash-poor puts her in a crunch. My brother will help pay for minor sprucing up depending on what the real estate agent says we need to do to make the house presentable, but if Mom remains in the home there are other things to be done. We are assuming that we should sell it and find an apartment for her to rent until she needs more assisted living at a later age. Are we right to take action now?
Answer: Your family needs to take action, but setting your mother up for not just one but possibly two future moves probably isn’t the best course. Moving is terribly disruptive, and AARP surveys show that the vast majority of older people prefer to “age in place” rather than leave their homes.
Investigate reverse mortgages as one option. With a reverse mortgage, your mom could pay off her small mortgage and tap the substantial equity in her home. She could get a lump sum, a stream of monthly checks or a line of credit that could allow her to fix her home and live more comfortably. She wouldn’t have to make payments or pay income taxes on this loan, and it wouldn’t have to be paid off until she dies or moves out.
Reverse mortgages can be expensive because of the fees involved, although a new version of the federal Home Equity Conversion Mortgage offers lower upfront fees, and some lenders will waive or reduce their fees. You’ll want to do plenty of research, and shop around to make sure you get the best deal. The AARP and U.S. Housing and Urban Development websites have a lot of information about reverse mortgages.
If your mom decides she’d rather sell, she should consider a move directly to a senior community that offers assisted living as an option. She will have the most choices if she’s healthy when she moves in. Although she may never need the assisted living option, many people start to need some kind of help with daily activities by the time they reach their mid-80s.
Should you refinance a mortgage that’s almost paid off?
Dear Liz: We have a second home close to a lake that we bought in 2002 for $370,000. It could have sold for $1 million at the peak of the market but is now worth about $800,000. We owe $100,000 on a mortgage with four years left until it’s paid off, but the payments are a hardship and barely manageable. I don’t expect prices in the area to improve much in the next several years and they may decline more. Since I could sell the house now and get back all the money I ever put into it, I figure that every dollar I pay on it from now on is a dollar of profit burned. Selling the house is not an option, though, as my wife is adamant about keeping it. We are 10 years from retirement and have a kid to put through college. Our income is just under $100,000, we have no other debts and our primary home is paid off. Should we refinance the remaining balance to a 30-year loan, or just grin and bear it until the payoff in a few more years?
Answer: If you’re on track saving for retirement and your child’s college education, then the smart thing would be to gut it out and get the property paid off. You’re so close to the end of this loan that the majority of your payments go toward principal. Refinancing might lower your payments, but would dramatically increase the amount of interest you’d pay over time.
If you’re stinting your savings, though, the math gets more complicated. You could view the paid-off vacation home as an asset you could tap later for retirement expenses or college. In that case, getting it paid off on the current schedule would make sense. If selling or borrowing against the home in the future isn’t an option, though, then lowering your payments so you can save for your other goals starts to make some sense.
If that’s the option you choose, consider a 15-year loan rather than a 30-year loan. The shorter loan will still dramatically reduce your payment but you’ll pay about 60% less interest over time.
New rules may help more underwater homeowners
Dear Liz: I have an adjustable-rate mortgage that is currently at 3.125%. I’d like to fix the rate, but no one will even discuss it with me because my house has been appraised at less than $100,000 and the balance of the mortgage is $144,319. I have never been late, and my credit scores are above 800. What can I do? I don’t want a mortgage modification. I just want a fixed rate.
Answer: If your loan was backed by Fannie Mae or Freddie Mac, and if it was originated before June 1, 2009, you may be in luck, thanks to recent improvements to the federal government’s Home Affordable Refinance Program, or HARP.
Federal officials eliminated certain fees and barriers that made lenders reluctant to refinance underwater mortgages. They also eliminated the limit on how far underwater you could be to get help. In the past, you could owe no more than 125% of a home’s value.
You’ll first need to find out whether you have a Fannie Mae or Freddie Mac loan. You can visit http://www.fanniemae.com/loanlookup or call (800) 7FANNIE ([800] 732-6643). You’ll find information for Freddie Mac at http://www.freddiemac.com/corporate or by calling (800) FREDDIE ([800] 373-3343). The toll-free numbers are open from 5 a.m. to 5 p.m. Pacific time.
Borrowers must be current on their mortgage payments with no late payments in the previous six months and no more than one late payment in the previous 12 months. Loans that have been refinanced under the old HARP guidelines aren’t eligible for another refinance.
If your lender isn’t offering HARP refinances, you can search for others that are. You may want to contact a counselor approved by the Department of Housing and Urban Development (referrals at http://www.hud.gov) to help you through the process.
Don’t make the mistake of entering “HARP” or “Home Affordable Refinance Program” into a search engine. Most of the links that will turn up will be to for-profit sites, not all of them reputable. For the real deal, visit http://www.makinghomeaffordable.gov or call (888) 995-HOPE ([888] 995-4673).
How to get a house sold fast
Dear Liz: My elderly mother lives in another state and her health is deteriorating. We want her to come live with us, but her home has been on the market for more than a year and hasn’t sold, even after several price cuts. She’s depressed and we’re getting frantic. What can we do?
Answer: If her goal is to sell the house, she probably needs to cut the price even more. In most real estate markets today, what gets a home sold is a truly competitive price.
You also might consult an experienced real estate agent about what low-cost improvements could speed the sale. If the home is cluttered or stuffed with furniture, for example, removing one-third to one-half of the household contents can make the space seem dramatically larger. Your mom will be packing and discarding all this stuff anyway, and starting the process now can help sell the home. If she’s not able to manage this alone, consider taking a week or so off to help her or hiring a professional organizer to assist with the process.
Other relatively inexpensive fixes can include minor repairs, refreshing the landscaping, washing the windows and deep cleaning the house. Your mom shouldn’t embark on any major projects because she’s unlikely to recoup the expense. But the money she spends getting her home ready for sale can be deducted when she determines whether she has any taxable profit on the sale. (Typically $250,000 of home sale profit is tax-free. The limit is $500,000 for married couples.)
Another alternative is to simply move her in with you and rent out the home, but trying to manage a rental long distance can be a hassle. If that turns out to be your best option, consult the real estate agent for referrals to good property management firms.
Shop hard before you refinance
Dear Liz: In February 2007 we put down $75,000 on our $274,000 home purchase. In July 2010, our home appraised for $261,000. We wanted to refinance with the bank that holds our mortgage. Recently they sent an appraiser who appraised our home at $235,000. So our choices are pay almost $200 a month in mortgage insurance, bring about $6,000 to closing or withdraw the loan. I feel we tried to do the right thing: We put down more than 25% on our home, always pay on time and have FICO scores over 800. But the bank that can help us save on our loan is hurting us, not helping. What can we do?
Answer: Your lender isn’t under any obligation to help you save money. As a result — and as you’ve discovered — there’s often little advantage in sticking with the lender you have.
Whenever you refinance, you should shop and shop hard. Applying with at least two lenders will allow you to compare refinancing deals. It’s possible that another lender would have given you a low appraisal as well, but at least you wouldn’t be held captive in the way you are now.
If you want to continue with this lender and expect to remain in the home for more than a few years, bring the cash to the closing so you can pay down your loan balance to the point where you won’t need mortgage insurance.
