Mortgage Problems: What If Mom & Dad Can’t Make Their Payment?

Mortgage Problems Hit All Generations

The economy is changing, and sometimes that means mortgage problems close to home. What can you say if Mom and Dad have run into tough times?

The government reported in June that the average work week is now 34.5 hours – far short of the 40 hours we usually associate with full-time employment.

This Time, It’s Personal

This can be really difficult for Mom and Dad when they have always been the breadwinners. Because of ego, pride, and status, it’s tough when financial situations change.

Personal interactions can shift with economics. And, as always, many families are simply not models of social harmony in the best situations.

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But, in spite of personal and financial issues that may be involved, it’s still possible to help parents. Here are some options to (gingerly) mention.

Mortgage Problems And Reverse Mortgages

Available to those aged 62 and above, a reverse mortgage is a way to refinance a home and lower monthly cash costs.

Imagine that the Starks have a home worth $225,000 and a $100,000 mortgage balance. Their monthly mortgage payment for principal and interest is $500. They also pay $200 a month toward property taxes and homeowners insurance.

Reverse Mortgage: Who Should Consider It?

If the Starks refinance with a reverse mortgage, they can pay off their existing loan completely. This cuts their expenses by $500 a month, allowing them to stay in the property.

In addition, they may be able to get additional cash — as a lump sum, monthly payments or a line of credit. The amount you can take with a reverse mortgage depends on your age, interest rates and the property value.

The reason they save $500 a month is that with a reverse mortgage, there’s no required monthly mortgage payment. Instead, the lender adds unpaid interest to the reverse mortgage balance. When the borrowers vacate the home, they pay off the balance by selling or refinancing the house.

Reverse Mortgages Are Newer, Safer, Better

If the house doesn’t sell for enough to repay the entire debt, insurance covers the remaining balance. Because a reverse mortgage is “non-recourse” financing, the lender cannot make additional claims against the estate or the heirs.

Refinancing

In many cases, the existing mortgage is old and has a higher interest rate than new financing. This means your parents may be able to reduce their payment by refinancing.

Refinance Options When You Experience A Financial Setback

Even if the new rate is not much lower than your parents’ current rate, they may be able to reduce their payment. That’s because simply extending the loan’s repayment over a new term can drop the payment significantly.

For instance, if the Andersens took a $300,000 mortgage ten years ago at 4.5 percent, and now they can get a rate of 4.0 percent, they might see a bigger drop in their payment than expected.

• Starting balance: $300,000
• Original rate: 4.5%
• Original payment: $1,526

After ten years:

• Remaining balance: $229,830
• New rate: 4.0%
• New payment: $1,097

Refinancing frees up over $400 a month.

Note that this will not decrease the interest paid over the time it takes to completely pay off the home. But if cash flow is the issue, refinancing can make a huge difference, especially if your parents have been paying on their mortgage for some time.

Increasing Equity Can Help

The National Association of Realtors (NAR) reported that existing home prices in June were up for “the 64rd straight month of year-over-year gains.” Because property values have increased substantially in most areas, owners may have enough equity to refinance.

Even if their credit is suffering due to money problems, homeowners with more equity often pay a lower rate. Climbing property values can also help eliminate the need for mortgage insurance.

Streamline Refinances Allow Declining Credit

If there’s the problem of little or no equity then parental borrowers might want to consider several options.

Those with FHA-backed loans can look into “streamline” refinances, arrangements where they can get a lower rate but avoid such application hassles as credit checks, asset and employment verifications, and home appraisals.

Streamline Refinance Programs; Which Is Best For You?

VA borrowers should check out an IRRRL – an Interest Rate Reduction Refinance Loan. There’s no minimum credit score or appraisal requirement plus you don’t necessarily need income and job verifications.

Those with Freddie Mac or Fannie Mae (conforming) mortgages have streamline options, too. It’s called HARP, the Home Affordable Refinance Program. However, government is ending the program on September 30^th, so if you’re interested, you need to hurry.

HARP allows homeowners to refinance even with negative equity — if the mortgage balance exceeds the property value. The HARP program is restricted to mortgages owned by Fannie Mae and Freddie Mac which were issued prior to May 31, 2009.

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In the future, the Freddie Mac Enhanced Relief Refinance and the Fannie Mae High Loan-to-Value Refinance Option will replace HARP. These programs can refinance loans originated after May 31, 2009.

For details and specifics please speak with mortgage loan officers.

Boarder Income

If your parents have a large home, they might consider a month-to-month boarder. Done right, boarders can provide monthly income, and their presence in the house can make it more secure.

Many property owners now rent bedrooms on a short-term basis, maybe a night or two, through a services like airbnb. Such rentals can produce income.

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However, this is a market niche which is now in transition. Nightly rentals may be prohibited under local ordinances designed to protect hotels, and they can raise insurance and mortgage questions as well as privacy and security concerns.

For details, speak with your insurance broker and an attorney to see what’s okay and what isn’t.

Family Help

Rather than new financing or boarders, a better option may be family help, just giving Mom and Dad what they need each month. While this is not always financially-feasible, it can be an attractive choice when possible because there are no loan applications and no boarders.

If the goal is to keep the house for the heirs, then family help can be a better option than a reverse mortgage in which the debt grows each month. According to the IRS, you can give up to $14,000 in 2017 tax free to each individual recipient. For specifics, speak with a tax professional.

Help Friends Or Family Qualify With An FHA “Family Mortgage”

If you go the family route, it will be helpful for Mom and Dad to have wills and living wills, or whatever is required in your jurisdiction, to assure a smooth transfer of ownership down the road.

Having wishes in writing can avoid a lot of family disputes. Attorneys who specialize in elder law can provide advice.

What Are Today’s Mortgage Rates?

Today’s mortgage rates, whether for refinancing, buying a smaller house, or reverse loans, have been moving up and down within a narrow range for some time.

They are still affordable. Check with several lenders to see what’s available to you and / or your parents.