Ask Liz Weston

Get smart with your money

Real Estate

Q&A: How to get rid of home-equity loan headaches

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Dear Liz: We have taken several withdrawals from our home equity line of credit. Now the balance is close to $100,000. It’s the interest-only type. We don’t know how to pay off this amount systematically. Can you help?

Answer: As you’ve discovered, it’s not a good idea to pledge your home as collateral when you don’t know how you’ll pay off the debt. Home equity lines of credit can be an inexpensive way to borrow initially, but the interest-only period doesn’t last forever and eventually your payments will get a lot more expensive.

Many homeowners who tapped their equity before the financial crisis are discovering this fact — and some risk losing their homes. The initial “draw” period where you pay only interest typically lasts 10 years. After that, you can’t make further withdrawals and you’re expected to pay both interest and principal over the next 20 years. Your payments may jump 50% or more, depending on prevailing interest rates.

A better way to use HELOCs is for short-term borrowing that’s paid off well before the draw period expires. If you can increase your current payments to do that, you should.

If you can’t make pay more than your minimum, though, you’ll need to explore other alternatives. You may be able to arrange a cash-out refinance that combines the HELOC balance with your current mortgage and gives you 30 years to pay it off. If not, you can make an appointment with a housing counselor (you can get referrals at www.hud.gov) to see what options may be available to you as a distressed borrower. If you can’t restructure the debt, a short sale or a deed-in-lieu of foreclosure may be a better option than letting the lender take your home.

Q&A: Getting a new mortgage after a foreclosure

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Dear Liz: Is it true that we can’t refinance our home until seven years after a foreclosure? We lost a rental property six years ago. Our credit scores now are in the 740 range, and we are anxious to take advantage of lower rates since our mortgage rate is 5.75%. Other than the foreclosure, our credit is perfect.

Answer: As foreclosures surged, the agencies that buy most mortgages increased the amount of time troubled borrowers had to spend in the “penalty box” before being allowed another mortgage.

Fannie Mae and Freddie Mac still have a seven-year waiting period after foreclosures. But that has been shortened to three years when borrowers can prove “extenuating circumstances,” such as a prolonged job loss or big medical expenses. Waiting times for other negative events, such as bankruptcy or short sale, have been reduced to two years with extenuating circumstances. Otherwise, it’s four years.

There are other loan programs that are even more forgiving. For example, the FHA has a three-year waiting period that can be shortened to one year if borrowers participate in its “Back to Work” program, which requires they document a significant loss of household income, that their finances have fully recovered from the event and that they’ve completed housing counseling. The Veterans Administration, meanwhile, makes loans available one to two years after foreclosure.

Q&A: Factors to consider for refinancing into a 15-year mortgage

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Dear Liz: I am considering refinancing my home from a 30-year mortgage to a 15-year loan and wondered if it would be a wise decision. I am 57, divorced and make a little over $100,000 a year as a high school teacher (and I plan to keep working until at least age 65). Other than a car loan, I have no debts and an excellent credit rating. I will receive a pretty decent teacher’s pension and I have about $150,000 in mutual funds in retirement accounts. I can afford the larger payment on a shorter loan. Do you think this would be a good move for me?

Answer: For most people, a 30-year mortgage is a good option. People can always make extra principal payments to pay down the loan faster, but the lower monthly payment is easier to handle if they face financial setbacks such as a job loss.

Your employment situation seems pretty stable, though, and you’re in good shape with a pension plus savings. If you can swing the payments, you’d be building equity much faster and while paying less interest. You’ll still have home debt into your 70s, which isn’t ideal, but it’s certainly better than having a mortgage in your 80s.

Q&A: A dirty problem

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Dear Liz: I bought a house four years ago. The previous owner allowed a gentleman to plant flowers every spring and tend them all summer. I allowed the man to continue after I bought the house. He waters the flowers using my water and I help weed every year. He came to me last week and said he was getting too old to tend to the flowers and wanted to sell me the dirt for $1,000. This was never addressed when I bought the house. Presumably the guy did bring in special dirt, but removing it would damage the property. What should I do?

Answer: The dirt goes with the real estate you bought and has long since become part of it, said real estate expert Ilyce Glink of ThinkGlink.com. Without a written agreement, the man was simply doing work for free.

That said, his labor and the flowers he bought enhanced the curb appeal of your home and arguably its value, said Glink, author of “100 Questions Every First-Time Homebuyer Should Ask.” Consider offering him $500 as a compromise or “retirement gift” to thank him for his efforts.

Q&A: The pitfalls of renting a house to relatives

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Dear Liz: My son and his family are having trouble with money. I see him stepping up since he had my lovely granddaughter. I am getting ready to retire from teaching. I have my teacher’s retirement and a nest egg set aside. I was thinking of buying him a place where he could pay me rent and when the time happens, move to find his future. I was told, though, that I would have to live in the home after purchase or I cannot get a loan. I just want to see where I can stand in this endeavor.

Answer: People get loans to buy rentals and other investment property all the time. But that doesn’t mean you should be one of them.

Taking on a mortgage in retirement is risky, to say the least, and you’d be putting your financial future in the hands of a young man who has “trouble with money” and who hasn’t always been responsible, given your comment about “stepping up.” When his family hits a rough patch, how hard would it be for him to justify skipping a rent payment, or six, to Dear Old Dad? And what would you do about that — evict him and your lovely granddaughter?

If you were wealthy enough to pay cash for this house, take care of all the ongoing costs and not care if he ever paid you a dime, then maybe this scheme would make sense. In your case, you’re inviting financial distress and family trouble at a time in your life when you should be reducing the odds of both.

Q&A: Adding daughter as co-owner of mother’s home could trigger costs

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Dear Liz: My father passed away last year, and my mother wants to add my name to her house so there is no probate. Do I need to change the title or the deed or both? Are there any negatives to doing so? Also, we already have a durable power of attorney between us. Does that offer me any benefits as far as real estate? What does it offer me in general?

Answer: A deed is the legal document that transfers the title or ownership of a property. Please don’t alter the home’s documents until you consult an estate-planning attorney. Your mother’s desire to avoid the costs of probate could inadvertently trigger much larger costs.

Adding you as a co-owner could mean giving up a big tax benefit, for example. If your mother bequeaths the house to you when she dies, you won’t owe any tax on the gain in the house’s value during her lifetime. If she adds you to the title, she’s gifting you half the house. In that case, you potentially could owe tax on some of that gain even after she dies. If she wants to preserve tax benefits while avoiding the court process known as probate, she may need a living trust.

There could be other complications if you should die or be sued, which is why it’s important to get good advice before proceeding.

As for the durable power of attorney: It isn’t designed to give you benefits. Powers of attorney allow you to make decisions for your mother if she becomes incapacitated. Those decisions need to be in her best interest, not yours.