3 ways retirees can build a cash cushion

When home won't sell on open market, innovate

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Mar. 7, 2011

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When home won't sell on open market, innovate

Benny Kass
Inman News™

DEAR BENNY: I read your recent column regarding bridge loans. I would like to look into a bridge loan for my parents, who are both in their 90s. They have moved into an independent living community and are almost out of money -- and their home of 61 years will not sell.

Who do I call to get a bridge loan? It's the only way they will be able to stay where they are because they are cash-poor. I hope you can steer me in the right direction. --Beth

DEAR BETH: A "bridge loan" is generally a loan to help a consumer buy another home before the old home is sold. When the old home is sold, the bridge loan is paid off. In effect, the loan is a "bridge" between the two houses.

So I don't think you are referring specifically to a bridge loan. I see three possible alternatives. First, see if your parents can get a home equity line of credit (called a "HELOC"). I assume their house is free and clear of any mortgage. Talk with your local banker about this.

Second, they may be a candidate for a reverse mortgage. Generally, you have to actually live in the house to be eligible, but I understand that some lenders are willing to make the reverse even if you are renting the house.

Third, perhaps you can buy the house, have your parents take back a promissory note and secure the loan with a deed of trust (the mortgage document)? You can pay the note off monthly -- with interest -- and this way your parents will have a steady income.

And if they have lived in the house for two years out of the five years before you buy it, and file a joint income tax return, they can exclude up to $500,000 of the profit they will make on the sale to you.

DEAR BENNY: I am 74 years old and have been contemplating paying off my condo mortgage. The remainder of my condo loan is $98,000 at 6 percent. Can you help me through this? On the surface it seems like a good idea, but I'm not aware of all the particulars. I am in good health and will not need the $98,000 in the near future. --Dee

DEAR DEE: While you say your health is good and you will not need the money in the near future, what about the "far" future? There is no guarantee that your health will remain good.

I am concerned about people who are "house-rich and cash-poor." They have a house that is paid in full, but cannot afford the upkeep, the real estate tax or even the insurance.

Do you get any tax benefits from your mortgage? Can you deduct the mortgage interest? I recognize that this will not be a lot of money but it is a factor that should be in your thinking.

Now I know that readers will say, "Hey, Benny, she is probably getting less than 1 percent on that $98,000 and paying 6 percent interest, so why shouldn't she just pay it all off?"

Yes, that's a good argument, but if there is any possibility in the future that you will need that money, why take the chance of paying off the mortgage? Keep in mind that down the road when you need the money, it may be difficult -- if not impossible -- to refinance. Lenders may look at your income and your age, and decide that you are not a candidate for a refinance.

But let's be positive. What if you pay off your mortgage and take out a home equity line of credit, or HELOC? Talk with your lender (or your local bank) about this. Most banks will either not charge you for obtaining such a loan or the charge will be relatively small.

With a HELOC, you have a checkbook in your desk drawer. When you need the money, you just write a check and then -- and only then -- are you charged interest on the amount of money you have withdrawn.

Alternatively, you can pay off the outstanding mortgage and consider obtaining a reverse mortgage. Recent developments at the U.S. Department of Housing and Urban Development (HUD) have dramatically reduced the upfront costs for reverse mortgages. You can either take a lump sum now, or get a monthly or quarterly check from the lender.

A reverse mortgage should not be obtained until you carefully do your research. Check with organizations such as AARP, which has very good information about these loans on its website (www.aarp.org). There are significant pros and cons to this, and you must educate yourself carefully before going that route.

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