By Jacob Passy
I hope you can help me figure this out. I am 69 years old and will turn 70 at the end of the month. I’ve been offered a cash out refinance loan and need to decide whether to take a 15- or 30-year loan. My monthly obligation would obviously be higher for the 15-year loan.
I may not — likely will not — live long enough to pay off either, or even conclude the 11 years remaining on my current mortgage, for that matter. I’m diabetic, let alone other infirmities. The mortgage lender knows my age, but the choice is mine.
Normally I guess one’s heirs would have to deal with it, based on the will, but I don’t have any heirs in my opinion. I’m single, have never been married and have no kids. My mother is deceased, and my father is 97 years old. He lives with a woman, but they chose not to marry.
My brother and I have been estranged since 1990. I don’t intend to bequeath him anything of value — he ripped me off big time when our mother died, besides the fact I don’t actually have anything of much value. I don’t wish to leave him a mess. He is 67 years old, and who knows if he’ll be living when I die. Then there’s my niece, his only child, whom I barely know. She’s never attempted to rectify that fact since becoming an adult. She’s 38 years old, is single and has no kids. I have 33 or more second cousins, but no relationship for almost 30 years with the few I ever met.
My hurt and resentment regarding my brother and niece shouldn’t negate my obligation to leave a will. They are my blood, after all, and I’m not emotionally attached to any nonprofit. I have close friends I met as early as 1954 to 1966, but no significant other.
Meanwhile, I owe around $33,000 on my current mortgage. I’m asking for a $30,000 cash out, which I intend to use for home improvement. The appraisal is waived, but the same size units in my condo have sold for between $285,000 and $315,000. I live in a suburb of Los Angeles. The current monthly payment is $458, including property taxes, with an interest rate of 5.25%. The new payment is $531 at 3.28%. Not a whopping difference considering what all the commercials say current refi rates are, but my debt-to-income ratio is no bueno.
Currently my only “real” income is Social Security and $900 my dad sends me monthly from a trust account. I intend to go back to work next year because I’m bored out of my mind, but that has zero to do with the loan. The amortized 30-year loan payment will include closing costs, prepaid taxes, and over $17,000 in outstanding debt in addition to the remaining mortgage and cash out.
When I die, who gets stuck with the unpaid balance? Does the lender assume it? Doesn’t someone have to deal with whatever problem there might be, or receive the balance if it’s sold? Am I right that it’s irrelevant if I take a 15-year or 30-year loan as I might die before either is paid off?
Since the intended loan is considerably less than the home’s value, are there other types of problems that whoever my heir is would have to deal with? Of course, another earthquake could happen, but barring some unforeseen disaster, or my being in arrears in payments, who legally could be forced to handle any issues if I don’t leave a will?
Refinancing Golden Girl
<STRONG>‘<INTERNET LOCATION="EXTERNAL" URL="https://www.marketwatch.com/column/the-big-move?mod=article_inline&mod=article_inline&mod=article_inline&mod=article_inline&mod=article_inline&mod=article_inline&mod=article_inline&mod=article_inline&mod=article_inline&mod=article_inline&mod=article_inline&mod=article_inline&mod=article_inline&mod=article_inline&mod=article_inline&mod=article_inline">The Big Move</INTERNET>’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.</STRONG>
<STRONG>Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Jacob Passy at <INTERNET LOCATION="EXTERNAL" URL="mailto:TheBigMove@marketwatch.com">TheBigMove@marketwatch.com</INTERNET>.</STRONG>
I want to start by addressing your question about the length of the loan term, since I worry that you might be understating the difference between a 15-year loan and a 30-year loan.
You’re aware that the monthly payment is higher for a 15-year loan — that’s true. But it might be even higher than you realize (unless the lender spelled out the difference already.) For instance, for a $100,000, 30-year mortgage carrying an interest rate of 3%, the monthly payment would be roughly $422. If that same loan carried a 15-year term instead, the monthly payment would be around $691.
To underscore, the monthly payment on a 15-year mortgage is roughly 64% higher. Often, people are attracted to the shorter term on a 15-year loan because it saves them on interest in the long run. But for someone on a fixed income, that difference in the monthly payment can make a huge difference.
As you said yourself, it’s not clear you’ll live long enough to see the loan paid off either way. So the long-term savings brought on by the shorter term wouldn’t be worth, most likely. You’re relying on your dad’s financial support now, but will that continue when he dies? If not, again, the higher monthly payment from a 15-year loan might suddenly become completely unaffordable.
For whoever gets the house when you die, it won’t make a difference whether the mortgage had a 15- or 30-year term when it comes to resolving the debt. Indeed, when we die, our housing-related debts still must be paid.
In your case, it sounds as though you either don’t have a will or have not specified who should inherit your assets upon your death. Most states follow a process to determine who is eligible for the inheritance, starting with spouses and children, followed by grandchildren. In cases where none of those individuals are around, then the state will consider other relatives, including siblings, nieces and nephews. The state may also inherit the property itself.
If you die without a will and the state does not determine a rightful heir to the property, then theoretically your mortgage lender or servicer would foreclose on the home to cover the loan. If an heir was identified, or you named one, most states have laws to protect their rights to the home. When you die, your heirs would inherit the home’s title, but not its mortgage. Mortgages often include a due-on-sale clause that requires the loan to be paid off if the home is sold — because that’s when the title transfers.
When the title transfer happens via an inheritance, laws typically protect the heir. They can assume the mortgage and continue making payments. In some cases, they can have the mortgage transferred into their name, or they can sell the home to pay off the loan and pocket the proceeds that are left afterward.
If I may overstep just a bit, I would advise you to reconsider who is worthy of receiving your inheritance. By nature, most of us think of leaving our worldly possessions to blood relatives — but in my view, the definition of family is broader than that. Your brother brought you grief, and you say you have virtually no relationship with your niece.
It does sound as though you have many friends with whom you have rich relationships. Sure, they may not be romantic in nature, but I’m sure these friends bring joy and comfort to your life. These people are your chosen family, and they deserve every right and privilege that’s typically reserved for blood relations. Indeed, you can bequeath your possessions to a friend rather than a family member.
Perhaps your friends may not be interested in inheriting your condo, but I would talk to them to see what they would think of such a gift. Maybe they themselves have a child or other relative who could benefit from inheriting a home to live in (or the financial value of that property.)
You’ve worked hard to maintain your home, and you should feel comfortable knowing that it’s going to someone you care for after you pass away. Whoever you do identify as your heir, let them know of your plans. That way it won’t come as a shock upon your passing, and they can feel well equipped to handle the various tasks that come with an inheritance.
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