“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 $1076 until the balance is paid
off, which will be in another 8 years... Or should I pay off
the balance now with a reverse mortgage?”
is relevant to all the baby boomers now reaching 62 who have
mortgage balances. My answer depends on which of the 4
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 8 years when your current
loan will be paid off.. If you take a standard 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 8 years at
current interest rates.
If instead you
stay on your current path and don’t take a HECM until you
are 70 in 8 years, your credit line will be about $252,000
at that time. If your property appreciates over the 8 years,
the credit line will be larger. However, this comparison
ignores the fact that if you wait 8 years rather than take
the HECM now, you must continue making monthly payments of
$1076. There are no required payments on the HECM.
To make the
two scenarios roughly comparable, we must assume that if you
take the HECM now, you set up an investment account into
which you make the same payments. Then we compare the credit
line plus investment account in 8 years if you take the HECM
now with the credit line in 8 years if you delay taking the
HECM until then.
The outcome of
this comparison depends on the appreciation rate if you
delay, and on the short-term investment return on your
monthly payments if you take the HECM now. I have looked at
numerous combinations of these variables, and most of the
plausible ones favor taking the HECM now. For example, if we
use an appreciation rate of zero and an investment rate of
1%, which is roughly the current situation, the credit line
plus payment savings if the HECM is taken now will be about
$329,000 as compared to a $252,000 credit line if you wait.
The proviso is that you are able to continue making the same
payments you would have made if you delayed.
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
lay-away plans, those who deliberately over-withhold on
their income taxes, and…many mortgage borrowers. If you want
to set aside $1076 every month but realize that you will
probably fail if the payment is optional, you will stay with
your current mortgage which requires the payment. The HECM
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.
They get both if they convert their existing mortgage balance into a HECM balance, with the remainder of their HECM borrowing power taken as a credit line. They can tap the credit line when they need funds, and they can use surplus funds to pay down the balance. The return they earn when they pay down the HECM balance is the mortgage rate plus the mortgage insurance premium, and in addition, the portion that is applied to interest is a deductible expense.
In sum, with the exception of those who need the discipline imposed by required mortgage payments, seniors reaching age 62 with a mortgage balance would do well to convert it into a HECM balance. Just make sure that you convert the remainder of your borrowing power into an adjustable rate credit line that will serve you in the future. Do not convert the balance into a fixed-rate HECM that requires you to withdraw cash – that will leave you with nothing down the road – unless you need the cash to save a life now.