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Reverse Mortgage Decision Making / Pros-cons

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Answered By Our Experts

Question From Ellen K.
2/22/2018
Is a line of credit and a monthly tenure a good idea versus just a line of credit?
Expert Answer

Hi Ellen,

It is IF it is a good idea for you.  It all depends on your individual needs.  I have done many loans with this set up and it worked well for those borrowers who needed some money available for repairs, updating and other expenses (line of credit) but wanted to have a monthly guaranteed payment for life (tenure).  They had the security of knowing that they had a set payment amount and that those funds would be there for as long as they lived in their home while still having some money to do the things they needed and didn’t have to request the funds every month, they were direct deposited into their account like clockwork each month.  If that’s better for you, then it’s a great idea.

Let me tell you one time when that is not such a good idea.  If you find that the monthly payment is well above what you need each month and you are accumulating funds you don’t need.  In that case, you are accruing interest on money you are borrowing that you don’t need to live on and perhaps you should switch a either the line of credit or a lower term payment so you aren’t borrowing needlessly.  Also, if you are on a needs-based assistance program, you want to be sure that you don’t negatively impact your ability to qualify for the program benefits.  In other words, if you receive benefits under a program which you must demonstrate that you have less than XX amount of money in the bank monthly, the tenure payment may not be as good an idea as the line of credit because if the payments come and you don’t spend the money in the given month, you could hurt your eligibility.  Whereas with the line of credit, if your expenses were lower in a given month, you could just be sure not to take any more money until you needed it.  So again, the right option is what is right for you.

Also See: Skip Tenure Plan & Go for the Credit Line Growth

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Question From Dante V.
2/15/2018
At closing is it wise to eliminate my mortgage (approx $8,500) and also $13,000 owed on a car loan?
Expert Answer

Hi Dante,

Any existing loans you have on the home will have to be paid in full at the time you close a new reverse mortgage so the mortgage will be paid at closing for sure.  With regard to your car loan, that is a call for you and your financial advisor to make.  If the payments are uncomfortable for you, you may want to eliminate them by putting them in the reverse mortgage.  You will want to weigh the fact that this loan would not be paid down as interest accrues on it and the balance remains unpaid whereas a car loan has an ending date when all the payments are paid and you owe nothing.  If you plan to buy other cars in the future and can afford the payments easily, a financial expert may feel this is not a great way to go.  Also, if you have to, or plan to, replace the car in the future (especially in the near future), you would want to consider this in your decision and may not want to pay off the loan with your reverse mortgage. 

However, if the payments on the car are restricting and it is more important to you to free up the cash now that represents that monthly obligation, it might be a better move for you to be able to stop making that payment.  In that case, it might be better for you to eliminate the payment by including it in your reverse mortgage.  Everyone has different circumstances and you need to make sure you do what is right for you.

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Question From Shell
2/03/2018
My mom has asked me to cosign on her reverse mortgage. Is this a good idea? What are the pros and cons?
Expert Answer

Hello Shell,

There really is no benefit to cosigning unless you also live in the home and intend to live in the home for the rest of your life as well.  As a matter of fact, unless you are living in the home and are at least 62 years of age, you can’t be a borrower on the loan anyway.  But if you are 62 or over and do live there and plan to continue to even after your mom passes, this would allow you to keep living there without having to make a mortgage payment for the rest of your life and that would be a definite “pro” if that was your plan.

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Question From Clyde B.
5/22/2017
WE HAVE A VA 30 YR FIXED LOAN. Our financial advisor has told us that we have little in our retirement acct. that (66K) we should get a reverse mortgage. I am 71 and my husband is 76. Is that the best advice?
Expert Answer

Hello Clyde, I am not a financial advisor and would be happy to answer any questions about the loan you may have. For a lot of folks, the reverse mortgage makes a lot of sense and when it works it works well. For others, even the benefits of a reverse mortgage will not sufficiently improve their circumstances enough to where the loan makes sense for them. If the loan will enable you to live comfortably and not require you to continue to deplete your savings just to remain in your home, it might be a very good option for you.

On the other hand, if it only slows things down and you still have to use a portion of that retirement account each month just to get by, the loan may just be delaying the inevitable (a sale of the home and relocation) to a time when you have even less equity to carry you through. I would advise you to talk to your financial advisor and your family and see if the mortgage will resolve the issue that is requiring you to deplete your savings. Take a look at your income and your outgo and determine if this loan will resolve the issues that are making you exasperated at this point. Only you can really decide if you should get this loan but with the help of your family and trusted advisors, you can make the best decision possible with the available information.

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Question From Brian
2/19/2013
Lump sum appears to be better under this scenario? Max loan = 305K. Need 145k right away. Take additional 160k as credit line or additional lump. If house does not appreciate much and borrower passes in 10 yrs, 160k as additional lump passed to heirs via co-account or investment while credit line sucked away by cost of sale of home and house worth less than loan repayment...
Expert Answer

Hi Brian,

This is one I simply can't answer.  You're asking me to predict the future of interest rates, appreciation rates and how long the loan will remain outstanding.  You only pay interest on the reverse mortgage proceeds that you actually use so unless you can get as good a return on the funds as you pay, you're losing money by taking $160,000 out of the property only to put them in the bank.  Right now, depositor's make less than 1% on deposits.  Assuming you received the 3.99% fixed rate and added the 1.25% HUD mortgage insurance premium.  We know that the amount paid on deposits will eventually go up, but that will be sometime after 2015 if you listen to economists so we'll use an average of 1.5% on the funds in the bank. 

