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.
In my previous post I discussed the serious issue of the number of seniors in the United States who still have a mortgage on their home and may have difficulties paying for it.
If they are still employed, the may not be able to afford to retire because of their mortgage payment that they are obligated to pay each month.
Certainly a Reverse loan is the better option, since the homeowner is not required to make any payments and it will allow them to manage their retirement savings to last longer if they are not drawing down on their funds.
Here is the second part of the article that summarizes a report that was published recently by HUD’s Office of Policy Development and Research.
Written by Jason Oliva
“The implications of carrying housing debt into retirement years are severe. Not only may these homeowners have to postpone retirement or make difficult decisions regarding lifestyle spending on food, medical care and other expenses, but carrying debt also weakens their ability to draw on home equity to supplement their income as they age.
Refinancing options and reverse mortgages, HUD writes, may be appropriate for some older homeowners with mortgage debt, and financial counseling and assistance programs can provide help to those facing financial hardship.
“Older homeowners might draw on their home’s equity to fund modifications that allow them to age in place, help pay for their children’s or grandchildren’s education, or pay medical expenses—and as long as they have the resources to make loan payments, they can reasonably carry mortgage debt,” HUD writes.”
I will share the reminder of the article in my next Post.