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Is Reverse Right for Us?

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Posted On: 10/07/2015

Question: We’re thinking of getting a reverse mortgage so we can end monthly loan payments. Our home is worth $220,000 and we have $45,000 remaining on our current mortgage. Does a reverse mortgage make sense for us?

Answer: Reverse mortgages are designed for individuals aged 62 and older. Instead of making monthly payments for principal and interest as you would with a traditional “forward” mortgage, with reverse financing you have a giant negatively amortizing loan where there are no required monthly payments for principal and interest.

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We used your basic numbers and the reverse-mortgage calculator created by the National Reverse Mortgage Lenders Association at ReverseMortgage.org to get a general idea of how much you could borrow with a reverse mortgage. Here’s what we found:

First, you have enough equity to get a reverse mortgage for as much as $110,000. This is just 50 percent of the home’s value. The rest remains off-limits.

Second, by paying off your current mortgage you will no longer be making payments on your current loan. You have a $45,000 balance. If we say that the loan has a 4 percent fixed rate and a 30-year term then the cost for principal and interest is $214.84.

Third, while the existing forward loan can be paid off, the borrower must still pay property taxes and insurance.

Fourth, $54,892 is left over from the reverse mortgage for a monthly advance under the one-month LIBOR program. The calculator says a borrower can get a $296.77 monthly draw. This suggests a 30-year loan with a 5.0624 interest rate.

Fifth, if we combine the $214.84 saved by paying off the $45,000 remaining mortgage balance and the $296.77 paid out from the reverse mortgage, the borrower is ahead by $511.61 per month. This money is a “savings” (no more monthly costs for principal and interest) and a loan (the $296.77 received each month), neither of which is taxable. Check with a tax professional for details.

Sixth, the fees to set up this program amounted to $10,109.

Seventh, the reverse mortgage must be paid off when the borrower moves, sells or passes away. The debt is secured by the home and the lender cannot go after any other assets if the value of the property falls.

Do such numbers work for you? Would it make more sense to sell the property and move to a less expensive location? Or, should you consider taking $10,100 to pay down your current loan and go for a faster payoff?

For additional information speak with lenders, in addition to a fee-only financial planner or an attorney who specializes in elder law.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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