Yes, you can get a reverse mortgage if you have a mortgage. This is one of the most common reasons people get a reverse mortgage. They use the reverse mortgage to payoff an existing mortgage to free up monthly cash flow.
I don’t know about you, but I have always wondered how much better life would be if I didn’t have a monthly mortgage payment. And all I had to do was pay property taxes, homeowners insurance and take care of the property.
Here is an example of getting a reverse mortgage if you have a mortgage
Please understand that these numbers are for illustrative purposes only and interest rates and fees vary depending on the market and value of the home.
Rick and Ginny are both 65. They own a home in Oregon worth $400,000. They currently owe $109,728 with a 4.75% interest rate and have 18 years left on their loan. Their monthly mortgage payment, not including taxes and insurance, is $782.47. Their monthly income is $2300 which is just Social Security. They have no other assets.
Things are a little tight by the end of the month and they would feel more comfortable and enjoy retirement much more if they just had some extra cash. They are also worried about upcoming expenses as the home will need a roof within the next 10 years and the HVAC unit is 20 years old.
They decide that they should get a reverse mortgage to pay off their current mortgage.
Here are the numbers on their new monthly adjustable rate reverse mortgage:
- Principal Limit: $156,900 (most they can borrow)
- Initial Interest Rate: 5.705%
- Growth Rate: 6.205% (Interest rate plus mortgage insurance)
- Fees: Origination: $6,000
- 3rd Party Fees: $4,644
- Initial Mortgage Insurance: $8,000
- Total Fees: $18,644
- Line of Credit: $35,497
Rates as of 9/6/2022. The initial APR is 5.705%. The loan has a variable rate, which can change each month. The rate is tied to the 1 year CMT plus a margin of 2.375%. There is a 5% lifetime interest cap over the initial interest rate. This means that the maximum APR that could be imposed is 10.705%. Rates and funds available may change daily without notice. Closing costs vary by property state. Please call or visit online for further details.
By getting the reverse mortgage Rick and Ginny are keeping: $782.47 in their pocket each month. That equates to:
• $9,389.64 each year.
• $49,948.32 over 5 years.
• $78,247 over 10 years.
• $169,013 over the 18-year remaining life of their previous loan.
Those are some big numbers for someone that is struggling financially each month. Those savings far outweigh the cost of the loan.
For this couple, an extra $782.47 a month is the equivalent of getting a 34% raise in their Social Security checks, but better. It’s better because they don’t have to pay income taxes on that extra $782.47. (consult a tax professional)
On top of that they have set themselves up with a line of credit in the amount of $35,497 that grows over time. The line of credit is what is available after paying off the current mortgage and lumping closing costs into the reverse mortgage.
They can use this line of credit as those large housing expenses pop up, like needing a new roof or if the HVAC unit were to go out. This line of credit will keep them from using a credit card to pay for those expenses which would further eat into their monthly cash flow.
If they never used the line of credit and assuming the growth rate never changed. The available funds would grow to $47,702 in 5 years, $64,103 in 10 years and $86,144 in 15 years, and it keeps on growing. Even if they were to use some of those funds, the remaining available funds would continue to grow.
If one of the spouses were to pass in the next 18 years, the remaining spouse is not stuck with a mortgage payment that would be hard to pay with a reduction of household income.
They get the financial equivalent of owning the home free and clear. Which is they don’t have a mortgage payment and they only pay taxes, insurance, other property charges and maintain the home.
That extra cash every month allows them to have a more enjoyable retirement. They can go out to dinner and a movie more often. They could take small weekend excursions or save up that monthly savings for a nice long vacation. They have the cash to continue to enjoy their hobbies. Or they could save that money every month.
Is the cost too high for these people in this example? No way! All the benefits that they are getting far outweigh the expense.
I get that the fees are high when you compare them to a regular mortgage. However, you cannot compare them to a regular mortgage because you are comparing apples to oranges. Reverse mortgages and regular mortgages are completely different types of loans, with completely different outcomes and completely different financial impacts. It’s like comparing life insurance to car insurance.
With a regular mortgage the fees are based on the initial loan amount. With a reverse mortgage, the fees are based on the appraised value up to a maximum value of $1,089,300.
Almost all the fees are lumped into the loan. There are some fees that are paid out of pocket which could include the required counseling and a portion or all the appraisal cost. In other words, you are not required to pay all the loan fees out of pocket.
In this example, almost half of the fees are the initial mortgage insurance premium. The mortgage insurance provides several benefits. These benefits include:
• Being able to borrow more money at a better interest rate. This alone will save you more money over time.
• Guaranteed access to funds, even if the home value decreases, if you are following your loan obligations.
• You can never owe more than the home is worth even if the loan exceeds the home value.
• The lender cannot pursue you, your estate or your heirs for any losses associated with this loan.
• You have a loan that comes with voluntary loan payments. (you still have to pay property taxes and homeowners insurance)
For some of you reading this, this scenario really hits home and makes sense why you should get a reverse mortgage to payoff your current mortgage.
For others, you think the costs are too high and would never consider getting a reverse mortgage. If that is you, I would encourage you to check out the strategic uses of a reverse mortgage. You will see why and how you can benefit greatly from a reverse mortgage beyond using it as a last resort.
