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Don't understand reverse mortgages

Posted by Cube1067 (My Page) on
Wed, Mar 5, 03 at 22:46

I have read various articles about reverse mortgages and I still dont understand the concept.

My Dad is 70 and struggling to make ends meet. Ive subsidized him to the tune of $1850 in 9 months not a lot to some, but its a lot to me. I know Ill be laid off soon; Ive been given 4 previous layoff dates, but miraculously the date has been extended each time; I dont expect this good fortune to continue indefinitely. Ive been squirreling away money to prepare for layoff, and I have a goal to save a minimum 9 months living expenses before this job ends.

Thats all to say that my money is allocated for my well-being.

I dont have issues about saying NO to my father, well maybe some; hes so pitiful and has always been totally clueless about valuing the power of accumulated money. For the record, I find the idea of NOT helping himwellabhorrent. (chalk that up to cultural influences) I hadnt fallen far from his tree, financially speaking; I thank divine intervention for waking me up to new ways 4 years ago. Ive given Dad money 3 times. The second time I gave him money I told him he had to write down his living expenses, so we could see where his money was going. This third time (Monday) he asked for money, I asked had he finished his list of living expenses? I tried to budget, he said, but the house and car insurance snuck up on me. I told him I didnt ask him to budget, I asked for a list of his living expenses. So now Im going to give him a list to fill out and we will determine what his monthly outgo is and what is monthly income is. I will tell him that I will not give him any more money until he does this work. (The power of those two numbers amaze me: monthly living expense vs. monthly income)

Once I get this information, I can determine how to proceed. Thats why Im asking for some plain talk explanations about reverse mortgages, because I know thats an option for elderly home owners. I just want a better understanding of reverse mortgages. I do a modicum of financial reading, but I cant quite grasp this concept.

Please explain it to me like Im a six year old. I know Im an intelligent woman, but I hit roadblocks on this reverse mortgage concept. I liken this to my struggle with physics in college. If you fail a course 3 times, you are booted out. I had failed Physics twice with the same professor. The third time, I was given a different professor and, voila!, he was able to teach me. I actually began understanding the concepts. I could visualize the problem, and therefore, envision the solutions. Still didnt get an A, but got a B. Doesnt mean the first professor was bad, he just couldnt simplify his explanations enough for the non-physics-gifted.

So, please, you financially knowledgeable people, Id appreciate your best attempt at reaching the non-financially-gifted student. Thanks.


Follow-Up Postings:

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RE: Don't understand reverse mortgages

A reverse mortgage is a possible solution for people who own their own homes, but are cash-poor. The lender will pay the home owner a certain amount, either in a lump sum or in periodic payments, and the homeowner is responsible for repaying them only when he moves, sells the home, reaches the end of the agreed loan period, or dies.

In the usual case, an older person will borrow a sum of money for current expenses, and the loan (with interest) will be paid when the borrower dies.

I am enclosing a link for a website that has more information.

Here is a link that might be useful: reverse mortgages


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RE: Don't understand reverse mortgages

Cube1067, that link Joann23456 gave explains reverse mortgages about as clearly as anyone could. I just wanted to say, it's great that you are willing to help your dad, and you never will regret what you have done.

I know it is hard to think about this, but one thing you can do if you don't want to involve mortgage companies and interest payments is to have your dad write his will to reflect the financial help you have given him, perhaps leaving his home or other possessions of lasting value to you.

This is often a real problem in families: One child has given a parent all kinds of help, financial or otherwise, and others have done little or nothing. But the parent does not bother to write a will, or the will is poorly written or not updated, so when the parent dies, everything is split up equally. Invariably in this situation, those who have done the least, and who have never even come around to visit, will miraculously crawl out of the woodwork and demand "their share," if not more than their share.

It's something to think about, anyhow.

Ken


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RE: Don't understand reverse mortgages

Thanks for he link. So, is this the gist..with RMs, the best you can hope for is that you die owing money? Because each year you live, isn't the loan getting more expensive? And when you die, who owns the house? Are your heirs responsible for the RM debt even if their names aren't on the mortgage? Aren't you mortgaging the future of heirs with a RM?(deep breath...)Who answers these questions? Are these the kind of questions a financial planner answers?


