Reverse loans more attractive for older homeowners

Dear Ms. Mortgage Maven,My husband is 60 and I am 58. We both have two jobs, plus he has run his own business on the side for 30 years. We have an adjustable rate mortgage on our house for $180,000. The house is worth $800,000. I was just diagnosed with a non-life threatening but chronic illness and have to cut back on my work and hire help around the house, too. Our home needs repairs. Do you think we should take out a home equity line of credit for the repairs? Our daughter wants to buy the house from us someday. We were thinking of signing a quitclaim deed to her for the property. What should we do?

- Dixie

Dear Dixie,

Your first question is a no-brainer. You have $620,000 worth of equity in the property, you have an illness and must cut-back on your employment, and you need money for home repairs - yes, by all means, take out a home equity line of credit. I would start with your local bank and ask if they will give you a no-cost home equity line of credit. You should be able to find a lender who will do it at no cost to you - no lender charges, no title company charges, etc.

The only costs you should pay are for the appraisal and a fee to record the second trust in your local jurisdiction. If your lender wants to charge you any more than those two fees, keep looking until you find a no-cost home equity line of credit.

As for transferring ownership of the house to your daughter - selling it to her and signing a quitclaim deed over to her are two entirely different things. It doesn't sound like you and your husband have any intention of leaving the property any time soon.

By the time you do, your home may well be worth $1,000,000 or more, and my guess is that you would have to sell it to your daughter at a loss in order for her to be able to afford it. If and when that day comes, have your daughter look for a loan that allows for a 20% or more "gift of equity". The gift of equity, for loan purposes, will act as a down payment. Once someone has a 20% down payment, they qualify for a conforming loan and will get a better interest rate and avoid paying mortgage insurance on the loan.

I strongly advise against signing a quitclaim over to your daughter. A quitclaim deed transfers your interest in the property, subject to all liens, to the recipient of the deed. It does not warrant or guarantee that you have clear title or 100% ownership of the property. If you do this, she owns the property, and you are obligated for the mortgage. Your lender would most likely consider this a breach of the terms of the loan(s). You would not be able to refinance your adjustable rate mortgage once you no longer own the property. Not to mention all the terrible problems that can occur in the future - for instance, if she marries someone and the marriage ends in divorce, her ex-spouse could end up owning part of your house and force a sale. Or what if your health requires you to move into an assisted care facility and your daughter refuses to sell the house to pay for your care?

Once both you and your husband reach 62 you are excellent candidates for what is called a "reverse mortgage". In a nutshell, a reverse mortgage will pay off the first and second trusts, and give you either a lump sum payment or a monthly payment as long as you live in the property. When you die, the remaining equity will go to your heirs. To me, it seems like a reverse mortgage may make sense for you once you reach 62. If your daughter is on the title to the property, you will not qualify for a reverse mortgage until she reaches 62.

If you want your daughter to own the house someday, it is best that she inherit it. Talk with an estate attorney to set up what is called a revocable living trust.

Go find a virtually no-cost home equity line of credit to make those repairs and call an estate attorney to make sure you and your husband have your affairs in order. And in four years, consider a reverse mortgage if it suits your needs at that time.

Until then relax, enjoy life and focus on being healthy.

Jessica White, also known as "Ms. Mortgage Maven," is a senior mortgage consultant with Tenacity Mortgage. Call or email her to discuss your home purchase or refinancing needs, including FHA and VA loans. She can be reached at 202-607-4449, Jessica@ msmortgagemaven.com or jessicawhite@tenacitygroup.com. You can also apply online at www.msmortgagemaven.com.