In the continuation of a multi-part series on reverse mortgage loans, the Mortgage Professor (a.k.a. Jack Guttentag) takes a stab this week, via Inman News, at the different types of borrowers and when it pays for them to take a reverse mortgage.
Depending on spending preferences and habits as well as current financial burdens, borrowers will sometimes benefit most from paying off their existing mortgage now, while others may benefit more from paying off the mortgage as planned (if they are able) and taking a reverse mortgage down the road, he says.
“I reached 62 this year and have a mortgage balance of $85,000 on my house, which is worth about $400,000. I plan to continue working and making my payment of $1,076 until the balance is paid off, which will be in another eight years … Or should I pay off the balance now with a reverse mortgage?”
Your question is relevant to all the baby boomers now reaching 62 who have mortgage balances. My answer depends on which of the four groups I describe below best describes you.
You want the largest amount of cash possible in the future: In your case, I define “future” to be eight years when your current loan will be paid off. If you take a standard Home Equity Conversion Mortgage (HECM) now at age 62, draw enough cash to pay off your current mortgage balance, and leave the balance as an unused credit line, the line will grow from about $149,000 to $222,000 in eight years at current interest rates.
…You are currently payment-burdened: Your objective in taking a HECM now could be to relieve yourself of the current payment burden, in which case you have no interest in continuing to make the payments. You want the HECM now to relieve financial stress now.
…You need budgetary discipline: You might belong to the group of consumers who can save only by positioning themselves so they have no choice. This population includes people who buy merchandise under layaway plans, those who deliberately overwithhold on their income taxes, and many mortgage borrowers. If you want to set aside $1,076 every month but realize that you will probably fail if the payment is optional, you will stay with your current mortgage that requires the payment. The HECM can wait.
…You like to actively manage your cash flow: You might belong to the group of consumers who actively manage their accounts, usually because they have fluctuating incomes. They are not chronically payment-burdened and don’t require external discipline to save when they have the money. What they particularly value is having a ready source of additional cash when they need it and a safe place to park excess funds when they have them.
Written by Elizabeth Ecker