This week, Gail helps readers decide whether to refinance a 10-year mortgage and clarifies a few misunderstood facts about reverse mortgages.
Dear Gail,
I need your advice. Last year we refinanced our 10-year fixed mortgage at 5.625%. The rate is now 4.25%. I am wondering if we should take advantage of the new low rate and refinance the mortgage again. My husband is against it. His reasoning is that we only have 9 years to go....The closing costs would be more than $2000. We figure we would save $160/month with the new rate, but it would stretch the loan to another year. Do you think we should do it again?
Regards,
Sharon
Dear Sharon-
Since you have already estimated the monthly savings, it's a cinch to arrive at the answer of whether or not to re-finance.
Simply divide the cost of your new loan by the amount you'll save each month. This gives you the number of months it will take to make up the cost of originating a new loan.
In your case, $2,000 divided by $160 gives you 12.5 months. This means you will recoup the cost of taking out the new loan in slightly more than one year. After that, you begin to really save money thanks to the lower interest rate.
Just because the new loan has a 10-year term, that doesn't mean you have to take that long to pay it off. Provided the loan does not contain a pre-payment penalty (a rarity these days), you could still pay off your home in 9 years: simply pay more than the minimum each month and instruct the mortgage company to apply the extra amount toward reducing your principle.
Check out the website for Profina, a debt counseling service, at www.profina.org. Then go to the section on "calculators." You want the one for mortgages.
Try playing with the numbers, plugging in different scenarios for interest rates, monthly payments and timeframes and see the results you get. (If you had told me your loan balance I would have done this for you, but I have every confidence you can do this.)
If you're really serious about paying off your home, re-finance at 4.25% but continue to pay the same amount each month as you're paying now. In other words, pay the extra $160. My hunch is the calculator will show you can wipe out this new loan in less than 9 years and still save a bundle of money!
One more suggestion: before you sign on the dotted line for a new mortgage, contact your current lender and tell them you plan to pay off their loan. To keep your business, they might come back and match this rate for little or no cost at all.
Tell your husband his wife's pretty smart!
Gail
Dear Gail,
I am very disappointed in your article on reverse mortgages. More debt is never the answer to money shortages. What solution do you propose if the person outlives the mortgage term? Then they lose their biggest asset they have worked a lifetime to secure.
The best thing Americans can do is live debt-free...not get by on gimmicks.
Matt
Dear Matt-
Please go back and re-read this article. Clearly, you misunderstood it.
A reverse mortgage is a sound, proven strategy for turning what is often a person's most valuable asset -- their home-- into income. There are stringent government regulations, which lenders must adhere to. Respected, senior-citizen organizations such as AARP offer advice on how to obtain a reverse mortgage. Do you think they'd do this if this were not legitimate?
As the term "reverse mortgage" implies, instead of paying a mortgage company for a home loan, a bank or mortgage company makes monthly payments to you, based on what your home is worth. In essence, you are getting the use of the increased value of your residence without having to sell it.
Don't think of it as taking out a "loan;" think of is as taking an advance on what your home would sell for.
Furthermore, Glenn Petherick of the National Reverse Mortgage Lenders Association (NRMLA) says even after you have drawn down the entire value of your reverse mortgage, you can never be forced out of your home. By law, you can continue to live there as long as you're able to.
In fact, the additional income provided by a reverse mortgage can make it possible for an elderly person to live in their home years for longer than they might have been able to afford to do so otherwise.
The mortgage company gets its money back when the home is sold. And this happens only after you move out of the home, sell it, or die.
You home is just one more asset you have accumulated over your lifetime. A reverse mortgage allows you to benefit from its increase in value and still enjoy the use of it.
To me, this is a smart way to turn a home into a paycheck!
Gail
Hi Gail.
My mother in-law is on a $600/month fixed income, Social Security only. She also qualifies for some benefits from Wisconsin's Medicaid program. Upon death, the state comes in under Medicaid and gets their money back from the estate. If she were to get a reverse mortgage to provide extra money would the reverse mortgage be paid out first, then the State would get theirs? Or would the State get first dibs and then the reverse mortgage come in after that?
Thanks for your input.
Bruce
Dear Bruce,
Once a Medicaid recipient has died, Wisconsin, like a number of states, attempts to recoup some of the money it paid out to provide care for that individual. It does this by filing a claim against the decedent's estate.
However, not all benefits are what the state calls "recoverable." Here are examples of those that are:
-Nursing home services
-Home health aid services
-Private duty nursing services
-Home and community-based waiver program services
You can find a complete listing by visiting Wisconsin's Medicaid site on the Internet: http://www.dhfs.state.wi.us/medicaid1/ (There are similar Medicaid sites for each of the 50 states and I highly recommend them-- very informative.)
I spoke with Kathy Bailey, a supervisor in Wisconsin's Estate Recovery Program. She says if your mom took out a reverse mortgage, upon her death, first "the mortgage would be satisfied, then the remainder would be left in the estate."
If you mom had received "recoverable" benefits under Medicaid, the Estate Recovery Program would file to be reimbursed from whatever is left in your mom's estate.
Keep in mind that your mom has to report the income she receives from a reverse mortgage. While this will have no impact on her Social Security or Medicare benefits, it could affect whether she is still eligible for Medicaid.
You should visit with someone at Wisconsin's Medicaid office to see what impact this would have. Would your mom be better off receiving more income or would she be better off relying on what she can get from Medicaid? You'll have to weigh the differences.
Hope this helps!
Gail
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The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments Inc. or any of its affiliates. You should consult your own financial adviser for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.
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