April 7, 2016 by HECM Pro
Are you retired (or nearly retired) and still making mortgage payments? If so, is that what you envisioned for your retirement? Was it your plan from the beginning to make mortgage payments for the rest of your life?
For most people, probably not. But we all know that life happens: health issues come up that force you to retire early, you get hit with unexpected medical bills, the stock market crashes and takes 40% of your IRA, a spouse passes away, etc.
Nobody wants these things to happen, but it’s often unplanned events like these that derail the plan to get your home paid off before retirement. Because of that, many people enter retirement thinking they’d better just get used to the idea of having a mortgage payment for the rest of their life. It doesn’t have to be that way! In fact, if you’re not planning on selling your home any time soon, making a mortgage payment for the rest of your life could be like throwing good money down a rat hole.
Think about it, if you’re 66 years old and have 26 years left on your mortgage, you won’t have that mortgage paid off until you’re the ripe old age of 92. Do you really want to wait that long to have no mortgage payment? Are you sure you’ll even live that long? Could you be doing better things with your money than spending it on a mortgage you may never pay off in this lifetime, anyway? If so, get rid of the payment! That frees up more cash that you can use for other things, like travel to see your grandchildren, do home improvements, or pay off other bills.
Throwing Money Away on Mortgage Interest
I recently talked with a gentleman I’ll name Fred who is 72 and modified his mortgage at the beginning of 2011 when the balance was about $250,000. To get his payment down, the lender stretched out the loan term to 40 years and gave him a 4.50% interest rate, which meant his new principal and interest payment was $1,123.91 per month.
Because the loan term was so long, we figured out that he would make nearly $135,000 worth of payments and only pay off around $29,000 of the loan balance in the first ten years. Over the first twenty years of the loan he would make $270,000 worth of payments and only pay off a little more than $70,000 of the principal balance.
Think about that: after 20 years of payments, Fred would still owe $180,000 and have spent over a quarter of a million dollars of his retirement income on mortgage payments. And what did he get in return for that? Sure, he paid down the mortgage balance a little bit, but so what? He can’t take his home equity down to the car dealer and buy a new car. He can’t use it to buy a new roof for the house. On top of that, he could lose all of that accumulated equity if home values fall in the future.
Because he planned to live in the home the rest of his life, spending his hard-earned income trying to build home equity was like throwing good money after bad. He was essentially throwing money down a rat hole.
Fred realized very quickly that it made no sense to continue paying on a mortgage that wouldn’t be paid off until he was 107. The vast majority of his payment was going to interest and he was making little progress on the loan balance. It made perfect sense to refinance his loan with a reverse mortgage and get rid of the payment altogether. Effectively, he got a $1,124 monthly pay raise to enjoy for the rest of his life.
Cutting Back to Keep Up With a $400 Mortgage Payment
Jody and Tyson, 72 and 74, respectively, own a small home in northern California worth around $150,000 and have a relatively low mortgage balance of just $30,000 that has about 20 years left on it. Their monthly payment, which is just over $400/month, is a struggle to make at times because they’re only living on about $2,000/month in Social Security income.
The roof needed replacement a few years ago, but they instead opted to go cheap and just patch what they could with the hope that it would hold them over for a few more years. Jody has had some health issues over the last few years, so their already tight budget is being stretched to cover medical bills. With no savings to speak of, they have a very limited financial capacity to absorb new unexpected expenses – let alone replace the roof in a few years.
Tyson acknowledged that they have no plans to move and there’s probably no point spending $400 of their already tight income on a mortgage they may never pay off. But for some reason, he just couldn’t get his head around the idea of doing a reverse mortgage. He’d been paying down his mortgage for so long that he couldn’t imagine having a mortgage balance that went up over time. Meanwhile, he and his wife were scrimping and cutting back wherever they could just to cover the mortgage and their living expenses.
What’s the point of that? When you’re retired, your lifestyle is determined by your cash flow. When all the mandatory bills are paid off, what’s left over determines the lifestyle you can have and the things you can do. This couple qualified for a reverse mortgage that would eliminate the mortgage payment and give them an extra $400 every month to play with, and set them up with a line of credit worth around $60,000 that they could dip into to cover unexpected medical bills and get the roof replaced.
Jody and Tyson had a phenomenal opportunity to change their lifestyle substantially and get some needed home repairs done, but instead, they opted to keep making the mortgage payment. They opted to keep throwing money down the rat hole.
Are You Throwing Money Down a Rat Hole?
If you only have a few years left on the mortgage and you’re early in retirement, there could be a case for just toughing it out a little longer and getting the mortgage paid off. However, if you have been retired for a few years, don’t plan to move, and have a lot of years left to pay on the mortgage, do the math. How old are you going to be when the mortgage is paid off? Will you likely even pay it off in this lifetime? If not, a reverse mortgage could make a lot of sense for you. Continuing to make a mortgage payment on a loan you may never pay off could be like throwing good money away – down a rat hole.
The scenarios in this post are based on real people, but names and other details have been changed for purposes of confidentiality.