I previously discussed in earlier posts some of the details and considerations when a senior might be thinking of borrowing equity from their home and they have four options.
- Refinance their home using a traditional mortgage – There will be a monthly payment
- Do a Home Equity Line of Credit/HELOC – % only for five years then become fully amortized for remaining 10 years. There will be a jump in the monthly payment. “Payment shock”
- Get a Fixed rate 2nd. Deed of Trust – Fully amortized monthly payment for 15 years.
- Use a HECM/Home Equity Conversion Mortgage; a “reverse” mortgage. No payments or loan term. It is in effect as long as the borrower continues to occupy the home and/or they”pass” away.
Let’s examine the options a little bit closer. The first three choices all require the borrower to qualify using their income and credit, plus they will have monthly mortgage payments.
Initially, the first 3 options are less expensive in closing costs, but there are risks associated with obligating oneself for a mortgage payment in the later years of their life.
If the borrower is currently employed and plans on working for many more years, then maybe the first 3 choices are ideal. But what if you want to retire? The mortgage payments won’t go “away”, the borrower will have to continue to make them each month.
Doing a traditional “cash-out” refinance is certainly an option to consider especially if the existing mortgage is at a high interest rate or it’s an Adjustable Rate Mortgage ( who knows what will happen with interest rates in the future? They will probably increase). And of course, there is a monthly mortgage payment to be made.
Is this a particularly good option for a senior to continue to maintain an ongoing mortgage for many more years?
I will discuss the other three mortgages in my next post and each of them can be appealing depending on the borrower’s circumstances and what they are attempting to accomplish.
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.
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?