How one couple were put at risk, all because the right questions weren’t asked
Should older homeowners refinance their existing home or purchase a new one with a 30-year mortgage? It’s a question that’s often ignored but one that warrants consideration.
Imagine yourself as a traditional mortgage broker. Sam & Sally Homeowner come into your office looking to refinance their mortgage at a lower rate. You helped them get their first mortgage six years ago when they purchased their home for $350,000 of which they financed $125,000 Today their mortgage balance is $112,700. Sam and Sally are 75 and 73 respectively.
How would most traditional mortgage lenders respond?
They would qualify them again and give them a shiny new 30-year mortgage at today’s low rate. Perhaps they inform them they could right-size into a brand new home.
However, little does the broker know that Sam’s pension survival benefit only pays Sally 50% of his current monthly payout. Also, in 8 years the income from a business they sold ends when the loan is paid in full. Neither have long-term care insurance.
Also unbeknownst to their helpful mortgage lender, neither Sam nor Sally really care about the home being paid off when they die. In fact, they don’t care if there’s any equity left for the kids because both adult children are financially secure and well off. They used to care about having a mortgage interest deduction when the standard deduction was $12,700 for married couples filing a joint return. Both being over 65 their standard deduction is $27,000 for married filing jointly. Mortgage interest matters little as itemized deductions would come nowhere close to the standard deduction.
Thanks to their hard-working and dedicated mortgage professional Sam and Sally have a new 30-year mortgage. It’s unlikely either of them will live past the age of 100 when the loan is ultimately paid off.
Are they worse off? Not now, but they could be. Had their mortgage broker asked them the following questions they would have uncovered a few pitfalls that could create big problems in the future. Should necessity dictate a change they could possibly qualify to get a reverse mortgage. Regrettably, they would have made unnecessary mortgage payments for years, unnecessary loan fees on the initial mortgage, and possibly stand to get far less money if interest rates go up or home values drop.
Here are the questions their mortgage broker could have asked **
- Do you plan on moving in the next 5 years?
- Is either of you working?
- If you’re working when do you expect to retire?
- Would losing your employment income in the future make it difficult to pay your mortgage?
- Why is paying down the balance of this loan important to you?
- Are you currently deducting mortgage interest or itemizing your deductions?
- If one of you predeceases the other, would the surviving party be able to pay the bills?
- Are you planning on leaving your home or its equity to your children or grandchildren?
- Would you be interested to learn about a mortgage that allows you to pay when you want or not at all?
- What unexpected future expenses do you see that could make mortgage payments difficult?
Knowing your client is one thing. Knowing what options they have is quite another.
**Mortgage lenders cannot ask about health issues, sexual orientation, or family planning. Mortgage professionals should seek the advice of their company’s compliance department to ensure all questions meet federal and state guidelines.
4 Comments
Shannon I love what you have for us every week it keeps us focused on our borrowers. With the daily grind we can lose track of that.
Recently I decided to get a reverse mortgage for my wife and myself. If anything ever happened to me she may struggle with staying in the home that we just completely remodeled. Now i have peace of mind that if I got ill or checked out of this life she will be fine with all the other assets to live comfortably . The timing was perfect because our value came in over the lending limit. We may still make payments or enjoy a few more trips before we get too old to enjoy them but it is nice to have a choice.
Mike Schuler
All Reverse Mortgage
Michael, thank you very much.
Shannon,
To further the conversation, several years ago I had a couple in my office who were ready, within several days, to sign final loan documents for a credit union HELOC loan that they would be using to pay the HELOC loan payments because they were not, income wise, really qualified to pay the monthly payment, maybe on paper qualified, but in reality they knew their household bills were high enough that the only way to get the HELOC payment made each month was to use proceeds from the HELOC. This is the part were one of the couple cried tears telling me their sotry: by their calculation it was inevitable, because they did not have the income to pay the HELOC monthly payments, the loan money would run out in 8 years and they would have to sell their home. No one at the credit union, both of them were in their 70’s, recommended a reverse mortgage credit line loan as an alternative option. A relative heard of their plight and sent them to me. I explained how a reverse mortgage credit line loan would work for them, ran their numbers and they not only were qualified for a much larger line of credit, of course there would be no monthly mortgage payments. They were elated when they left my office and canceled the HELOC signing session and proceeded to completed a RM credit line loan with me. It saddens me that a credit union working with seniors is not required by disclosure laws, or just general ethical practice, to inform borrowers that a reverse mortgage loan may be an alternative to a HELOC conventional loan.
Shawna McDonald, LO
Zyng Mortgage, Formerly named MLS Mortgage
Shawna. Thank you. Your comment drives home the reality that a traditional mortgage loan or HELOC can possibly do more harm than good for older homeowners.