Q My mother-in-law is 80 years old, in good health and lives in a condominium. She has a $50,000 mortgage at 7.5 percent; there are 15 years to go before it will be paid off. I am considering suggesting that she refinance with an adjustable five-year or seven-year mortgage, or alternatively that she obtain a reverse mortgage. What do you suggest?
AThere are a number of options available to you and your mother-in-law, but only she can decide what is best for her. Whatever approach you take, you should seriously consider getting rid of that 7.5 percent mortgage while interest rates are low.
First, have you considered buying the property from her? Let's assume that the condominium unit is worth $250,000. If you can qualify for a loan, you can obtain a new mortgage in the amount of $50,000, which would pay off her existing loan. The balance of $200,000 could either be given to her directly on the date of sale (assuming you have this cash available) or, better yet, you can pay her in reasonable monthly installments. You can then rent the property back to her for little or no rental income. In my opinion, this would be the best approach.
Second, have you considered the possibility of obtaining a new mortgage for her, and also getting a home equity line of credit? In our example, the property is worth $250,000 and there is a $50,000 mortgage. Thus, the difference, called equity, is $200,000. Most banks will be happy to give your mother-in-law a home equity line of credit of up to 80 percent of this, or in this case $160,000. It is my opinion that every homeowner should have such a credit line.
Why? Because in most cases, banks will charge little or nothing for such a transaction. The great advantage of a home equity line of credit is that you do not pay any interest or principal on the loan until you use the money. You have a checkbook that you keep in your desk until you need the money. Then you pay monthly interest on only that portion of the loan that you have drawn upon.
A third alternative is a reverse mortgage. A mortgage, called a deed of trust in this part of the country, is a loan made either to enable a person to buy a home or to refinance an existing mortgage. A reverse mortgage is money lent by a financial institution to homeowners, usually those older than 62, based on the existing equity in their home.
Reverse mortgages became popular in the mid-1980s. Many recently retired homeowners suddenly found themselves with a house free and clear of debt, but with little or no savings with which to enjoy life after retirement. In popular terms, these homeowners were house-rich but cash-poor.
Lenders came up with the idea that these homeowners could borrow money based on the equity in their house. Instead of the homeowners paying a monthly mortgage to the lender, the lender would either advance a lump sum -- not more than 75 to 80 percent of the equity in their home -- or would send the homeowner a monthly check.
When the homeowners died, or no longer lived in that house, it would be sold and the lender would be repaid from the sales proceeds. But how much would the lender get?
Although most legitimate lenders would require that the repayment be based on an interest rate, such as 1 or 2 percentage points above the general average, there were too many instances in which homeowners were taken advantage of by unscrupulous lenders. In addition to a higher-than-normal interest rate calculation, some lenders were requiring that they receive a sizable percentage of the sales price (called an "equity share").
