SEPTEMBER 14, 2016 Volume 11 • Issue 37
RE WEEKLY STORY COUNTY
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DEAR MONTY
Pros and cons of a reverse mortgage R eader Question: Reverse mortgages, good or bad? I’m 81; it’s our primary residence, no mortgage. We have a $1,000,000 second home that will go to our kids who all are well off. We just want to use some of our equity for travel. Your thoughts? — John P. Monty’s Answer: There is not enough information about your personal circumstances to comment on if a Home Equity Conversion Mortgage is best for you. It is very likely you are eligible for the HECM if you qualify.
Primary structure of the HECM • Loan to value ratio is lower than
RICHARD MONTGOMERY conventional loans because income is not required. • Both husband and spouse must be 62 or older. • Must attend a financial counseling session to demonstrate an understanding of the loan. • When you move out or sell the house, you must repay the interest and principal on the loan. • The property must be kept in good repair or risk foreclosure. • Insurance and real taxes must always be current or risk foreclosure.
• If certain health conditions exist 12 months or longer, the lender can call the loan. • If the house is in your name when you die and the loan is underwater, you protect your estate against loss on sale over and above the interest and principal. • Verification of income, assets, credit history, and monthly living expenses is necessary.
concept of senior living communities. They come with different ideas, price ranges, and amenities, and many seniors find one that fits into their lifestyle. Your current housing situation is not clear in your question, but depending on the value of your home, you may be able to sell your current home and buy a smaller home. Here you raise free cash and have no loan. If you chose to rent instead of buying a smaller home, you would have even more money to travel.
From your brief description, it is possible you have other alternatives that may achieve your travel goals without using the HECM. Consider starting a conversation with your accountant, if you have not done so already. Estate planning concepts may offer other solutions, such as Reverse mortgages are not some loan against assets like stock, for everyone bonds or IRA’s. Another option The perfect fit for a reverse may be selling some of those same mortgage is an older senior holdings. whose retirement program has Consider investigating the gone sour; their spouse has
passed away, and a need for some limited health care assistance in the near term. They had depleted their funds, ?and death and illness have cut into the? social security income. All they have left is the equity in the house. A reverse mortgage allows the surviving spouse to live in their home for a significant period. Most seniors prefer “Aging in place.” — Richard Montgomery gives no nonsense real estate advice to readers most pressing questions. He is a real estate industry veteran who has championed industry reform for over a quarter century. Send him questions at DearMonty.com.
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Home sweet loan? Home-equity borrowing rebounds, but owners show more discipline By Jim Weiker More Content Now
W
ith home values having increased dramatically during the past four years, consumer borrowing against some of that value — in the form of homeequity loans — has risen, too. Home-equity lines of credit, or HELOCs, have steadily climbed after bottoming out in 2010 during the housing recession. Last year, lenders approved about $156 billion in new loans, up 22 percent from the previous year. Banks are again pitching specials and teaser rates to draw home-equity borrowers. Before being seduced by such deals, however, homeowners need to consider several factors, experts say. The most important: A home-equity loan, like a mortgage, puts a property on the line. Your house becomes the insurance policy for the lender — if you can’t pay, the lender can collect it. “Here’s the trade-off: You’re getting favorable terms because you’re using your home as equity,” said Greg McBride, chief financial analyst with Bankrate.com. Still, for disciplined borrowers in need of quick cash, a home-equity line can make a lot of sense. Home-equity interest rates are far lower than creditcard rates and carry an added advantage: Interest paid on the debt can be deducted from your taxable income. Even financial advisers, who tend to discourage taking on debt, see advantages to a home-equity line. “I like the flexibility,” said Eric Bishoff, president of the Bishoff Financial Group in Worthington. “The interest is very reasonable, the payment structure is flexible, and it allows you to not get a new loan every time you need money. If you’re
said. Although both can make financial sense, most experts agree that a line is best used for home Up renovations. “The no-brainer time to use it is when customers tell me they’ll update the kitchen and bathrooms,” said Mark Seymour, vice president of lending at KEMBA Financial Credit Union. “That’s a great time from 2014 to use the product because you’re actually adding value to the house.” in new loans in 2015 When Susan and Biff Smithhisler decided to renovate the kitchen of their house in the Clintonville neighborhood in the spring, they took out a homeborrowing on a short-term basis, you can take it out a equity line through KEMBA. “We paid around $40,000 for the kitchen and little at a time.” For the same reasons, McBride, too, likes the loans paid for it with the home-equity line,” said Susan Smithhisler, a nurse at the Arthur G. James Cancer — albeit with cautions. Hospital. “The disadvantages are that it’s a variable-rate The couple liked the ability to borrow and pay loan,” McBride said. “And, unlike your credit card, back the money on their schedule. it’s not really open-ended. You usually have it for Erich and Debra Scheetz of Dublin also were only 10 years. Then, it converts to a home installment attracted to the loan’s flexibility when they received a loan, and you have to start paying the principal.” Fifth Third home-equity line in January. They wanted The key to a successful home-equity loan, a cushion as their daughter, Lauren, began college. McBride and others say, is discipline. They also expect to eventually use the line for home Such behavior was missing during the housing boom, when homeowners downed home-equity debt improvements. “We’ve been in the home for 16 years,” said Erich like bonbons. Default rates skyrocketed on the loans, Scheetz, a physical therapist. “At some point, we’ll leading to borrowers losing their homes. More recently, though, homeowners have regained need a new roof, new furnace. To have that money available made a lot of sense.” discipline, experts say. The past three years, accordScheetz knows the line is secured by the home, so ing to the Icon Advisory Group, the default rate on he’s in no hurry to run up a big debt on it. HELOCs dropped from 1.9 percent to 1.4 percent. “We’re trying to be frugal,” he said. “We’re not “Since the financial crisis, people are using the doling it out.” lines differently,” said Nancy Elkus, vice president and senior consumer-lending product manager for — Jim Weiker is the real estate and home writer for Fifth Third Bank, who also heads the Home Equity The Columbus (Ohio) Dispatch. He can be reached Lending Committee of the Consumer Bankers at 614-461-5513 or jweiker@dispatch.com. Association. Home-equity lines are most commonly used for home improvements and debt consolidation, Elkus MCN ILLUSTRATION
Lenders approved
$156 billion
22%
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