Interest-only mortgage/HELOC as a refi? (retired and low income)

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prudent
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Interest-only mortgage/HELOC as a refi? (retired and low income)

Post by prudent » Thu Feb 15, 2018 6:30 pm

A close elderly relative told me the other day the interest-only part of his mortgage is coming to an end in a few months and he's panicked because his payment is scheduled to go up by around $250/month, beyond what he can afford. Apparently his mortgage was 10 years interest only, then converts to a 20-year conventional mortgage. He's really not sharp enough to tackle this, and knows it, and asked if I could help figure out what to do.

Looks like he has about $100k of equity and owes around $90K. Only income is SS and a small pension, around $28K/year total. He's hinted that he might not be able to live independently for much longer, so he'll be selling in a couple years (at most).

I looked at a couple sites but I couldn't get detailed info/rates without providing more data than I wanted to supply (his street address/phone number/email).

Any ideas on an obvious direction? Refi to another mortgage that is interest-only for 5 years (if so, where does one find such a beast?) Or see if a HELOC can replace the first mortgage, if that makes any sense? He thinks a VA loan would be a "good choice" but can't explain why. Low payments are key.

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Strayshot
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Re: Interest-only mortgage/HELOC as a refi? (retired and low income)

Post by Strayshot » Thu Feb 15, 2018 6:54 pm

You can’t really replace a mortgage with a heloc, the heloc is a secondary lien and they would offer a heloc line equal to the difference between what is owed and 80% of the appraised value. Maybe you could convince someone to do a heloc with an initial draw that would pay off the first lien and then pay interest only for a while, but I have never heard of that happening and the rates would be much less favorable than just originating another mortgage. He could add a heloc and draw from the line to make the now larger mortgage payments, but that is just eating the equity in the home to stay in it.

It sounds like he can’t afford the house, and in that case nothing will solve the issue beyond finding housing he can afford.

Another option is a reverse mortgage, but if he believes he will need assisted living soon anyways that is a worse option than just selling.

I would sell, downsize possessions, and find an apartment or go straight to assisted living.

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Re: Interest-only mortgage/HELOC as a refi? (retired and low income)

Post by cheese_breath » Thu Feb 15, 2018 7:00 pm

Interest only mortgages enable people to purchase houses they can't afford. They might be OK for younger folks with rising incomes that will enable them to absorb the increased payments when the zero interest term ends, but not for older folks on fixed incomes. Seems like your friend is one of the latter. If he's going to be selling in a couple years, why not just do it now and be done with it.
The surest way to know the future is when it becomes the past.

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Re: Interest-only mortgage/HELOC as a refi? (retired and low income)

Post by prudent » Thu Feb 15, 2018 7:29 pm

He's looking at his options for moving elsewhere but there are waiting lists at the places he's interested in. It seemed like a good idea to get something that would act as an extension to his interest-only mortgage in the short term as that will be $hundreds/month cheaper than anywhere else he can move to. He's paying less than $400/month currently. It would be a relatively short-term fix until he gets longer-term arrangements in place.

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Re: Interest-only mortgage/HELOC as a refi? (retired and low income)

Post by delamer » Thu Feb 15, 2018 7:34 pm

I agree with the previous posters that it is time for your relative to sell.

If he has no savings, he is one major repair away from not being able to keep the house in any case.

At 4.5% for 30 years, the PI on a $90,000 mortgage would be about $456/month. With taxes and insurance, could he qualify?

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Re: Interest-only mortgage/HELOC as a refi? (retired and low income)

Post by Strayshot » Thu Feb 15, 2018 7:48 pm

Don’t forget the transaction costs (likely in the thousands) involved with originating another mortgage, which will eat equity in the home. This individual seems to be living on a meager budget, so incurring $3000 in transaction costs is sizeable.

I do not believe that there are no other living arrangements this person can find that are at or below what he currently pays and that any other option results in paying hundreds more per month.

