Don (74) and Rachel (67) are clients that did not have to get a reverse mortgage. They had a healthy income of almost $50,000 a year, plenty of funds in retirement accounts and very little debt except for the home. They owed $206,000 on their $555,000 home.
The main reason for them considering the reverse mortgage was to get rid of the monthly mortgage payment. With the mortgage payment gone, they would increase their monthly cash flow over $1100 a month. They would also create another source of liquid funds of roughly $78,807 in the form of a line of credit.
This particular scenario is really interesting because they wanted to pay down their mortgage balance with $100,000 they had sitting in a savings account. The decision to do this had three very important outcomes.
First, the $100,000 reduced the initial amount they would be borrowing. This reduced the principal limit percentage below 60%. When the principal limit is below 60%, the upfront mortgage insurance is .5% of the appraised value vs. 2.5%. The $100,000 saved them $11,100 in upfront mortgage insurance cost.
The second thing it did was increase their line of credit from $78,807 to $189,907. The $100,000 they put towards the reverse is still as liquid as it was in the savings account. However, instead of earning well less than 1% in growth, the line of credit is growing at 5.598%*. Given this growth and assuming they don’t use it, the line of credit is expected to double in value in about 12 years. With the extra $100,000 they put towards the loan, they are expected to have $375,814 vs. $157,617 in their line of credit.
Finally, the loan balance will be growing at a much slower rate with the lower loan balance and will preserve more equity over time.
The overall return of using the $100,000 to pay down the mortgage is quite significant. The initial savings in closing costs, the return on the growth of the line of credit and the monthly savings on accumulated interest combine for a nice return on funds that were virtually stagnant.
I help clients with reverse mortgages in Oregon. I am located in Medford Oregon but can work with clients outside of this area. If you have questions about using a reverse mortgage to purchase or refinance a home in Oregon, give me a call today.