While refinancing a home is primarily used for either reducing a monthly payment or raising some needed cash, a third and underutilized option is to refinance in order to shorten a period of indebtedness. One of the ways that senior homeowners can do this is by getting a Home Equity Conversion Mortgage (HECM). This is according to a new article in Chicago’s Daily Herald by Jack Guttentag, a.k.a. “The Mortgage Professor,” who has long been a proponent of reverse mortgage use.
“Indeed, borrowers who refinance into a new mortgage that has the same term as the original term of the existing mortgage – a new 30-year supplanting an old 30-year, for example – extend the life of their mortgage instead of shortening it,” Guttentag says. “That is not the way to go for anyone who expects to retire someday.”
One of the major reasons Guttentag has identified for such few borrowers refinancing for the purpose of shortening a period of indebtedness is because the benefits aren’t always easy to see. They can be “delayed and seldom displayed,” Guttentag says, especially compared to the more popular reasons of reducing a monthly payment or raising cash.
“Where the first two options provide immediate feedback in lower payments or cash-in-hand, benefits of the third option are deferred for years,” Guttentag says.
Unless the decline in mortgage rates is uncharacteristically large, he says, the immediate impact will be a higher monthly mortgage payment and/or upfront refinance costs to be paid. Long-run benefits aren’t typically calculated, but a reverse mortgage can play into one of those long-run benefits.
“The major benefit, in addition to the psychic satisfaction of being out of debt, is enlarged future borrowing power if it is needed,” Guttentag says. “As an example, if they need additional funds when they hit 62 and look to a HECM reverse mortgage to get it, every dollar of debt remaining on their existing mortgage reduces the amount they will be able to draw on the reverse mortgage dollar for dollar.”
The second long-run benefit is an overall reduction in costs, tied to a decline in market interest rates. The cost of a new, refinanced mortgage carrying a shorter term will be “lower than the costs of retaining the current mortgage,” he says.
Read the full article at the Daily Herald.