Savings or reverse mortgage for home loan?


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Dear Senior Living Adviser,
I am 67 and am self-employed part time, so my income varies. Even with a credit score over 800, I am not eligible to refinance my 5.35 percent mortgage loan. The home is worth more than $300,000, with an outstanding balance of $90,000.

I have a little over $175,000 in savings that I keep in a money market account. I am afraid to put any of it in any long-term investments, since I might need access to cash to live on or for emergencies. I have no retirement savings accounts, pension or annuities, other than the $1,000 per month I receive in Social Security benefits.

My questions are: Should I use some of the savings to pay off my house, which would free up over $12,000 a year? And, if I got in a financial bind, could I perhaps do a reverse mortgage since I’d have no mortgage outstanding?

Is this even an option since I cannot provide proof of regular income? And is a reverse mortgage even advisable?

Thanks in advance!
— Diane Decisions

Dear Diane,
Self-employed people typically have trouble with income verification to qualify for a mortgage. Also, you and a lot of other seniors get very frustrated when they have the assets and the credit score but not the income to qualify to refinance their home.

If you haven’t checked your credit score in a while, you can do it for free at myBankrate.

No need to worry about having sufficient income to qualify for a reverse mortgage. There are no monthly payments, so the lender doesn’t have to worry about your ability to make those monthly payments. However, the lender will want to make sure you can continue to pay your homeowners insurance, property taxes and upkeep on the home.

You don’t have to raid savings to pay off the mortgage. You could take out a reverse mortgage to pay off the existing mortgage. Any outstanding mortgage loans are paid off at the closing of the reverse mortgage.

There are a half-dozen different options in how you can choose to receive any additional funds from the reverse mortgage.

A downside to a reverse mortgage is its high closing costs. You could raid your savings instead and not have to pay those costs while keeping the option open to take out a reverse mortgage at some point in the future. The downside in waiting to take out the reverse mortgage is you don’t know how the program requirements might change over time.

Other things being equal, waiting to take out a reverse mortgage should increase the amount available from the loan. The National Reverse Mortgage Lenders Association has a reverse mortgage calculator that will help you estimate the closing costs and what you might get from a reverse mortgage loan after paying off your existing mortgage.

Prepaying the mortgage usually makes sense when the effective rate on the mortgage is higher than the after-tax yield on your investments. With a 5.35 percent pretax rate on your mortgage, and the next-to-nothing rate you’re earning on your investments in a money market account, that seems to be an easy choice. The reverse mortgage option replaces the financial safety net provided by the $90,000 in savings you would use to pay off the mortgage.

Not comfortable enough to make a decision? Pay a fee-only financial planning professional for a few hours of his or her time to help you gain confidence in your decision.

Ask the adviser

To ask a question of Dr. Don, go to the “Ask the Experts” page and select one of these topics: “Senior Living,” “Financing a home,” “Saving & Investing” or “Money.” Read more Dr. Don columns for additional personal finance advice.

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