Ask Liz Weston

Get smart with your money

reverse mortgage

Q&A: The dark side of reverse mortgages

By

Dear Liz: I have had a reverse mortgage on my condo since 2009, due to financial necessity. The interest rate on my mortgage keeps going up. Could the interest rate be reduced by changing lenders or would there be exorbitant fees involved in the process? My financial standing is not good, and I am in credit card debt. However, I do pay the minimum payment each month on each card. Being retired, I need some guidance on relieving the financial pressure I am currently experiencing.

Answer: Please consult a bankruptcy attorney.

Changing reverse mortgage lenders would indeed involve considerable expense and wouldn’t relieve any financial pressure because you don’t have to make payments on this kind of loan. (For those who don’t know, reverse mortgages allow people ages 62 and older to tap their equity in a lump sum, through a stream of monthly checks or via a line of credit. The debt grows over time, typically at a variable interest rate, but the borrower doesn’t have to make payments. The loan is repaid when the borrower moves out, sells the home or dies.)

If you can pay only the minimums on your credit cards, you probably have more debt than you’ll be able to repay. Some people manage to dig themselves out of such debt, often by working two jobs and dramatically cutting their expenses. They may use a debt management plan offered by a credit counselor to reduce their interest rates. Sometimes they sell their homes and use the equity to pay off the debt.

You can explore these options, of course, but chances are they won’t be a solution for you.

You may not be able to find a job, or have the stamina to work. Selling your home to pay off the debt would leave you without a house in your old age and may leave you without income, if you’re getting monthly checks from your reverse mortgage. If you borrowed a lump sum instead, your debt may have grown to the point where you don’t have much equity left anyway.

Your situation is one of the reasons many financial planners are leery about reverse mortgages. They can be an extremely helpful tool in retirement, but sometimes people use them as a way out of a financial jam without addressing the spending or other issues that got them into the jam in the first place.

Why reverse mortgages are a harder sell now

By

The millions of Americans who haven’t saved enough money for retirement still have a potential safety net: their home equity. But recent changes to reverse mortgages mean seniors and their families may have tougher decisions to make.

In my latest for the Associated Press, the changes to reverse mortgages that are causing people to think twice.

Q&A: Reverse mortgages have gotten safer and cheaper but aren’t for everyone

By

Dear Liz: I have been making interest-only payments on a home equity line of credit but starting in January the payments will increase to include principle. I would like to do a cash-out refinance of my first mortgage (I owe about $190,000) to pay off the HELOC (on which I owe $140,000).

My home is worth about $600,000, but my debt-to-income ratio is very high, and I’ve been told I won’t be approved.

I have never been late on my mortgage or credit cards, on which I owe about $30,000. I am working very hard on paying off my debt but my income is low, $25,000 a year.
I am 72, a widow and find it hard to land a good paying job like I used to have. I have to settle for what I can get.

My son and his family live with me and pay $900 rent and half of utilities but those payments are not reflected on my taxes.

The advice I am getting so far is to get a reverse mortgage for about a year, to not take any money from it and instead pay down my credit, then after a year try to refinance again. What are your thoughts on reverse mortgages?

Answer: Reverse mortgages have gotten safer and less expensive but they aren’t a good short-term solution for anyone. All mortgages have costs, and it makes little sense to pay to set up a reverse mortgage if you plan to get rid of it a few months later.

Reverse mortgages, for those who don’t know, allow borrowers 62 or over to tap their home equity to get a lump sum, a series of monthly checks or a line of credit. Borrowers don’t have to make payments on these loans, but any debt incurred on a reverse mortgage grows over time and must be paid off when the borrower sells, moves out or dies.

The most common reverse mortgage is the Home Equity Conversion Mortgage, which is insured by the federal government. The HECM loan typically includes upfront and annual mortgage insurance premiums, third party charges, origination fees, interest and servicing fees.

The amount you can borrow is based on your age, prevailing interest rates and the value of your home (the maximum home value considered is $636,150). You’ll find a calculator at www.reversemortgage.org/About/Reverse-Mortgage-Calculator that can help you estimate what you can borrow and the costs.

Normally, people can’t access more than 60% of the borrowed amount in the first year. That’s to prevent them from running through all their equity in a short time. The exception is when the money’s being used to pay off existing loans. You probably would be able to borrow just enough to pay off your current mortgages, but the upfront mortgage insurance premium you would owe would be high: 2.5%, rather than the usual 0.5%.

Another complication is the fact that you have family living with you. You’d need to think through what would happen if you died, had to sell or moved into a nursing home, because that could leave your son and his family homeless if they weren’t able to pay off the mortgage.

A final concern is the fact that you’ve been living beyond your means for quite a while, as shown by the amount of debt you have. Eliminating mortgage payments could help you pay off your remaining debt, but that’s only if you keep your expenses in line with your current income — not what you were able to spend when you had a good job. There’s also no telling how much longer you’ll be able to continue working, which would mean getting by on even less.

Consider meeting with both a nonprofit credit counselor and a bankruptcy attorney to understand your options. You can get referrals from the National Foundation for Credit Counseling (www.nfcc.org) and the National Assn. of Consumer Bankruptcy Attorneys (www.nacba.org), respectively.