A different option would be selling the home to a flipper or real estate investor with a stipulation in the sale that the prior owner be allowed to remain in the home for up to 3 years paying a fixed monthly rate. Obviously the sale price will reflect the stipulation and be lower than market value, but it is an option (you are trading cash from the sale for a rent guarantee).

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Re: Interest-only mortgage/HELOC as a refi? (retired and low income)

Post by prudent » Thu Feb 15, 2018 8:22 pm

Good point about the transaction costs although if they could be rolled into the mortgage I don't think he'd care. He wants to conserve cash. Maybe the idea of using a HELOC to pay the higher mortgage payments would be a simpler arrangement but I don't know if he'd qualify for two monthly payments. Granted the refi costs even if rolled in would be a lot if he's only there a year or two.

I think he might qualify for a 30 year - my guess is his PITI would be just shy of 30% of income (he has no other debt) which should be OK for a VA loan - but he seems sure he can't afford any more than he's paying now.

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Re: Interest-only mortgage/HELOC as a refi? (retired and low income)

Post by cherijoh » Thu Feb 15, 2018 9:34 pm

Is his house big enough that he could rent out a room to generate some additional income?

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Re: Interest-only mortgage/HELOC as a refi? (retired and low income)

Post by Shikoku » Thu Feb 15, 2018 9:35 pm

Quicken Loans offers interest-only mortgage which come from Schwab Bank.
https://www.schwab.com/public/schwab/ba ... days_rates

I had their 5/1 interest-only ARM. Although it is an unloved product, I used it in my advantage. viewtopic.php?f=2&t=233001
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Re: Interest-only mortgage/HELOC as a refi? (retired and low income)

Post by Strayshot » Thu Feb 15, 2018 10:30 pm

prudent wrote:
Thu Feb 15, 2018 8:22 pm
Maybe the idea of using a HELOC to pay the higher mortgage payments would be a simpler arrangement but I don't know if he'd qualify for two monthly payments. Granted the refi costs even if rolled in would be a lot if he's only there a year or two.
The home is worth 190k but to make the math easy we will say it is worth 200k. He owes 90k, which means at an 80% loan to value he could originate a heloc for 200*.8=160-90=70k. Usually with a heloc there is no origination fee (free to open, usually they will also pay for appraisal but you might have to spend 400 or so) with a minimum draw of 15-20k. They usually are interest only for 10 years of draw, so pretty much a credit card. Let’s say the rate on the heloc is 5.5%.

He could take the 20k draw and deposit in a high yield account at 1.5%, making the cost of capital about 4%. He would need the 250 each month for extra mortgage plus 100 a month to pay the interest only on the heloc, so 350/mo total. With a 20k draw, he could last ~60 months in the home before needing to draw more out of the heloc. The downside here is he is eating equity in the home and will make closing when he finally sells more complicated due to the second lien from the heloc.

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Re: Interest-only mortgage/HELOC as a refi? (retired and low income)

Post by Watty » Thu Feb 15, 2018 11:19 pm

The costs to set it up are high but a reverse mortgage would be worth considering.

They are still pretty much a choice of last resort but they revised the rules for them about five or ten years ago so they are not as as bad as they used to be.

The problem is that he still would have the maintenance costs and property taxes so it sounds like it would be better to move someplace more affordable sooner rather than later.

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Re: Interest-only mortgage/HELOC as a refi? (retired and low income)

Post by JGoneRiding » Thu Feb 15, 2018 11:41 pm

I am trying to figure out what the rest of you think would be more affordable. Most likely he is paying less than 500/mos for housing plus insurance and taxes in probably mcol area (200k home). I live in mcol area I can tell you what you can rent for 600/mos is very very limited. I don't see how he affords any form of assisted living what so ever.

So his options are refi some how. Sell and rent the dinkiest apt he can find. Personally I think he should just get a roommate. Win win he isn't alone has help around the house and enough income to afford it

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Re: Interest-only mortgage/HELOC as a refi? (retired and low income)

Post by prudent » Mon Feb 19, 2018 7:34 am

Thanks to all. I gave him a summary of the options above for consideration.

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