Is your best money move reassessing your mortgage?

Doing Your Homework
The bad economy may mean your best money move is reassessing your mortgage. Here are three options to consider.

Calling this a time of financial uncertainty is an understatement. More often than not, recent economic news has been grim.

For many of us, our most valuable asset is our home. On the other hand, mortgage payments are a drain on the bank account. Maybe it’s time to change that pattern.
 

Joe Willis, vice president of the Richmond real estate firm Spotts & Carneal Inc., suggests the obvious option: If you have a high interest rate or an adjustable-rate mortgage, refinance. “These rates aren’t going to last forever,” Willis said.

Some might want a shorter mortgage term, perhaps 10 or 15 years. Others might want to stretch the payments out to get the lowest monthly payment.

What about paying off the mortgage in full? Willis said that if you have the resources, that’s worth considering. It’s an obvious way to chop monthly expenses. But don’t forget that taxes and insurance are built into virtually every mortgage bill, and those will still have to be paid.

Raiding a stock portfolio or a 401k to pay off a mortgage didn’t appeal to Willis or the other professionals we talked to. “You want to hold onto stocks that have a strong potential to recover,” Willis said.

Is a reverse mortgage the way to go? With a reverse mortgage, the lender pays you in a lump sum, an equity line or monthly payments. The loan doesn’t have to be repaid as long as you live in your home. Your home is the collateral, and the repayment will not exceed the amount your home sells for.

Roy Holmes, who deals with reverse mortgages for Prosperity Mortgage, explained that the loan formula takes into account not only the home’s value but also the age of the youngest borrower in the house. The reason? The older you are, the sooner you’re likely to leave the house, and that’s when the loan will be paid off. For example, for a house valued at $300,000 with $50,000 left on the mortgage, a 65-year-old homeowner can get $115,000 or $691 a month. For the same house, an 80-year-old can get $159,000 or $1,209 a month.

Holmes notes that the reverse mortgage doesn’t carry restrictive requirements for income or assets. “If you’re 62 or older and have sufficient equity in your home, this product offers a lot of solutions for some people,” he said. “But it shouldn’t be entered into lightly.”

The University of Richmond’s Tom Arnold, an associate professor of finance and the F. Carlyle Tiller Chair in Business, said the good thing about a reverse mortgage is that it allows a homeowner who does not have a steady income to get a loan that would otherwise be unavailable. On the other hand, reverse mortgages, like ordinary mortgages, are costly over time. With the bulk of the repayment covering the accumulated interest, the loan may cost three or four times the amount borrowed.

Arnold also urged anyone considering a reverse mortgage to check the agreement carefully for fees and associated charges, “and don’t be afraid to shop it around. Fees are things that can be competed on.”

Arnold said his general recommendation to empty nesters looking for a way to improve their mortgage outlook would be to downsize – sell a larger house and buy one that is smaller and less expensive.

Alicia O’Brien, president of the Richmond Mortgage Brokers Association and a loan originator at Prosperity Mortgage, said the right strategy depends on different factors for every individual. Her advice is to do your homework.

“Educate yourself,” she said. “Check with a CPA for tax implications, consult with a loan professional, a real estate attorney. This is an important decision.”

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Randy Hallman is a former reporter and editor for the Richmond Times-Dispatch and the Richmond News Leader in Richmond, Virginia. He reported on sports and business.