DEAR BENNY: I am the owner of a house that has flooded repeatedly over the past eight years. It is paid off. I want to pull the equity out of the property and walk away from it. How do I best approach this task? I have considerable cash assets that I do not want to put at risk.
I have asked the government to buy the property, but the state has not funded the program and I have no other recourse but to pull the equity out or lose it to depreciating marketplace conditions and the flooding stigma associated with it. Thank you for any advice you can offer. --Jon
DEAR JON: How do you pull the equity out of your property? The only two legal ways I know is either to sell it or to get a mortgage. If you get a mortgage, you really can’t walk away. Your lender will search you down, and whether you are sued on the promissory note you signed or the property is ultimately foreclosed upon, your credit rating will be destroyed.
My only suggestion: What is the cause of the flooding? Can that be resolved so that there will be no more flooding? Can berms or drainage ditches be installed, or something else be done so that your house will be salable?
If readers have any other solutions, I welcome hearing from you.
DEAR BENNY: In one of your recent articles, your response confused me. In answer to the 58-year-old who would like to downsize, you responded that his house was “free and clear” and yet this same person had a “line of equity with $130,000 owed.”
I have paid off the original mortgage on my house and I also have a line of equity with a balance owed. Even though the original mortgage has been paid off, my house is not “free and clear,” because of the equity line. The bank that provided the equity line to me has a lien on the house. Am I missing something here? A clarification would be most appreciated. --J.D.
DEAR J.D.: My column is written sometimes a month or more before it is published in your local paper, so I really can’t recall specifically what I wrote. But if I indicated that the person’s house was “free and clear” when she had a home equity loan on the books, then clearly I was wrong.
Free and clear means that you owe absolutely nothing on your house other than real estate taxes and home insurance. If there is a HELOC (home equity line of credit) on your house (whether or not you owe anything on it), it is a lien on your property and the house is not free and clear.
DEAR BENNY: I have been a student of retirement living for a long time. Among my findings:
1. There are hundreds of thousands of Americans living today in over-55 retirement communities. Very few of them are “currently in financial trouble.” About 30 percent of them paid cash for their houses. Many others have only very small mortgages. Practically none had subprime mortgages, and few have negative amortization. Foreclosures are minimal.
2. About the only financial problem is that many seniors are “brick-rich and cash-poor.” I ran across one case a few years ago where an elderly widow had such a small income that she could not pay the $2 donation for “Meals on Wheels.” But her $400,000 house was free and clear. If reverse mortgages had been in existence then, it would certainly not have been “a last resort”; actually, “godsend” would be more like it. She could have lived like a queen (albeit a modest one) for the rest of her life tax-free.
3. Lump-sum payments, I agree, may create real problems and should be “a last resort.” But I see a real advantage to many seniors the way monthly payments are structured on the FHA program. They are based on average actuarial tables for life expectancy at a given age. That means that some of us are going to die short of our life expectancy and some of us are going to outlive our life expectancy.
The ones who die early are not disadvantaged because they have not used up much of their house’s equity. The “outlivers” reap a bonanza because their monthly payments are received as long as they live, even after their house’s equity is used up. This is guaranteed by the FHA’s mortgage insurance pool we contribute to monthly. This can go on for a long, long time.
My next-door neighbor, for instance, is 96, and she is not at all unique in our community. Had she taken out a reverse mortgage at age 65, she would have received 372 monthly payments by now (and counting). Talk about win-win!
4. Most in our age group read newspapers, while many in the younger generations don’t. Consequently, your excellent column might be well served to address the reverse mortgage issue from the perspective of those most likely to read your column. --Kelly
DEAR KELLY: You sent this email to me a while ago, but it still is timely so I am taking the liberty of reprinting it in full. You indicated that before you retired, you were an executive with a large company specializing in retirement communities, but I am withholding the name of your company.
While your analysis makes a lot of sense, I still am hesitant in recommending a reverse mortgage to everyone. As I wrote about paying off your mortgage, in the reverse mortgage arena there are also many pros and cons. Yes, it’s true that you can get cash, and not have to make any more payments other than for the real estate taxes, hazard insurance and maintenance of your property. But many people want to preserve the family home for their children, and a reverse mortgage may defeat that purpose.
Counseling is required before you can get a reverse mortgage, especially one under the auspices of the FHA. Many people just go through the motions of listening to the counselor. That’s a mistake. You may be making the most important decision in your life, especially where your home is involved. Pay attention to the counselors, and do your homework.
AARP has some excellent information about reverse mortgages on its website (www.AARP.org).
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to firstname.lastname@example.org.