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  • Refinance or HELOC? Special Situation

    Hello,
    I have a special situation that I'd like advice on because scouring the internet is just not giving me the answers I'm looking for.

    My mother is 65 years old, doesn't make too much money as a teacher and is rapidly drawing down her retirement funds (which is getting killed by the market as well). At this rate, she will run out of money in 5 years. Her financial planner told her she needs to move to a cheaper location but she refuses and is in denial and doesn't want to uproot her life.
    Please keep in mind she lives in an affluent NJ suburb of NYC- a conservative estimate on her house is 550,000 and she has a 80,000 mortgage on it at 6.75% that she is currently making interest only payments on.

    I am her responsible daughter. I am 30 and just finished my MBA from a top school. I am gainfully employed (and guaranteed safe from any layoffs for at least 2 years) at a large bank where I can get discounts on mortgages for myself or family. I think I can currently either get 1k off closing costs or a .5 point deduction.

    I have around $120k in student debts with interest rates ranging from 6% to 7.5% (as part of the terms, the 6% one will automatically adjust upward in a year or two as well). I have two seperate lenders (gov't and private) on these loans and I can't even find a good consolidator like in days old because that business has all but died out due to unfavorable gov't policies.

    So I would like to take my mother's mortgage off her hands in order to remove one monthly bill from her stack and also keep her from having to deduct $ from her IRA each month to pay for that mortgage payment.

    I am trying to decide between getting a HELOC or a 30 year fixed mortgage for $200k (80K of her existing mortgage + 120K in my loans). I will then be able to pay off my loans and just be making 1 monthly mortgage payment. I think with my employee status and the discounts- I can do either a 2 point mortgage at around 5%, a 0 point mortage at around 5.875% or somewhere in between.

    The monthly payment is not too much of a concern for me because it'll surely be less then what I currently pay in student debt

    My mother says she has an excellent credit score. I am around 720 myself but I'm thinking whatever we decide to do will be in her name instead of mine, because if it's in my name then I'll miss out on some first-home buyer benefits down the road when I'm ready to buy my first home.

    Finally, I have looked into a reverse mortgage for her but I have opted against it. There's no need to be doing that when we are a family, one unit, and I can easily help her with her debt burden while also giving myself a better rate on my own debt.

    I don't know much about HELOCs...so please tell me wihch is better: HELOC vs. Cash out refinancing mortgage and why. Also, if a mortage is the answer- should I do 0 points or 2 points? (I can afford the upfront cost of points if need be & we plan to be in the home for quite some time)

    thanks!

  • #2
    I am interested in the answers for this situation as well. I was looking into HELOCs this morning and from what I could tell they are all variable rate (Something that I will not touch for any situation).

    My uneducated opinion would be to get a fixed second mortgage for the 200,000 that you mentioned. Then just pay extra every month on the loan. Let me see if I can run some numbers please verify these before you make a decision:

    30 Year loan
    Fixed int of 5.875%
    Scheduled Monthly Payment will be $1,183.08
    360 payments.

    15 Year loan
    Fixed int of 5.875%
    Scheduled monthly payment will be $1,674.24
    180 payments

    Your total interest payments for the 30 year will be somewhere around 225,000, whereas the 15 year loan total interest payments will be 101,000.

    Let's assume you can manage 1,500 per month for these loans:

    30 Year loan
    Payment $1,500
    Pay off in 217 months or just over 18 years.

    I always advise 15 year fixed if you have to get a home loan, however, sometimes it's better to get the 30 year loan and pay it like it was a 15 year loan, effectively in the end, you will pay the same as a 15 year loan with the flexibility of a lower payment when you need it.

    So what you would do is get the fixed 30 year loan with mandatory payments of $1,183.08, however you would pay $1,674.24 every month ensuring the extra goes towards the principle. In the event you needed a little extra money one month (Say Christmas time) you would have the option to pay the $1,183.08 that month and still be current along with having a few extra dollars in your pocket that month. In addition, with the extra payments, you will get ahead a few payments and if you had to skip a payment all together you could do so without penalties (Save for paying a little extra interest for that month).

    I am interested in seeing what the smart folks say,
    Ray

    Comment


    • #3
      I'm not a fan of your plan. Combining your debts in her name leaves her with all the risk. If she does not wish to move, I would recommend that she do the reverse mortgage as a last resort, down the line. The market should swing upward in the next two years.

