Is converting a standard mortgage into a reverse mortgage a good idea? The letter below started me thinking about this question.
“Will I be better off 10 years down the road if I take out a reverse mortgage in order to pay off the balance on my standard mortgage? I am paying 3 percent on that mortgage, and have been told that reverse mortgages are available at 2.5 percent or less. If I did this, I would invest the $2,107 I am now paying monthly for principal and interest. I am 76, the house I live in is worth $626,000, and my current mortgage balance is $380,000.”
I decided that whether this shift made sense depended heavily on the objectives of the senior borrower. Broadly, they fall into two groups.
The author of the letter asks whether transitioning to a reverse mortgage would make him wealthier in 10 years than staying with his current mortgage. He is a “wealth maximizer,” probably because he is looking ahead to sell his home at some point, or wants to leave as large an estate as possible. But paying off his mortgage with the proceeds of a reverse mortgage would reduce his wealth.
If he stays with his mortgage, his $380,000 balance would be paid down to $218,253 in 10 years. If instead he pays off the balance now with the proceeds from an adjustable rate HECM, available at 2.154 percent, in 10 years he will owe $704,343. Investing the monthly payment of $2,107 at 1 percent, which is about the highest super-safe return that is available today, would generate $218,253 over 10 years. But that leaves him with $267,837 less wealth than if he had stayed with the standard mortgage.
read more: http://triblive.com/business/headlines/7444532-74/mortgage-percent-reverse#axzz3Nyyq8j4Z
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