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RE: Don't understand reverse mortgages

Your questions are why I suggested what I did. If your dad just needs an occasional couple hundred dollars here and there, it might be better for you to give it to him as he needs it and then have him leave his home or other valuable possessions to you rather than involving a mortgage company and entailing interest charges.

Every month of a reverse mortgage, you owe a little more. Just as the name implies, it's the opposite of a regular mortgage where you pay a little off every month and eventually owe nothing. If you take out a reverse mortgage, the mortgage company makes a payment to you every month (or however often the agreement calls for, or all in one lump sum), and at some point the term of the loan is up, and it becomes due. Payment can be made in one lump sum, as would occur if the house was sold to pay off the mortgage, or the house could be kept and a regular "non-reverse" mortgage can be obtained on the property, allowing the homeowner to pay the reverse mortgage back off and regain title to the home. In this latter situation, it would be just as if they had purchased a home and obtained a regular mortgage to finance it.

Heirs are not legally responsible for any debt that they have not obligated themselves to, BUT some are a little confused about what it means to inherit something. Heirs can only inherit what's left over after the obligations of the estate have been paid off.

For example, if I get a reverse mortgage on my house and then die five years into the RM agreement, and my son is planning on inheriting my home, he will not be able to do that until he satisfies what is owed on the reverse mortgage obligation. That's not legally HIS obligation; he could do nothing, and no one would chase after him for money. But if he did that, the RM holder would sell the house, and any remaining monies would be available for disbursement to him or other "heirs." Obviously it would make more sense for the heirs to take the responsibility of selling the house and paying off the mortgage themselves, since they could probably sell it for more than a mortgage company would, since all the mortgage company would care about is getting what it was owed. Or, as I said above, if an heir wanted to keep the home, he or she could get a regular mortgage to pay off the RM.

Yes, a reverse mortgage is a rising debt mortgage, and the more the balance owed grows, the more interest accumulates. Still, it can be a very good option for someone who is "property rich but cash poor" which sadly is a common situation for the elderly in our society.

Ken


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RE: Don't understand reverse mortgages

Cube 1067,

Perhaps, rather than your Dad willing the house entirely to you, as Ken suggested, it might be a good idea to have him sign a promissory note each time that you "lend" him money. Perhaps with some interest accruing, whether or not at full rate.

It's only fair to include some interest - as $1,000. won't buy as much now as it would 10 years ago, due to inflation.

Moreover, it's likely that the value of the home will increase some over the next number of years.

When your Dad can't live in the home any longer and you folks are ready to sell it, you present the notes for payment when the money that it brings becomes available.

Check out how long financial instruments remain valid in your area, and if some are about to become outdated, have him renew them. If he writes a new one, have it specify that the debt has been in force for whatever time, so that interest is to be calculated back to then.

You didn't say anything about any other family members helping Dad out along the way.

Promissory notes would make it easy to sort out who should get what - if other family members haven't contributed along the way, they'll have no promissory notes on which to collect.

If he dies while living in the house, the house will become part (most) of his estate.

Make sure that he has a will - when one dies without one, things are more complicated, are delayed - and much more expensive.

The executor of the estate would have to take care of the funeral, outstanding bills, including income tax, etc.

Including repaying the amount owing on the reverse mortgage, if one has been put in place.

The amount left over after the obligations have been covered is available to be divided up among his heirs, accordingto his instructions.

If he dies with no will, the state wil have a formula that must be followed - which may not be the way that yourDad would have wanted, or that makes the most sense.

I appreciate your loyalty to your Dad and your desire to help him, even if things are not easy for you and your future prospective income quite "iffy".

Over nearly twenty years as a financial planner (and before, really), I've told many people that learning how money works is an interesting hobby - and it pays well.

Unfortunately, our young people get little such training, unless they get it at home (and are willing to take advantage of it).

The cost of not learning can be rather high - as your Dad and you are finding out.

Don't feel bad - some highly trained and skilled people feel inadequate when it comes to managing their money.

What is it about a dollar bill that scares the heck out of some people?

If you don't boss your dollar - it (or the lack of it) will boss you.

Good wishes to you both.

joyful Ed


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RE: Don't understand reverse mortgages

Yes, common sense would dictate that if there other children helping dad out, the house or other possessions would be apportioned among them. But the situation I have often seen is where nothing is spelled out and the children who have done nothing wind up inheriting the same as those who have done a lot. That's my point.

