February 15, 2016 by HECM Pro
Both are still working, Patricia as a nurse, Ted as a truck driver. They like their jobs, but they’ve been at them for a long time and are tired of the stress and long commutes. They really want to quit working so they can spend more time with their children and grandchildren.
The two of them combined bring home a good income, but they expect it to drop substantially once they quit their jobs and begin living on just Social Security, Ted’s pension, and Patricia’s 401(k) that is currently worth around $160,000.
There home is currently worth around $580,000 and they have no desire to move. They love the home and want to remodel their bathrooms and upgrade a deck outside so it is even more enjoyable to live in. However, if they can’t significantly lower their expenses, they may be forced to downsize to smaller and more affordable home out of state.
The only thing standing in the way of retirement is a mortgage principal and interest payment of $1,220.01 (they pay their property taxes and homeowner’s insurance separately). The loan is a 30-year fixed at 4.25% they’ve had since April 2010 and it currently has a principal balance of around $221,000. Though they have a low interest rate, the payment is enough to eat up one of their Social Security checks, which limits their ability to do fun things like travel to northern Nevada to see their children and grandchildren.
The following is a summary of the numbers we’re working with so far:
Both are in good health, but with 24 years left to go on the mortgage, they’re not sure they’ll pay it off in this lifetime at the rate they’re going. Ted doesn’t want to wait until he’s 93 to be free of his mortgage payment. They feel like they’ve got better things to be doing with $1220 every month than spending it on a mortgage they may never pay off anyway.
Their goal with the reverse mortgage is to eliminate the monthly mortgage payment so they have more money to fund their lifestyle and get about $20,000 out of their equity to remodel the bathrooms, rebuild the deck, and pay off a few miscellaneous bills. If there’s any money left over in the reverse mortgage, they’d like to use that to supplement their existing retirement assets.
The Results: A Nicer Home and the Ability to Retire
Based on Patricia’s age (she’s the youngest) and a home value of $580,000, Ted and Patricia qualify for a benefit amount of $287,000 after closing costs. The first $221,000 of that is used to pay off their existing mortgage balance, which leaves them another $66,000 to use for other purposes. Of that, they’ll take $20,000 at closing as a lump sum and leave the rest on a line of credit for use in the future.
Let’s summarize what the reverse mortgage has accomplished for them:
- Elimination of $1,220 mortgage payment. Getting rid of the mortgage payment means they’ve eliminated $15,000 per year from their expenses, which means they are now able to quit their jobs and retire. Over a 26-year period, that adds up to $380,000 of their income that would otherwise have been spent on mortgage payments.
- New bathrooms and deck. After paying off the mortgage, Ted and Patricia were able to extract $20,000 from their equity to completely redo their bathrooms and deck, which helps make their home a more enjoyable place to live for many years to come. They’ve also paid off a few credit card balances that were a headache, which increases their monthly savings even more.
- Increase in available retirement assets. Instead of just the 401(k) (which is taxable), Ted and Patricia now have a tax-free $46,000 line of credit as well. In one shot, they’ve increased their available retirement assets by around 28%. Even better, whatever money is available in the line of credit will automatically grow and compound larger over time with no limit. Assuming they receive a 5% growth rate, which is very reasonable for today’s market, the line of credit could grow to over $71,000 after ten years. After twenty years, it could be worth as much as $122,000. Ted and Patricia have effectively turned a portion of their equity into a tax-free retirement account that will automatically grow larger over time.
Making Possible What Was Impossible
Without the reverse mortgage, Ted and Patricia may have been stuck working for many more years or may have been forced to downsize to a smaller home. Instead, they’re able to stay in the home they love, eliminate a large payment from their monthly bills, get retired, and can do the projects around the house they’ve wanted to do for so long. On top of that, they have a larger retirement nestegg, which means they can enjoy their retirement with greater financial security for many years to come.
Case studies are based on real life scenarios but names, ages, locations, and other details have been changed to protect client confidentiality.