 Refinance
or reverse mortgage?
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 Dear
Dr. Don,
I am checking out whether to refinance or take a reverse
mortgage. I will be 79 in January and live on my Social Security income. If I
take the reverse mortgage it will cost me over $10,000 in closing costs plus the
payoff balance on my existing mortgage, which is about $22,100. Which way do you
thing would be best for me?
-- Joyce Juncture
 Dear
Joyce,
You might have a problem qualifying to refinance your mortgage based
on your income. Beyond having good credit, the lender needs to see
an income stream large enough to cover the payments on the loan.
A reverse
mortgage gets past that issue because there are no contractual payments on the
reverse mortgage. The interest expense on the money borrowed goes against
the equity you have in your home. For that reason you also don't get to
borrow as much because the lender needs to allocate a portion of your home's equity
to estimated interest expense.
In general terms, the loan is called when you move
out of the house, sell the house or upon your death. Any remaining
equity not required for interest expense or principal repayment
is yours -- or your heirs'. A Bankrate feature, "Reverse
mortgages are useful, but take care," has more on reverse
mortgages.
As you found out, closing costs on a reverse mortgage
are very expensive when compared to closing costs on a traditional
first mortgage loan. One way to try to hold these costs down is
to shop the three main reverse mortgage loan programs and compare
costs. If you do this in a concentrated time period of a few weeks
it won't negatively impact your credit score because it's obvious
that you're doing a little comparison shopping.
You can do some clever things with a home equity line
of credit, or HELOC, but face qualifying on the basis of your income
for that type of loan, too. An earlier Dr. Don column, "Reverse
mortgages," speaks to this approach as an alternative to
a reverse mortgage.
From what you've told me, and you didn't tell me how
much equity you have in your home, I think a reverse mortgage makes
more sense for you than refinancing or a HELOC, but I'll borrow
a line from my earlier column and tell you that my best advice is
that you don't look at this loan in isolation from your household
budget, any other investments and your expected financial needs.
To ask a question of Dr. Don, go to the "Ask
the Experts" page and select one of these topics: "financing
a home," "saving & investing" or "money."
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