Ken


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RE: Don't understand reverse mortgages

I got the feeling that Cube was an only child. But, on second thought, given the family history of poor money management, perhaps Cube is the only one capable of helping out. Regardless, I think the best course of action for Cube to take is in line with the original idea. Stop supplementing Dad's income, and get together his monthly income and expenses. And, this is gonna be a hard sell, but, Cube, I think you should take control of your Dad's finances. Take over his checking account. Have him deposit his checks (SSI, I assume) and then you pay his bills for him. Give him a weeekly cash allowance for food, gas, and entertainment. When the allowance is gone, it's gone. He may not like this, but what else can you do? The plus for him is that you can guarantee him that his bills will all be paid on time and he will get a guaranteed allowance every week. You could offer to "teach" him to do this himself, but, it's been my experience that you can't teach an old dog new tricks. My grandfather has never been good with finances. My grandparents have never owned a home or much of anything else. Whenever my grandfather comes into a large sum of money, he gives it to my Mom to hold for him until he needs it for a new(used) car, or whatever. My mother's younger sister, who is fifty something years old, just became a first time homeowner, and her children, I am certain, will never become homeowners. My point is Cube, you are very lucky to have woken up when you did! And I know that you feel a strong responsibilty, as you should, to take care of your Dad, but supplementing his income, or even getting him into a reverse mortgage, may not be the best soluton for either of you.


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RE: Don't understand reverse mortgages

Dad may not want his finances run for him. Because someone has some trouble managing money does not mean that at 70 years old they lose all rights and have to come to their child, hat in hand, to beg for money whenever they want something. In this day and age, a 70 year old may have 20 or more good years of independent life left; that's a long time to be treated like a child on an allowance.

It is for precisely this reason that reverse mortgages have their place. In Cube's case, dad must have SOME money sense if he owns a house free and clear. A reverse mortgage allows him to take some value out of that house and turn it into cash so he can retain his independence. Sometimes there's a tendency to brand those who have different money priorities than we do as "money stupid," and this is unfortunate.

Yes, it may deprive the children of "their" inheritance to do this, which is why I suggested that making gifts to dad in exchange for items promised in the will might not be a bad deal at all. But in the end, the person who worked all his or her life for something should have the benefit of it as they reach their elderly years. Taking a sharp-minded elderly person and treating them like a child in order to protect a child's "right" to an inheritance is an injustice to the person who spent a lifetime working for that house and other possessions.

Ken


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RE: Don't understand reverse mortgages

I used to work for a small regular mortgage lender that did a huge amount of reverse mortgages and, while I didn't work directly with reverse mortgage clients, I just thought I'd mention that I never heard about a single customer having a negative experience with a reverse mortgage (compared with regular mortgages, that is amazing). The only problems I heard of were with children getting mad and trying to interfere because their inheritance was being used up - but no one "owes" their children inheritance. It seemed like, I guess because the elderly can be easy to take advantage of, the states were preemptive in scrupulously regulating reverse mortgages, and the loan officers were the best of the bunch.

I think about half of the reverses we did were monthly payments and the other half were either one-time lump sums or lines of credit. Sometimes they were used for home improvements, and part of the balance owed could be recouped when the house was sold (if the borrower was going to have to go to a nursing home eventually). Sometimes they were used to pay off the remainder of their existing, regular mortgage, so they could stop making payments.

For your situation, a reverse mortgage seems to make more sense than keeping a record or a will of what your dad owes you - it sounds like you aren't all that concerned about getting your money back in the long run, you just want to make sure that you don't have to struggle financially with a layoff imminent (totally understandable).

The main consideration is that, like Ken said, your dad could live another 20 years. Plus, nursing homes and elder care are very expensive. You'd need to make sure that he doesn't reach the limit that he can borrow too fast. Some of the loans I saw paid out less than $200 per month - just enough, I guess, to help with expenses, and probably around the amount the rate the house is appreciating at, anyway.

Another thing to think about is how long your dad is going to be able to stay in his house. My grandparents just had to move because my grandpa (93) couldn't walk up the stairs, and it was too much maintenance for them anyway, and more space than they needed. If your dad isn't too attached to the house, this might be a good time for him to think about moving closer to you, or moving to a more efficient place, maybe a condo, or a place that is easier to maintain or can support limited mobility. My grandparents put off their move for a long time because they loved their house, but it probably would have been easier for them if they'd done it earlier. Maybe your dad would be interested in trying to find a less expensive place, keeping some cash from selling the old place, and then still having the option of a reverse mortgage on the new house if he turns out to need it.


