Ask Liz Weston

Get smart with your money

mortgage

Are sons plotting–or genuine?

By

Dear Liz: I read your response with interest regarding the two sons in their 60s who were pressuring their parents into taking a reverse mortgage, according to a neighbor who wrote to you about the situation. You may be correct that the sons are trying to get an early inheritance, but you may also be very wrong. The sons may feel well off enough that they don’t need an inheritance and that the money would be better spent by the parents to enjoy their remaining years.

As a reverse mortgage loan officer, I’ve had seniors who are not cash-poor and house-rich go on extended vacations, purchase income properties, buy long-term healthcare policies and fund a research and development project for an invention, to name a few uses. I even know someone who bought a Ferrari, which had been a lifelong desire.

Reverse mortgages are no longer considered to be a loan of last resort. They are, in fact, a source of tax-free cash used in a variety of ways such as preserving and prolonging taxable cash assets, and for seniors who don’t need cash to live on, they may be used by their financial planners for arbitrage purposes.

By the way, I did like your reference to elder care attorneys. Many seniors think it’s a waste of time or way too expensive, but I frequently refer my clients to them as well. They are almost always able to justify the expense in the savings they produce for their clients.

Answer: While there can be many reasonable uses of reverse mortgages, remember that the parents in this case are in their 90s. This may not be a time in their lives when they’re longing for adventure travel, hot cars and investment real estate. It’s certainly not a time in life when they could buy affordable long-term care policies.

There could, however, be another explanation, as the following reader outlines:

Dear Liz: I just read your column about the neighbor’s concern that an elderly couple was being pressured by their sons to get a reverse mortgage. I am glad you mentioned the possibility of fraud by the sons. The elderly are vulnerable and need advocates.

The concerned writer needs to consider another option. Maybe the elderly couple is not doing as well financially as they portray. I was once a concerned neighbor to an elderly widow. As a ploy to remain independent, she was not always upfront about how well (or not well) she was doing. In her case it was health issues that she would hide or downplay (money was not an issue). Though all the neighbors cared and looked out for her, we did not have all the facts that the family had and the family was not aware of all we knew. The concerned neighbor should reach out to the sons. Hopefully the sons are looking out for their parents’ best interests and the neighbor can assist the sons in that common goal.

Answer: Your neighborhood is to be commended for trying to help an elderly person in poor health. Intervening in a financial matter, however, could be fraught with peril and lead to an ugly confrontation with the sons. That’s why directing the parents to an elder law attorney — one affiliated with the National Academy of Elder Law Attorneys at http://www.naela.org — probably would be a better course. The attorney could better protect the parents against potential financial abuse while assessing whether they might need more help than they’re letting on.

Getting help with a soon-to-be unaffordable mortgage

By

Dear Liz: I have an excellent credit rating, a steady job and an interest-only mortgage of $480,000 on a home now worth $400,000. I also owe $52,000 on an adjustable-rate home equity line of credit. In 2015, the interest-only portion of my loan ends and the principal payments will start, driving my payment to more than $4,000 a month. I have tried for the last four years to work with the lender to achieve some manner of stability, but to no avail. I have been told that my first loan has been sold to an outside investor. Is there any hope for me? I like my house.

Answer: If you haven’t already done so, you should make an appointment with a housing counselor approved by the U.S. Department of Housing and Urban Development. You can find referrals at http://www.hud.gov, or you can call the Consumer Financial Protection Bureau at (855) 411-CFPB (2372) to be connected to a HUD-approved housing counselor.

Housing counselors can evaluate your situation and offer guidance about any programs that might be available to help you refinance or modify this loan. You also should pick up a copy of attorney Stephen Elias’ book, “The Foreclosure Survival Guide,” so you can better understand this process and whether it’s worth fighting to save your home.

HUD-approved housing counselors offer free or low-cost help. Beware of anyone who promises to help you for a fat fee, because it’s probably a scam.

How to keep mortgage debt from wrecking your retirement

By

Dear Liz: I have a first mortgage with a current balance of $32,000 at 5.625% interest. This will be paid off in about 24 months, based on regular payments plus $200 a month extra I am paying on principal. I have a home equity line of credit with a balance of $200,000 at 3% interest on which I am paying interest only ($490) monthly with an occasional principal payment when I can afford it. Between the two mortgages I am making payments of about $1,950 per month.

I am about to retire and want to reduce my payments to a more manageable amount. I do not intend to move in the near future. Income is $145,000 annually now but will be reduced to about $76,000 annually upon retirement. Should I just hold on, pay off the first mortgage and then begin making interest plus principal payments on the credit line? Or should I refinance both mortgages now into a 30-year fixed mortgage?

