Mortgage Professor: How to Use a Reverse Mortgage to Avoid Poverty

For someone who has used existing assets to pay off an existing mortgage on their home, the use of a reverse mortgage line of credit would be an effective way to prepare for a person’s older years and to avoid premature exhaustion of assets, which can lead to poverty. This is according to Jack Guttentag, aka the “Mortgage Professor,” in a new column published at Forbes.

Answering a question from a 64-year old reader who owns a home valued at $370,000, the reader asks if they should use their savings to pay off the mortgage’s remaining $170,000 at 3% balance using a savings account with $260,000 at 1.5%. The reader does not use the savings account for living expenses, and asks if the account should instead be used to pay off the existing mortgage.

“I would,” Guttentag writes. “Paying off the mortgage is the equivalent of an investment that yields 3%. Since you are not earning 3% on your savings, repayment would save you money.”

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Once the mortgage is paid off, this is where a Home Equity Conversion Mortgage (HECM) can be strategically employed to cover any necessary expenses later in life, he says.

“Having paid off the mortgage, you should consider using your now debt-free house to store financial acorns for the winter of your older years,” Guttentag writes. “The best way to do that is to take out a credit line on a HECM reverse mortgage and sit on it unused – until you need it. The line will be based on an adjustable rate HECM and will grow at the HECM interest rate plus the mortgage insurance premium. The best rate, for this purpose the highest rate, is currently 3.461% which includes the mortgage insurance premium.”

The prospect of using a HECM in this way can have further appeal because of the current rate environment, Guttentag adds.

“In today’s low-rate market, a growth rate of 3.461% is attractive,” he writes. “You can use the line at any time, drawing cash, or converting it into a monthly payment, called a ‘tenure payment,’ for as long as you live in the house.”

A HECM credit line can also act as a form of “insurance” for homeowners who find themselves in certain situations, and who have specific worries when it comes to the longevity of their funds, he says.

“The approach described above is aimed at retirees with home equity who have no immediate need for additional spendable funds but are concerned about whether that will continue to be the case if they turn out to be especially long-lived,” Guttentag writes. “They can view a HECM credit line as a form of insurance on which they can draw at any time if needed. If it is never needed, their house will pass to their estate, which will repay the small loan balance. That balance can be considered the cost of the insurance.”

Read the column at Forbes.

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  • “For someone who has used existing assets to pay off an existing mortgage on their home….” The percentage of homeowners with existing mortgages whose payments come existing assets rather than income alone or a combination of income and existing assets is rather low.

    “’Paying off the mortgage is the equivalent of an investment that yields 3%.'” From a cash flow point of view that may be temporarily true (since mortgages do not normally extend indefinitely into the future) but from a diversified investment risk point of view, that is not true. Besides that is a choice of just two options. Since March the Dow alone has risen by 56%. in market value.

    “Once the mortgage is paid off, this is where a Home Equity Conversion Mortgage (HECM) can be strategically employed to cover any necessary expenses later in life….” Why does the existing mortgage have to be paid off first?

    Dr. Guttentag is a better mortgage analyst than financial planner. Even then, FEW reverse mortgage borrowers (or their heirs) walk away from the termination of a reverse mortgage owning the home even though it is possible, it is not probable.

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