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RE: Don't understand reverse mortgages

Ken, I think that you are totally misunderstanding my point of view. First of all, I never got the impression that Cube's dad owned his house fee and clear. She said that he said, but the house and car insurance snuck up on me. I took that to mean house payment, although, it could have meant homeowner's insurance, or real estate taxes. I don't know. But I assumed that he did not own the house free and clear. Also, I could care less about the inheritance. I don't care if I inheret a dime from my relatives, and I guess that I make the presumption that others don't care either. My concern is what is best for Cube and her dad. Sure, she could continue to supplement his income, and write IOUs, but that really is not what's best, because Cube is planning for a layoff, and the money simply will not be there for her to give to her dad. You can't give what you don't have. The RM is a possible alternative, but I don't think it's best for Cube's dad, mainly because, as you said, he may have another 20 years of living to do. That RM is gonna come due eventually. Or, he will tap it out, and then, how will he pay for his living expenses? As stated above, my opinion was not based on the fact that the RM would prevent Cube from obtaining an inheritance. My point was, the best way for Cube to help her dad out of this situation, which she feels a moral obligation to do, is to help him to not spend more than he earns. I'm sorry that you feel that that would be "treating him like a child." But, I disagree. My grandfather does not feel like he is treated like a child. My mother does not insist that he hand his money over for safe keeping. He willingly gives it to her and asks her to hold it (because he is well aware that he is not good with money,) so that if his cars breaks down and cannot be fixed, he can purchase a new one. And, I'm not talking about huge sums. Currently, my Mom is holding $3000 for my grandpa, and that is his entire net worth. In the case of my family, this is not an inheritance issue, it's a looking out for one another issue. No one has $3000 to give to grandpa, but my mom can help him be prepared in case an emergency pops up and he needs money.

Perhaps the term "allowance" makes you think of a child. But many adults put themselves on an allowance. It's just the amount of money that they have to spend each week (or month) after they have met all other financial obligations. Call it something else if you like. And, I never called anyone "money stupid." I don't like the term "stupid." But, I would not equate someone who is not good with money with someone who has different money priorites either. Someone who has different money priorities is not necessarily someone who cannot meet all of their financial obligations. Do you see the distinction?

I think Anita's last paragraph is a very good suggestion, IF it's even possible for Cube's dad to downsize.


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RE: Don't understand reverse mortgages

Well, Dad was horrified by my request that he *bare* his finances. "I'm going to have to think about that" he said. "You're asking to step into the depths of my psyche". He actually said that. Got a handwritten letter from him today saying he can't show me his finances, he appreciates my offer of help, but no thanks.

He must really be in trouble. My father sees himself as a born loser and he does all he can to make that true for himself. He retired at 56, had no mortgage and a 30K pension in 1989. He's managed to get to the point where creditors are calling (he let that slip) and he's hitting people up for loans. He said he thought he'd be dead at 50 so he never planned on needing money for old age.

I'm going to suggest that he let me find a financial planner for him. My thoughts were that maybe an RM or even bankruptcy (depending on the facts of his situation) were options. I'd also like to set up a joint savings with him and direct deposit a portion of his pension monthly. He says he's going to pay back the last loan; my plan was to secretly add his payback to the joint savings. I'd also like the statement to come to my address, not his.

He said I gave him an ultimatum by saying I would not continue to give him money if we did not sit down and do the financial work. Right now, I'm not feeling to bad about that. Part of understanding money is to respect it, right?


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RE: Don't understand reverse mortgages

Do you know if he has a mortgage on the house now? Maybe he took cash out on the house between 1989 and now and then spent the money and now it has run out and that's why he's having trouble making ends meet. If this is the situation, and he is having to make payments on the new mortgage, then, like I mentioned, he can take out a reverse to pay the regular mortgage off so he doesn't have to make payments and that might be enough to keep him from getting behind every month.

He didn't expect to live long enough to have to support himself... well, that is a bummer... but if he owns a home free and clear, he has a huge asset that he is just sitting on waiting to leave it to his kids. Like I said, I think reverse mortgages are a really good thing. Elderly people should be able to tap into the one asset they worked their whole lives for.