Answer: Ideally, you would retire your mortgage debt before you retire from your job. That’s not possible in your case, so you should focus on making sure this debt doesn’t wreck your retirement.

A spike in interest rates could play havoc with your budget. Mortgage interest rates have been extremely low for some time, but that won’t continue indefinitely. Inflation may pick up as the economy improves, which means that 3% variable rate on your home equity line of credit could march considerably higher.

Consider locking in today’s low mortgage rates with a 30-year, fixed-rate mortgage. You could get an even lower rate on a 15-year mortgage, but the payment would be significantly higher — about $1,600 a month on a $232,000 mortgage, compared with about $1,000 a month for the 30-year loan. You may prefer the flexibility of the 30-year loan, which would still allow you to make extra principal payments to pay off the loan faster without locking you into a higher monthly payment.

Soon-to-be ex wants cash-out refinance

By

Dear Liz: My soon-to-be ex wants to refinance our mortgage to pay for renovations so we can sell it for more money. He also wants to take out some cash to pay off unsecured loans. (I have $11,000 in credit card debt, and he has over $50,000.) The house recently appraised for $310,000 and we owe $158,000 on it. Is it wise to refinance in this circumstance?

Answer: A cash-out refinance would be a risky maneuver even if you intended to stay married. Renovations rarely boost a home sale price enough to cover their cost. Also, home equity that’s used to pay off credit card bills is often wasted, since the borrower never fixes the problem that led to overspending in the first place and simply runs up more debt. Since he would be getting the bulk of the benefit by having more of his debt paid off, you also would need to adjust the rest of your property settlement.

Often, the best and easiest solution in a divorce is to simply sell the house. You certainly wouldn’t want to remain on a mortgage with an ex after the divorce was final, if you could possibly avoid it. A good divorce attorney can give you advice about how to proceed from here.

Income matters more than assets in financial aid formulas

By

Dear Liz: You write about it not being a good idea in many cases to pay off your mortgage, but does it make sense to do so to reduce savings so that we can be in a better position to help our high school junior get financial aid for college in a year? We also have a 529 and some investments and are savers.

Answer: Your income matters far more to financial aid calculations than your savings, said Lynn O’Shaughnessy, author of “The College Solution: A Guide for Everyone Looking for the Right School at the Right Price (2nd Edition).” Another important factor is how many children you have in college at the same time. If you have a high income and only one child in college, you may not get much or any help, regardless of how your assets are arranged.

Many schools ignore home equity when figuring financial need, however, so it might be worth running some numbers. You can do that by using the net price calculators included on every college website. Pick the schools your junior might want to attend and run two scenarios on each calculator: one with your current financial situation and another in which you’ve paid off your mortgage with your savings.

Many parents are overly worried about how their savings will affect potential aid, O’Shaughnessy said. Parental assets, including 529 accounts, receive favorable treatment in financial aid formulas. Your retirement assets aren’t included in the federal formula at all, and your non-retirement assets are somewhat shielded as well thanks to an “asset protection allowance.” The older you are, the more of an asset protection allowance you get. The allowance will be somewhere around $45,000 for a married couple in their late 40s, the typical age for college parents. For those over 65, the allowance is $71,000. Beyond that, you’re typically asked to contribute less than 6% of eligible assets toward your offspring’s education each year.

 

Adjustable mortgage poses risks

By

Dear Liz: Should my retired wife (age 74) and I (age 78) refinance our home just to lower our monthly payment by $100? I’m considering going for a five-year fixed at 2.74% followed by a 25-year variable. Our outstanding loans amount to $200,000. The value of our home has decreased to $400,000. My wife is fearful of the 25-year variable.

Answer: As she should be. According to mortality tables, she’d have to live with it longer than you will.

You two are old enough to remember the double-digit inflation of the 1970s and the havoc that wreaked. If inflation like that (or anything close) were to return, your mortgage payment could quickly become unaffordable.

Economists are concerned that all the cash that’s been pumped into the economy to fight the downturn could spark inflation if growth resumes. Too much cash chasing too few goods is what traditionally has led to serious inflation.

In any case, lenders know that today’s record low interest rates won’t last. That’s why they’re so eager to push loans that will become variable at some point — so that the borrowers will be the ones to shoulder the interest rate risk.

Some borrowers can take that risk, but they tend to be younger folks whose incomes are also likely to rise if inflation returns. For people on fixed incomes, the math really doesn’t work.

Do yourself and your wife a favor. If your current loan has a fixed rate, stay with what you have. If it doesn’t, consider refinancing to one that does.