Q&A: Why a reverse mortgage might be a good idea for some older homeowners

By

Dear Liz: I recently retired to a small house I bought 30 years ago. I refinanced four times to get the rate down from 11% to 3.5%. This provided me with a low monthly mortgage (just under $450), but my current 30-year loan won’t be paid off until I’m 92. I’ll be 67 in two months, and just received an inheritance of $400,000 following the death of my parents. My only income is $2,000 a month from Social Security and a monthly pension check of $1,100, although I do have an IRA that should be worth roughly $170,000 by July.

I’m thinking about paying off the $90,000 remaining on my mortgage, which would allow it to be passed on to my sister, nephew (or whomever) without any complicated bank or loan issues. It also would free up that mortgage payment for other household expenses. The house needs some work, such as a new carport, double-pane windows, proper insulation, deck repair and maybe termite work, all of which will probably eat up the better part of $100,000. Is it worth keeping the loan just to maintain the tax deduction or does it makes financial sense to pay it off?

Answer: Keeping a mortgage just for the tax deduction doesn’t usually make much sense. Here’s why: If you’re in the 25% federal tax bracket, you’re getting back only about 25 cents for each dollar in interest you pay. Most homeowners get even less back, and many don’t get any tax advantage from their mortgages at all.

It can make sense, though, to keep a mortgage to preserve liquidity. Younger people, especially, should be wary of tying up most of their net worth in a home if that equity would be hard to tap in an emergency. Home equity lines of credit offer one way to access that equity, although lenders can freeze or reduce those lines on a whim.

Because you’re over 62, you could consider paying off the loan and then setting up a reverse mortgage line of credit.

An FHA-insured reverse mortgage line of credit can’t be shut down once it’s established, as long as you abide by the loan rules (such as paying your property taxes and insurance, and keeping the home in good condition). In fact, the amount you can borrow can increase over time with a reverse mortgage credit line. You don’t have to make monthly principal and interest payments on the money you borrow with a reverse mortgage.

Any amount you borrow will grow over time, typically at variable interest rates, and will have to be repaid when you die, sell or permanently move out of the home. That would complicate leaving the house to your heirs, but if the amount you owe is greater than the home’s worth, your heirs aren’t on the hook for the difference with an FHA-insured reverse mortgage, also known as a Home Equity Conversion Mortgage.

In any case, preserving an inheritance probably shouldn’t be your top priority. You should focus instead on preserving your quality of life and your financial flexibility.

Reverse mortgages have gotten safer and less expensive in recent years, but you would need to exercise discipline not to waste the money you borrow on frivolous purchases. You want that equity to be available for you when you need it, such as for nursing home or other long-term care expenses.

You would be required to get counseling before applying for a reverse mortgage, but you also should talk to an independent, fee-only financial planner to make sure this approach makes sense.

Q&A: The new reverse mortgage is safer but still expensive

By

Dear Liz: If you have never written about the new reverse mortgages, please consider it. I’m nearly 90 and this Home Equity Conversion Mortgage sounds too good to be true. Is it? I’ve talked to a broker and a direct lender and attended a two-hour seminar on the subject.

Answer: Reverse mortgages once deserved their bad reputation, but changes to the Federal Housing Administration’s HECM program in recent years have made them safer and less expensive. They’re still not a cheap way to borrow, though, because of significant upfront costs. Using a home equity loan or line of credit is often a better option if you can make the payments.

A reverse mortgage may be an option if you can’t make payments. These loans allow you to tap the equity in your home if you’re 62 or older. The amount you borrow plus interest compounds over time and is paid off when you die, sell or permanently move out. You can get the money as a lump sum, in a series of monthly checks or as a line of credit you can tap.

The older you get, the more you can receive from your home — but you can’t get the money all at once, as you could in the past. If you choose the lump sum option, you can only access 60% of your loan amount the first year. This restriction was put in place to keep you from blowing through your equity too fast.

While reverse mortgages have improved, some of the people touting them have not. Investment salespeople and scam artists sometimes try to push older people into reverse mortgages as a way to come up with cash to invest in their schemes.

You’re required to get counseling from someone approved by the U.S. Department of Housing and Urban Development to discuss how reverse mortgages work and how much one may cost you. In addition, consider hiring a fee-only financial planner to give you advice.

Q&A: Reverse mortgage due when borrower dies

By

Dear Liz: I was laid off from my job this year and decided to move in with my widowed dad in the suburban home that he and my mother purchased outright in 1989. However, over the years they apparently took out a reverse mortgage with a current balance of about $500,000 (the house was recently appraised at $680,000). When my father dies, how much longer can I live in the house? If there is little or no equity left, can I walk away from the house and let the lien holder handle the sale?

Answer: Reverse mortgages, which allow people 62 and older to tap the equity in their homes, are due and payable when the borrower dies, sells the home or moves out. You won’t be expected to vacate the premises the day after he dies, but you typically would have to leave the property within six months. You may be able to get an extension of that time if you’re selling the house or trying to get a loan to pay off the mortgage.

If there is still equity left in the home, it might make sense for you to try to sell it yourself to get the maximum value. Lenders only want to recoup what they’re owed and aren’t required to go to any extra effort to maximize the amount going to the heirs.

If the home is worth less than what’s owed, you can do a “deed in lieu of foreclosure,” which essentially allows you to hand over the keys and walk away. The good news is that you’re not on the hook. Reverse mortgages are non-recourse loans, which means that the lender can’t pursue the estate or the heirs for the balance owed.