It sounds like, with a small pension and social security, he could easily just not have enough money to make ends meet - but it also sounds like he doesn't have a super competent way with money. Don't be too hard on him for having a hard time showing you his finances. I don't know a lot of people who'd be comfortable with that. Maybe get him a book, like Nine Steps To Financial Freedom is a good one for helping people understand that having a hard time with money isn't anything to be ashamed of. Maybe there are some good books on retirement and finances that the two of you could read together to try to get to a common understanding of his options.


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RE: Don't understand reverse mortgages

This was exactly my point when I said above, "Dad may not want his finances run for him." So if dad doesn't even want to take a look at his finances with his daughter, I don't think he'd be too interested in having his daughter put him on an allowance.

As Anita9 said, a reverse mortgage could be a good option. However, so far Cube's dad has needed, on average, a $200 a month subsidy. That's not big money -- it only comes to $2,400 a year. Dad could write her a string of IOUs or promissary notes, which would remind him every single month of what a financial failure he thinks he is. Or, dad could write his will to ensure that Cube gets his house in exchange for her financial assistance. If dad lives 20 more years, and needs $200 a month every single month, that comes to $48,000. His house is probably worth far more than that.

Of course, if Cube can't afford $200 a month out of her budget, then there's always the RM option. Either way, "repaying" Cube through the will or by using a reverse mortgage, dad retains some self-respect and self-determination. If you think about it, the "will" option is basically the same thing as a reverse mortgage, except that instead of promising the house to a mortgage company he promises it to his daughter.

My primary concern here wouldn't even be the money, it'd be dad's attitude. Maybe like so many in our society he views his worth in terms of a financial balance sheet. Even at 70 years old, he could start to view himself in a more positive light.

Ken


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RE: Don't understand reverse mortgages

could you get him to do the work of writing down his expenses but not showing you the amounts?

Tell him your concern is less to know how much money he has/owes/makes, etc., but that it's important for you to know that HE knows those things.

Tell him about the reverse mortgage idea and that this will be good homework for figuring out whether he needs it or could use it.

And that the most important thing is that he doesn't forget some category (like car insurance that he pays once a year), and perhaps that he shares w/ you the final number of how much the difference is between income and out-go.


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RE: Don't understand reverse mortgages

If he needs $200 a month to make ends meet (and that is pretty understandable), that is $2400/year like Ken said, so figure out at what rate his house is appreciating (should be able to find this online somewhere or through an appraisal co) and think about how much equity he'd retain over the years if he was getting $200/month from a reverse mortgage.

If his house is worth $100K and is being maintained properly and properties in his area have appreciated 3% per year on average over the last, say, 20 years, then you could figure that $200 per month plus interest would add up to him taking the appreciation on his home as profit instead of just letting it pile up, and even 20 years from now he'd still have his $100K nest egg - the current value of his house.

Even if he would be digging into the current value at whatever amount he needs to support his income, you will want to figure out how it compares with the rate of appreciation.


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RE: Don't understand reverse mortgages

UPDATE:

Dad just sent me a letter telling me he's taking my advice about getting his finances under control. The letter was enclosed with a copy of the mortgage life insurance policy he just took out.

I'm so aggravated. He refinanced a few weeks ago. I had to ask him to tell me the details (15 year, fixed 4.75%, he didn't mention the payment but says it saved him a couple hundred bucks). I told him that was good. He tells me he's insisting on the life insurance, but the lenders are reluctant. I tell him his lenders are doing him a favor. A week later I get the letter I just told you about. Monthly premium of $173.

Is this a case of men not liking unsolicited advice, as the "Mars/Venus" author says?

I printed off several web pages explaining why mortgage life insurance is generally a bad deal - I plan to send them to Dad. He's being so hardheaded - would you butt out at this point?

BTW, I used a bit of each of your earlier suggestions when I wrote Dad back in April. He did his homework and came up with $300 more outgo per month than income. Which to me means it's probably more like $400 to $500 just due to oversight.

So, do I continue to try to school this man? Right now I'm just aggravated.

And, can you cancel a mortgage life insurance policy?