      I'm ok with you taking on the debt, if that is what your intent is. I think you both need to look at this from a 20 to 30 year time frame. If you taking the debt can keep her in the house that long, staying is an option, if not, she needs to relocate.

      As far as the note is concerned, you have to look at the break even point on the points. If the note is longterm, paying the points is an advantage. I question your intent to be in the house longterm. What if you get married? Your decision now has future consequences.

      One thing I need to add is, combinig your debt with her assets will create a problem with her estate later.
      Last edited by maat55; 11-26-2008, 05:05 AM.

      Comment


      • #4
        I don't like it either. I know your intentions are good, and even though you technically reduce the interest rates you are paying, the plan creates a messy situation where you are responsible for paying a loan which is against your mother's house but ultimately came mostly from your student loan debt. I would rather you keep you situations separate. It will prevent a lot of issues in the future (for instance, what if you lose your job in 2 years and can't pay the mortgage?). With your student loan debt, I would attack the private loan and see if you can knock it out in a few years. Maybe at that point the consolidation market will be better. For your mom's situation I would look into a simple cash out fixed refi or reverse mortgage. I would also look at her spending carefully. If she is living beyond her means a cash out refi could be dangerous, because she could end up spending all the cash and end up further in the hole. In that case a reverse mortgage might be more amenable since it "doles" out the money on a monthly basis.

        Comment


        • #5
          I like the idea you helping your mother in straigthen her financial condition. Instead telling you, you shouldn't do it. There is nothing wrong helping your own mother especially if you are in the position to help out. So I would choose fixed home loan instead (maybe 15 or 20 years) since you wouldn't have to pay all the necessary closing cost like you will incur on a REFI. Also, don't exclude the possibility of a reverse mortgage for your mother. That would eliminate the headache completely.
          Last edited by tripods68; 11-26-2008, 11:39 AM.
          Got debt?
          www.mo-moneyman.com

          Comment


          • #6
            Originally posted by Jennif102 View Post
            So I would like to take my mother's mortgage off her hands in order to remove one monthly bill from her stack and also keep her from having to deduct $ from her IRA each month to pay for that mortgage payment.

            I can easily help her with her debt burden while also giving myself a better rate on my own debt.
            I think your intentions are great but I'm concerned with the way you want to go about it. You should NOT merge your debt with her debt. That can cause all kinds of messy problems if anything goes wrong on either end. Plus, there are tax issues to worry about. What happens if mom dies? What happens if you die or become disabled and unable to make the payments? Who gets to take the deduction if the mortgage is in her name but you are making the payments?

            Why not just have her refinance the 80K into a fixed-rate loan and then you can help her with the payments? Keep your student loans out of it. They are yours, not hers.

            Also, make sure that by helping her, you aren't impacting your own financial future. Be sure you keep an adequate emergency fund, max out retirement plans, etc.

            Ultimately, though, she needs to find a way to live within her means, even if that means selling the house.

            ETA: As much as I dislike reverse mortgages, this is the exact scenario they were designed for: to help people who want to keep their homes but can't afford to. I would keep exploring that option.
            Steve

            * Despite the high cost of living, it remains very popular.
            * Why should I pay for my daughter's education when she already knows everything?
            * There are no shortcuts to anywhere worth going.

            Comment


            • #7
              Not sure I agree....

              I'm not sure why everyone is telling me to keep my student loans seperate and keep paying the government a ridiculous interest rate on them (the gov't rate is higher than my private lender's even!) when I could consolidate everything and save around 2% in interest rates.

              With the reverse mortgage, my mother, who does not know how to budget, will continue to spend beyond her means and then I'll inherit a house with a ridiculous mortgage upon her death that I'll have to take on anyway, unless I want to sell the house. The only way a reverse mortgage would benefit us is if the property value is less than the value of the loan at the time of my mother's death. Barring a housing implosion like the one that's going on right now, I find this highly unlikely. This is a good house in a good neighborhood in an excellent town with a direct train line to NYC. The public school system is one of the best in the country. The NY times recently profiled the town as one of the best places to live in the country. Home prices are stable there even during this crisis. Hence, I doubt the value of the home will ever significantly decrease.


              So either way I'm going to end up paying a mortgage on this house- I can start doing it now while she is alive or I can do it later after she is dead.

