I love talking with my clients, prospects and closed clients alike. They are my inspiration for most of the posts on my blog.
Yesterday, I was speaking with Jerry, a client who currently has a reverse mortgage. He was interested in refinancing out of his reverse mortgage into a 30 year fixed rate "forward" mortgage in order to maintain plenty of equity in his home to leave to his children. He has a great income, excellent credit and plenty of equity and should easily qualify for a conventional loan.
"Why don't you just make payments on the reverse mortgage?" I asked.
"Can you do that?"
"You sure can!" I replied. "And let me tell you why I think that would be the best idea for you." I went on to explain the following to him.
The current rate on your adjustable reverse is at a 1.25% margin over the One Month T-Bill (A HECM CMT 125 in reverse speak.) One of the lowest margins ever offered on the HECM.
- By making payments on the reverse mortgage you will not only eliminate or slow down the current principal balance increases, you increase the available line of credit. This feature is only available on the FHA Adjustable Rate Reverse product.
- You avoid the cost of refinancing.
- Payments on a 30 year fixed are mostly interest during the first half of the loan life, so basically the bank is now making @5.5% on the loan instead of the current less than 2%. This reduces the amount of principal reduction you would see from the same monthly payment.
- In the event the interest does adjust upwards,( and yes, everyone agrees that is bound to happen) you will have lowered your principal balance more than if you had refinanced AND.... Ready??? Here comes the best part! The growth feature on your line of credit is directly tied to the interest rate being paid on your loan (plus .5%)! That means that should you need to access equity in the future, due to an emergency of any kind, you will have more funds available to you when you need it.
- There is never a prepayment penalty on n FHA Reverse Mortgage, and yes, you can refinance at anytime, but carefully weigh the benefits of other options before you spend your hard earned equity.
Needless, to say, although I talked Jerry out of what would be an easy refinance for one of my forward team mates, I helped him to accomplish his goal of reducing his debt in order to leave more for his children AND be prepared for whatever the future may bring.
As always, I love to hear your thoughts, comments and especially differing points of view. Please let me know what you think.