This is not an easy question to answer because it depends entirely upon the details and circumstances of the potential borrower and what they are trying to achieve.
Whenever anyone is looking to borrow equity from their home they could possibly do a refinance of their existing mortgage and then request cash back at the close of escrow.
Ideally they would be reducing their interest rate on the mortgage they are refinancing and then receiving the extra funds they requested and are happy with their decision.
They will have a mortgage payment to make each month and it might be larger than what they had been previously paying, because they have taken out cash from their equity and increased their loan amount, even if they reduced the interest rate.
The applicant will have to go through a lengthy Underwriting process, have excellent credit, job stability, cash reserves and enough income to meet the “debt to income” ratios and of course good FICO scores.
This can be a very stressful process as it is more difficult to qualify for traditional mortgages than it was in the past and a great deal of documentation must be “willingly” provided by the applicant to complete the loan process.
And of course, they will have points and fees included in their loan amount as well and depending upon the size of the loan and the interest rate they choose, those fees will vary.
But what if their current loan already has a low interest rate and they want to keep it?
They could consider a Second Trust Deed that would be at a Fixed rate, a Home-Equity-Line-of-Credit or if they are aged 62 or more, a reverse loan/HECM/Home Equity Conversion Mortgage.
Unlike a HELOC, an FHA HECM reverse mortgage will not record in a second position and any existing mortgages on the property will have to be repaid from the funds from the reverse loan.
I will discuss these last two options in my next post.
In my previous post, I started a discussion about this topic and why it is never a good idea to use money from a reverse loan to purchase an annuity.
In general, an annuity may have high surrender fees and a deferred payment that tie up the borrower’s funds in an account that they would not have immediate access to and is of no benefit to them.
And why would an 80 year old senior buy one? What’s the point? It’s quite likely that they will die before they can ever withdraw any funds from it.
Because of this type of predatory lending, reverse loans developed a nasty image that continues to this day but is no longer true. A reverse mortgage is probably without a doubt the most regulated loan in the lending industry and the safest for the consumer.
At no time is a borrower obligated to buy any insurance products ( especially an annuity) as part of the loan process and within the loan application there are several forms asking the borrower if they intend to use their money from the loan to purchase an annuity and are they working with a retirement advisor?
Once the federal government stepped in and began managing this loan program along with individual state regulations, seniors are now protected from financial manipulation and the potential for financial abuse.
Plus a reverse loan is somewhat “like” an annuity, except the borrower doesn’t have to wait to receive their funds and there are no possible tax consequences.
Why is a HECM/Home Equity Conversion Mortgage better than an annuity?
An annuity should never be purchased using money from a reverse loan, but in the past there were times when a reverse loan borrower would unwisely do just that and sometimes these vulnerable seniors were (for lack of a less sensitive term) “robbed”.
But what has happened since then to protect seniors from this kind of scam?
In 1987 Congress passed the FHA Insurance and Uniform Lending practices and the FHA insurance bill that would insure Reverse mortgages.
The first reverse mortgage to be insured by FHA was in 1989 and they continue to oversee this program very closely as an added protection to seniors and since that time additional oversight has come from Housing & Economic Recovery Act, HUD, Ginnie Mae, the National Reverse Lenders Association and the Consumer Financial Protection Bureau.
Prior to this time, reverse loans were created and offered by other entities such as insurance companies in exchange for a portion of the equity of the borrower’s home when they passed away and at very high interest rates.
And quite often an annuity was tied to this transaction by obligating the borrower to use the funds from the reverse loan to purchase this insurance product.
Is this an acceptable suggestion for a senior to utilize in their “later” years?
In my previous post I mentioned that since the 1990’s, “Gray” divorce ( As senior divorce is often referred to) has increased. As a matter of fact it has tripled and more seniors are splitting up than in any previous time.
More often than not, the “wife” will want to continue to live in the home but is unable to qualify for a traditional loan due to lack of income and cash reserves.
So what happens if one of them wants to keep the home and continue to live in it?
More than likely they won’t have enough income to qualify for a traditional loan and even if they are going to receive spousal support, a lender will not use it for qualifying purposes because there will be no history of it’s receipt to the spouse who has been awarded support.
And what would be her option?
Depending on her age, the value of the subject property and if there are any mortgages on it, she may be able to qualify for a reverse mortgage, pay off the spouse and continue to live in her home.
Her only responsibilities would be to continue to pay property taxes, home insurance and any HOA fees and keep the home in good repair.
Reverse loans are a financial tool. A tool to leverage the longevity of a retirement portfolio, purchase a home, provide additional income for on going expenses and other aging concerns.
And it’s also an excellent tool that can help the pain of divorce be just a little bit less and allow one of the divorcing couples to remain living in their home and not be displaced.
My description is quite simplistic in this post and the borrower does need to qualify on their residual income, but overall using a Reverse mortgage as part an option to retain the property in a divorce is a very good suggestion and should be considered in the settlement process.
Divorce is always an emotional and difficult experience regardless of the reason or the age of the two individuals who are experiencing this wrenching event in their lives.
Overall the national average of divorcing couples has declined over the years but what is odd, is that it has tripled for those couples over the age of 65 since the 1990’s.
The reasons for senior or “gray’ divorce vary but some of the more common ones is that after raising their children for many years, they began to see themselves as simply parents and no longer friends or lovers.
Then when the adult children leave the home and start their own lives, an older couple may discover that they no longer have any shared interests as they have grown apart over this period of time.
The financial implications of a “gray’ divorce can be quite complicated in that any assets and or retirement funds could end up being liquidated with disastrous consequences for the couple and their future financial stability and security.
I am not a financial advisor and certainly not a Divorce attorney and not qualified to provide any guidance in this matter and it’s best for couples to always seek professional advice when it comes to something as serious as a divorce and splitting up their assets.
However if there is equity in the home, it may be adequate enough to utilize a Reverse mortgage as a tool to either give half of it to one of the divorcing party’s and or buy them out in exchange for the other party receiving any investments they may have accrued together.
But a property settlement would have to be created by their mutual Divorce attorneys to make a final determination as to how all assets are to be divided.
So how would that work?