Over 65 years old? Reverse mortgage or regular mortgage?
Thursday, March 10, 2011
As I went along the boulevard yesterday morning; there they were ... Boomers. I mean the 65 plus crowd ... and they were not walking, not slouching ... they were not moping and they were not leaving their houses for that old age home either.
They were jogging - earphones firmly planted.
These folks have a zest for life, a youthful and adventurous life, one that costs money. They also want to help their children and their grandchildren get a leg up faster than they themselves did. One way to do this is by accessing the equity in their residence. However for all this energy and great intention there is a deficit of knowledge when it comes to mortgage financing for the nearly or fully retired crowd.
Local mortgage Expert Dustan Woodhouse loves the boomers too but thinks that while some of them may know the latest Fergie lyrics, they do not grasp the basics of mortgage financing.
Says Dustan: I find it amazing some of the preconceived notions that very serious decisions are predicated upon.
Here are some of the things that amaze Dustan
The fact that many Boomers still believe that life insurance is a mandatory part of mortgage financing. Not so, says Dustan, they do not need life insurance.
Or that boomers think they would not qualify for a mortgage because they are over 65 ... retired or on long term disability. None of these things need impinge standard A level borrowing from a mainstream institution.
He places for instance a mortgage on a home of an 83 year old widow for 65% of the value. Funds that were used to upgrade a mortgage helper suite to offset the payments, the balance split between long term care bills and low risk investments. All locked in for 5 years at 3.49% with a mainstream lender.
We at JREI have held the multi-year position that reverse mortgages are not what they are made out to be. Interest rates are significantly higher and says Dustan: Since a boomer could get a conventional mortgage of up to 40 years (despite the pending amortisation changes) for between 50% and 65 % of the properties value the payments could in fact be quite manageable via investment revenue, suite income, or pension income...
Option #1. Leverage through an Accredited Mortgage Professional
1M $ property
Conventional lender 50% LTV @ 3.99% 5 year fixed (40 year Am - it is still available)
You receive 500K, your payment is $2,079.41 per mo (x 60 = $124,764.60)
Total interest Expense is $96,268.30
Balance at end of 5 years is $471,683.70
Option #2. Reverse Mortgage
1M $ property.
CHP 40% LTV @ 6.5.% interest
You receive 400K, your payment is zero,
Total interest expense is $150,757.75
Balance at end of 5 years is $ is $550,757.75
It should be noted that if you took the 100K additional proceeds from Option 1 and invested them and received a 4% return you would have $21,899.42 in investment proceeds as well. Thus you would in fact be $79,074.05 + the $21,899.42 for a total of $100,973.47 better off than having pursued option #2.
The point of taking the extra 100K at 4% and then only making a 4% return is that this is the money that your monthly mortgage payment can be drawn from, so with either option you have 400K available up front.
At the end of the 5 year term you owe significantly less with Option 1, and the proponents of Option #2 will tell you that your home will have appreciated by at least 150K and thus you will not have lost any equity. Indeed it may well have appreciated, largely due to inflation, thus having the same amount of equity 5 years from now is not equal to having the same amount of wealth or spending power as it is today. Said inflation makes having the same amount of equity a bit of a red herring.
So what do you do with Option #1 if you have spent the 400K on health, family, life, and used the other 100K to make payments - what now. Well following the same logic that the Option #2 fans use, the increase in value of your home has created the ability for you to remortgage up to approx 575K now, giving you a little over 100K once again ... presumably to make another 5 years worth of payments.
Is this a slippery slope, potentially, it all depends what your short term and your long terms goals are. If you are looking to access equity today, and plan to downsize the property in 5 to 10 years and essentially eliminate the bulk of the mortgage via trading down then Option #1 is far more viable and logical.
Is option #1 any 'harder' to make happen than #2? Not with the assistance and advice of an Accredited Mortgage Professional, hopefully coupled with the advice of a Certified Financial Planner.
For more information call or write to Dustan Woodhouse AMP
Cell: 604.351.1253 email: Dustan Woodhouse firstname.lastname@example.org