September 5, 2020
am 64, have a house worth $370,000 with a mortgage balance
of $170,000 at 3%, and $260,000 in a savings account at
1.5%. Should I use my savings, which I don’t need today for
living expenses, to pay off the mortgage?”
I would. 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.
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. 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.
In today’s low-rate market, a growth rate of 3.461% is
attractive. 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.
The data in the table apply to your age of 64, and your
house worth $370,000, which is assumed to appreciate 4% a
year. When you close on the HECM, you will have a credit
line of $184,461 which could be used immediately to buy a
tenure payment of $437 a month. You will owe $13,679
covering the closing costs of your HECM.
The numbers applicable to the closing date are based on
price data reported to my web site, and are therefore
accurate on the day specified. The other numbers, applicable
to the future, are projections based on the assumptions
If you don’t use the line for 10 years, and assuming the
rate stays at 3.461%, the line will grow from $184,641 to
$260,348 and the monthly tenure payment would grow from
$437 to $1,289. If you live another 10 years without
touching the line, you could begin drawing $2,519 a month.
Without doubt these numbers on credit line growth are
understated because the unprecedented low interest rates we
see today will not last forever. As rates begin to rise, the
credit lines available to new borrowers will decline – they
erred in waiting too long. The growth rate of existing
credit lines, however, will grow at a more rapid rate. A
rough indication of how that might evolve is provided in the
lower part of the table, which assumes that the rate
immediately jumps to the maximum of 8.461% and the property
appreciation goes to 6%.
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.
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.
Note: The data in the table are taken from my reverse
mortgage web site, www.kosher-reverse-mortgage.com.