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RE: Don't understand reverse mortgages

I'm glad to hear that your dad is organizing his finances. Too bad he didn't go with a 30 year mortgage. That would have created lower monthly payments, freeing up more cash/month, perhaps eliminating his monthly shortfall. If he's planning to live out his life in this house, and doesn't need any equity to use as a down payment on another house, that would have been the way to go. I'm pretty sure that when you inherit his estate, you'll have to sell the house and pay off the mortgage using the proceeds from the sale along with any other assets from the estate. BUT, if you are unable to pay off the mortgage using the assets from the estate, you WILL NOT be required to pay the balance of the loan, or any other loan that you are not the co-signer of. So, having equity in the house is really not important.

I agree, the mortgage life insurance is a bad idea. In fact, from what I know about your dad, it seems like ANY life insurance would be a waste of money, because he doesn't have any dependents who he supports. I think that any life insurance policy can be canceled. I just don't know what the procedure is. This is going to sound really morbid, and you probably won't want to discuss it with him, unless he brings up the issue of his "final expenses" that we frequently hear on TV commercials pushing life insurance for the elderly. Some funeral homes now allow people to begin making payments on their "final expenses" ahead of time. In a way, it's good, because they spare their children from having to make decisions. They pick out everything they want and make payments on it. You can also do the same thing with burial plots. Of course, one must be sure to clue the children in. Like I said, I wouldn't bring it up unless he starts talking about his "final expenses" in relation to why he NEEDS life insurance.

As far as continuing to school him, I don't know. But, I'd say that he's interested in your opinion, if he sent you a copy of his life insurance policy AFTER you told him it was a waste of money. That tells me that he's saying, "Here it is. Do you still think it's a waste of money?" I would suggest that you investigate the cancellation possibility/procedure, and let him know the results, and how better he might utilize the $173/month. The rest will be up to him.


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RE: Don't understand reverse mortgages

Hi Cube1067,

If the financial report that he made to you is unusual, which it appears to me that it may be, it looks to me as though your messages have had some effect.

I'd say go out in your psychic back yard and dig around to see if you can find some "patience". Sometimes we get a better crop of that with age.

Keep up the conversation, but try to avoid being pushy. Small steps at a time, probably.

I sometimes find that it helps to ask about various specific courses of action that may be possible, then discuss what results might apply if the person followed those courses, in turn. One could suggest that some other courses of action might be ones that someone might try, with possible results if one did.

Then they could do such and such. What might the results be if that choice were followed?

Pursue another option, etc.

Some people aren't used to thinking seriously about what courses of action may be available, then following each option out to its possible or probable conclusions.

Sounds like your Dad wasn't that good at such procedures.

The idea is to encourage him to increase his effectiveness at managing his life/money - with what level of assistance/guidance he is willing to accept.

It sounds as though he is making some positive responses to your earlier proposals, even though he wasn't willing to buy the whole deal.

Maybe it sounded to him as though he was being chased by a steamroller.

A light touch, with a little humour often helps - that is evidently not putting him down.

It will be helpful if your Dad succeeds at being empowered, rather than diminished, as a money manager/person.

I hope that he can see you as a helper, on his own level, rather than as school teacher/boss, etc. That way, instead of only telling the teacher/boss a small amount of what goes on in the school yard/workplace, you become like another kid/employee with whom the others share what's going on much more fully - as they don't feel threatened.

Recently, in dealing with an old step-uncle that had two great wives(*) but no kids, I sat on the floor at his feet for a while as he sat in his rocker while we discussed things that he might consider doing down the road - about what to do with the farm, keeping cattle in the barn (at age 86, with bad back, hip and leg), going to a retirement residence, etc. Sometimes I sat in a nearby chair, as well.

Sometimes relative positioning makes a difference - it's a lot harder to appear threatening if you're sitting on the floor in front of a person sitting in a chair.

Good wishes as you continue with this concern - and the one about your own employment uncertainty.

joyful guy

* not at the same time: about 20 years with one, 40 with the other


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RE: Don't understand reverse mortgages

Cube, your dad sure does like to take two steps forward and then a couple steps back, doesn't he?

If he's amenable to accepting help of any kind, maybe you could enlist a mortgage broker to help you out, and perhaps coming from a professional with an embossed name tag sitting on his or her desk, he will believe that he needs 1) a thirty-year mortgage, and 2) no mortgage life insurance. A convenient time to cancel the existing mortgage life insurance would surely be when doing another refinance.

Ken


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