Just using a quick calculation on the interest accrued on the extra $160,000, I calculate that the balance would be roughly $106,641.88 higher on the extra funds.  I calculate that the balance on the funds would be only about $34,000 higher after the same 10 years.  Depending on property values, etc, there is no way for me to determine what would be a better option for family members at this time.  If we had the same market as we have had between 2007 and 2011, then you could be correct.  With any reasonable appreciation, would it cost more than $60,000 to sell the property and make the funds a better option, probably not. 

Any way you look at it, the outcome will depend on future events and what if you only stay in your home for 4 or 5 years and something comes up that you have to sell?  Then you would have paid many thousands of dollars for funds you did not need or use and did not come close to making up for with interest paid to you on the funds.  I always tell people when they ask me about future events that my crystal ball broke years ago, otherwise I would have retired a very rich man long before now!  I simply would not know how to advise you based on future events which way would be the best and so I would suggest you contact a competent financial advisor who is not trying to sell you anything to help go over the pros and cons of both paths.

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Question From Carol
5/20/2011
With regard to balances going up and equity going down, this sounds like those nightmare balloon situations one hears of. Is the rate of interest fixed for the life of the loan, and is it possible to make payments against principle? Thanks, - Carol
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Question From Doug
3/14/2011
My biggest problem is that my wife thinks it sounds too good to be true. I've actually had one of our financial advisers to say he didn't like reverse mortgages, but when I asked why, his answer was that he didn't know why. Unfortunately, that's my wife's adviser. Mine doesn't deal with them and therefore offered no opinion. I've heard an adviser recommend one to a caller on a radio talk show, but that's the only instance of my hearing a financial adviser sounding pro, except for the selling agents. I'm trying to find out how to get something like an independent opinion and/or recommendation from someone who is not a selling agent, that my wife would give some credence to. I see it as a way to acquire a lot more financial cushion by tapping in to the equity we have accumulated in our home we have lived in for over thirty five years.
Expert Answer

There are many excellent sources of information available for borrowers explaining the program in a factual, non-sales format. The reverse mortgage is exactly what it is proposed to be, it is a loan which requires repayment at some point in the future upon given repayment requirements. She needs to know that it is not "too good to be true", as you will be accruing interest and the lenders and HUD do still expect you to maintain the home in a reasonable fashion and to keep the taxes and insurance current. Other than that, you can live in your home for the rest of your lives and never make another monthly mortgage payment. The problem with reverse mortgage reporting is that what most people get is the author's personal bias when they read about the program.

If that author likes the program, the review is typically glowing and may read more like a sales pitch. If they don't like it, it can be wrought with inaccuracies and we've seen some extremely poor reporting from some otherwise "reputable" names. Reverse mortgages seem to be one of the topics into which a lot of journalists love to make sensational articles, but then when you really look at their facts they can be sadly mistaken. As you, yourself have found, you've already found one advisor who has formed an opinion that he doesn't like the product - but he doesn't even know why!

Reverse mortgages can be expensive and so we tell people to look at all the options. They are not a good short-term solution and are meant to be the last loan you will ever need. We have saved homes for people, improved their lives and have made many folks extremely happy with their reverse mortgages. But having said that, we acknowledge that reverse mortgages are not for everyone. It has to be right for you.

You can get information directly from the HUD Website which includes links to several informational booklets from such notable experts as the National Council on Aging. I think the HUD site does a good job of explaining things without injecting a personal bias, one way or the other.

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Question From Sandy
3/01/2011
I'm a 70 yr old retired female with limited funds. I have a home mortgage with Chase Bank (into the 8th yr of a 3 yr loan) - interest rate is 6% fixed; balance $200,000, principal & interest $1340/mo.. My house is valued at approx. $375,000. I live in Oxnard, CA (southern Calif). A rep from Chase called me last week & offered a Streamline loan - 5-3/8% fixed, 30 yrs, with fees rolled into the payment; and my mortgage balance increasing $4,500. The mortgage payment would be $1146/mo. (savings almost $200/mo.) I don't know if I should agree to this -- as $200/mo. less may not be enough in a few years. Question: Do you recommend I take this refinance & in a few years do a Reverse Mortgage? Or - should I just wait a few years and do a Reverse Mortgage. I hate touching my present loan - but need more money. Banks charge exorbitant fees & I feel nervous dealing with them as I don't want to be scammed. Thanks
Expert Answer

This is an excellent question. Borrowers have to make this decision every day when deciding whether or not to refinance a loan and you really need to consider all of the pros and cons to determine which is the right path for you. If you refinance, you will save $200 per month, but then you will raise your mortgage balance and begin payment on a new 30 year loan. If you look at just the hard numbers, it will take over 22 months at $200 just to recoup your initial $4,500 investment. That does not take into consideration the additional interest that you would be paying on the higher loan balance (not a lot, but an additional $240 or so in the first year).

Since you pay the most interest on a 30 year loan in the first years, after 8 years more money is going toward your principal reduction now that it would if you refinanced at this time. In other words, not only will your balance be higher, but it will remain higher longer. If you plan to get a reverse mortgage in the next 3 years anyway, you probably would never even recoup the cost of the refinance.

Having said that, what will $200 less payment now do for your quality of life? Only you can quantify if the lowered payment is worth it to you and your daily living situation. The numbers say don't do it for a loan you think you might keep for only 3 years or less, but numbers can't determine your living situation and whether or not $200 a month would really make a difference that is bigger to you than the bare numbers show.

One last thing I would caution. I don't know what kind of loan you currently have, but 5.375% AND $4,500 added to the principal balance sounds extremely high in today's market! If you determine that the lower payment in the short run is the way to go, I would really suggest that you shop around and compare rates. If you have the income to support a conventional loan at less than $417,000 loan amount, I cannot see any reason why you could not get a loan under 5% at that same fee structure in today's market.

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