              Also, while there is a probability of me getting disabled, mamed, losing my job, etc........we could all get hit by busses and die tomorrow. There is always uncertainty in the future. More likely than not, however, is that I will outlive my mother and could be saving the 2% a month that I'm paying to the gov't in student loan interest and instead put that toward paying down a 30 year mortgage in 15 years (I agree with whoever suggested that- I will always try to prepay).

              I have no problem putting the mortgage in my name- I didn't think about the tax deductions that I could benefit from there so that's a good point. However, aren't there some perks for first time homebuyers? So when I do go to buy my first home...would I lose those benefits if I put this house in my name?

              Also, what's the difference between a mortgage refinance and a home equity loan? Home equity loans have higher rates right?

              Please keep in mind I am not someone that lives beyond her means and takes out ridiculous loans. I work in financial services, have a graduate degree from one of the top ten best schools in the US, and make 6 figures. I'm just trying to find a creative way where I can help my mom- right now I can't make payments on 6 unconsolidated loans AND pay her mortgage. And I won't be able to "knock" any of these loans out anytime soon. Each loan is $20 k each- cash that I don't have lying around given the current financial crisis.

              Finally, someone mentioned estate issues....what estate issues would there be? My mother has already agreed to put in her will that I am taking over the $80k mortage. Also, she is fine putting the deed in both our names- but again the only hesitation I have with that is that I lose any first time homebuyer benefits later in life.

              My intentions are good, I am a very responsible person and have no intention on defaulting either on my student loans or a mortgage. My goal is to pay off my debt while also keeping my mom from drawing down her IRA each month.


              Thanks in advance for your advice!

              Comment


              • #8
                You need to be realistic about potential risks. The best way to help your mother would be to just buy the house and let her live there. That, or move in and pay rent and utilities. Saving 2% on loans is not worth the problems that time will bring.

                You mentioned that you were the responsible daughter, this says that there are irresponsible siblings, siblings that may have a stake in the estate. If she is leaving her estate equally to her children, you will only own part of the house. If this is the case, you should have it appraised and establish the % of the equtiy you are buying.

                The chances that you can combine your loans with this asset and not run into problems later are very, very slim.

                Ask your mothers adviser what he thinks about this plan.

                Comment


                • #9
                  Originally posted by Jennif102 View Post
                  With the reverse mortgage, my mother, who does not know how to budget, will continue to spend beyond her means
                  And if you take over paying her mortgage, she will also continue to spend beyond her means. I don't see how you doing this accomplishes anything in that regard.

                  either way I'm going to end up paying a mortgage on this house
                  Do you plan to keep this house after her death? If so, that could change the advice I'd give. Then, I'd probably do as maat55 suggested and put the house in your name and let her continue to live there rent-free (or for whatever amount you both agree upon).
                  Steve

                  * Despite the high cost of living, it remains very popular.
                  * Why should I pay for my daughter's education when she already knows everything?
                  * There are no shortcuts to anywhere worth going.

                  Comment


                  • #10
                    more questions

                    Yes, I do have an incredibly irresponsible brother who does live in the house with my mother (rent free). He is a disaster and cannot help in anyway- so take that idea off the table.
                    We are considering having the house appraised and we will also change the will to represent the $80K stake that I am taking over with the mortgage. The rest will be split 50/50 between my brother and myself.

                    I am thinking that most likely my brother will want to continue living in the house after my mother passes- and so he will have to buy me out (which I can't see him every being able to do) or we will sell the house and be compensated according to our various stakes as outlined in the will. Or....hopefully he'll be willing to move out, I'll buy him out and I can live there- it's a great place to one day raise a family in.

                    I just don't understand why everyone thinks it'll be so messy for me to take a cash out mortgage and use it to pay off my debt. I don't really see what other options I have. I am not goinng to be able to teach my mother how to be more fiscally responsible- she is not changing at this point and is in denial about her bleeding bank account- so she'll bleed it dry and I'll have to support her in 5 years anyway and we'll be in a much worse situation. Trust me- my CPA accountant and her financial advisor have been trying to talk to her about this for years and she just doesn't listen. In fact, if you really want some more details- the reason why she has the $80K mortgage in the first place is because she needed the money to pay for a lawyer to deal with my brother's ridiculous legal issues a few years back.

                    I can't afford to make her mortgage payments as well as 6 monthly student loan payments. I don't want to do a reverse mortgage. What other options are there?

