I’m reminded a future retiree’s personal economy is often times anchored by their mortgage, as I slide back into my hammock hung between two ancient pines. The river roars past me making its way south to the Rio Grande. Great rivers form the earth’s circulatory system revealing Mother Earths health and well – being. Rivers also provide us answers to our questions. All too often rivers prompt us to ask better questions. How many of us have the right mortgage for retirement?
Turning on my side I ask my question directly to the river. What is the best mortgage to have? Spring rolls around slowly in the Rockies. The river is ice cold and clear. Canadian Geese, Hawks, and Woodpeckers have started do their thing. Insects are hatching; butterflies momentarily filled the air the other day. One important aspect of retirement planning is picking the right mortgage.
As we all know one’s home is not a credit card or a refinancing cash machine. Future retirees benefit from thinking long and hard about living in their home the rest of their lives or renting it out as a source of income in retirement. I’ll look at the pros and cons of buying a second home for retirement in future posts.
I recommend one gets into and stays in a 15 year fix mortgage 15 years before a future retiree stops working in their full time career. Younger future retirees that can’t swing the 15 year fixed payment initially benefit from a 30 year fixed that they can convert to a 15 year fixed down the road. Worst case scenario they can double up on their 30 year fixed payments, 15 years before retirement depending on interest rates.
Recommended Mortgage Options Prior To Retirement
“Money often times costs to much” Ralph Waldo Emerson
15 Year Fixed Mortgage
Nothing could be more accurate when it comes to buying a loan for one’s home. Be sure you know exactly what you want; a 15 year fix, what you will pay for it (total fees, origination points) and shop it. I recommend you spend no more than a half a point on total loan costs. Lock your rate early on in the process and shop it around, then declare in no uncertain terms what you’ll pay for it right before you receive your loan documents which you should not be rushed into signing. With rates at historical lows there is no reason to worry about rates suddenly spiking up so repeating the process to get your fees in line is a safe bet. Once you review your documents and ask for changes to reflect your expectations, if they are not immediately forth coming, let the documents expire from the initial lender. Likely you’ll discover they will meet your expectations on fees before letting you sign with the competition. Keep in mind some loans are more profitable to the lender than others. All unsigned loans are costly to a lender especially at the end of the month. Keep your focus on total cost of loan and shop the rate. Remember you’ll only sign for a loan once so be prepared for the process to be time consuming, repetitive and even a hassle. I prefer working Credit Unions and in some cases smaller regional banks.
Home Ownership Accelerator Mortgage
This is an option for a few future retirees who make good steady income with ample cash left over in their checking accounts every month. This assumes they are saving properly for retirement, have an emergency fund in place, and don’t carry any credit card debt. This approach uses a master account (combination of all your checking accounts) sweep to pay down your mortgage balance daily as much as possible thereby reducing the amount of interest ones pay on the life of the loan. Your income lowers your balance daily and saves you money in the form of interest you would of paid which is used to further reduce your balance. This becomes a cycle reducing your interest costs over the long haul. It’s not magic it’s math.
Recommended Mortgage Options in Retirement
Equity Transfer Transaction– Equity Partnership – Not a Mortgage
This is really a partnership based on splitting future appreciation (current owner keeps current equity) and it is based on the owner qualifying for a life insurance policy at age 62 from a sister company. Current owner gets cashed – out on existing equity. This program is harder to find in today’s real estate market but will become more readily available again in 3-5 years.
Reverse Mortgages Ensured by HUD
This is a good option for some retirees that need to free up monthly income. Requires counseling and fees are high. Please see the link below to an organization I belong to (National Care Planning Council) with an article on reverse mortgages. Bottom line is you need to get into a 15 year fix early enough to ensure you have equity free and clear in retirement. You can explore your equity options then to see if they make sense for you. Otherwise you have a place to live in without a mortgage payment impacting your monthly budget which is huge when living on a fixed income.
Senior Home Owners Find Financial Resource in Reverse Mortgages”
For many seniors the equity in their home is their largest single asset, yet it is unavailable to use unless they use a home equity loan. But a conventional loan really doesn’t free up the equity because the money has to be paid back with interest.
A reverse mortgage is a risk-free way of tapping into home equity without creating monthly payments and without requiring the money to be paid back during a person’s lifetime. Instead of making payments the cash flow is reversed and the senior receives payments from the bank. Thus the title “reverse mortgage”.
Many seniors are finding they can use a reverse mortgage to pay off an existing conventional mortgage, pay off debt or help pay for home repairs, remodeling or long term care needs….read the entire article by going to the link below
Please go to the following URL for the entire article and previous articles: Either click on the link http://www.planforcare.org or copy and paste the following into your browser: http://www.planforcare.org