                    I will run this by her financial advisor to see what he says.
                    But I'd really appreciate it if someone could outline the facts regarding why this could get messy from a legal standpoint.

                    I appreciate the advice!

                    Comment


                    • #11
                      Originally posted by Jennif102 View Post
                      Yes, I do have an incredibly irresponsible brother who does live in the house with my mother (rent free). He is a disaster and cannot help in anyway- so take that idea off the table.
                      We are considering having the house appraised and we will also change the will to represent the $80K stake that I am taking over with the mortgage. The rest will be split 50/50 between my brother and myself.

                      I am thinking that most likely my brother will want to continue living in the house after my mother passes- and so he will have to buy me out (which I can't see him every being able to do) or we will sell the house and be compensated according to our various stakes as outlined in the will. Or....hopefully he'll be willing to move out, I'll buy him out and I can live there- it's a great place to one day raise a family in.

                      I just don't understand why everyone thinks it'll be so messy for me

                      I'd really appreciate it if someone could outline the facts regarding why this could get messy from a legal standpoint.
                      I think you just outlined the facts regarding why this could get messy extremely clearly. IF you were an only child, I still wouldn't be a fan of this plan, but now hearing about your brother, I would not go anywhere near this plan.

                      You are setting yourself up for a huge battle when your mother dies. Your brother lives in the house and will continue to do so. He is living there for free so the odds of him wanting to move out are probably pretty slim, because he would then be on his own. You don't think he could ever buy you out. So after your mom dies, you're stuck paying his mortgage. Is that really what you want to be doing? Once the loan is repaid, you've got a big chunk of money tied up in a house that you can't live in and can't sell. Is that really what you want to be doing?

                      I would also suggest speaking with a lawyer and tax professional about the implications of having the deed in the name of a parent and child in regards to estate issues and tax issues. I can't detail them, but I think there may be potential issues you aren't thinking about.
                      Steve

                      * Despite the high cost of living, it remains very popular.
                      * Why should I pay for my daughter's education when she already knows everything?
                      * There are no shortcuts to anywhere worth going.

                      Comment


                      • #12
                        Here is one estate issue I know about. I'm not clear on the exact details, so you'll want to check with a will and trust attorney.

                        As I understand it, if you inherit the property normally, the basis when you sell is the value of the property when your mom dies. So if it's worth $550k at her death, and you sell it a year later for $600k, you'll only owe taxes on $50k of profit.

                        However, if you take a stake in the house and she adds you to the title before she dies, the basis is the price she originally paid for the house. So if she bought it for $200k and you sell it for $600k, you will owe taxes on the full $400k profit (since you did not live in the house for 2 of the last 5 years, you don't get the homeowner's exclusion, either.)

                        If you're not added to the title, your mother could at some point change the terms of her will in a way that is unfavorable to you -- perhaps one day she decides she'd better make sure your brother is taken care of since he won't take care of himself.

                        edited to add: This is a much bigger loss to you than any first-time home buyer benefits.
                        Last edited by zetta; 11-27-2008, 05:22 PM.

                        Comment


                        • #13
                          Originally posted by zetta View Post
                          Here is one estate issue I know about. I'm not clear on the exact details, so you'll want to check with a will and trust attorney.

                          As I understand it, if you inherit the property normally, the basis when you sell is the value of the property when your mom dies. So if it's worth $550k at her death, and you sell it a year later for $600k, you'll only owe taxes on $50k of profit.

                          However, if you take a stake in the house and she adds you to the title before she dies, the basis is the price she originally paid for the house. So if she bought it for $200k and you sell it for $600k, you will owe taxes on the full $400k profit (since you did not live in the house for 2 of the last 5 years, you don't get the homeowner's exclusion, either.)

                          If you're not added to the title, your mother could at some point change the terms of her will in a way that is unfavorable to you -- perhaps one day she decides she'd better make sure your brother is taken care of since he won't take care of himself.
                          Very good point.

                          Comment


                          • #14
                            Another possible estate issue...

                            If you are added to the title, you are considered 50% owner regardless of how much money you actually contributed. If you were to die, your share of the house would then count as inheritance to your mother. She could have to pay taxes on 50% of the value of her own home.
                            Steve

                            * Despite the high cost of living, it remains very popular.
                            * Why should I pay for my daughter's education when she already knows everything?
                            * There are no shortcuts to anywhere worth going.

                            Comment

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