Reverse Mortgages and More

One of the fun things about getting away is having time to read. We had a chance to get away for the holidays, and reading the newspaper from a different town can be enlightening. I recently discovered that there is a ‘Mortgage Professor’ by the name of Jack Guttentag who writes for the Sarasota, Florida, Herald-Tribune. He even has a website: www.mtgprofessor.com.

(I found it interesting that he would abbreviate the most important word in his website address, ‘mortgage’ to ‘mtg.’ I would have kept the whole word, which is very descriptive, and abbreviated the other word to ‘prof,’ but that is just me).

Anyway, Mr. Guttentag offers up some very interesting ideas on mortgages as investments. He is not suggesting that you buy a mortgage, but he does discuss the idea that people have used the equity in their homes as collateral for loans. Then they took those loan proceeds and invested them in the stock market. Now, not only have the stock portfolio values plummeted, but these folks owe big money against their homes. And to make matters even worse, they have exhausted their borrowing power. Ouch!

On a somewhat less depressing note, the writer offers up some ideas about ‘investing’ by making excess payments on your mortgage. For instance, if your best investment option is a 3 percent certificate of deposit from your local bank and if your mortgage rate is 6 percent, then why not put your CD money against your mortgage balance? You will be getting twice the return and creating equity in your home at the same time.

By building up the equity in your home, you are creating a borrowing opportunity later on if you need it for an addition, a vacation, a car purchase or medical work. You can secure a home equity loan of about 70 percent of the difference between your home’s value and the payoff of your current mortgage or even secure a reverse mortgage if you are over age 62.

I have written about reverse mortgages before. They give a senior citizen the opportunity to use his or her home as a way to finance the help and services that they need to stay there. Using that money to pay your real estate taxes, to pay for upkeep and repairs on your home and to engage the services of some home health professionals can allow you to stay in your own digs for many years before the personal care home or nursing home episode of your life begins.

There are two approaches to this idea. One is to make the investment decision every month about whether to add a few dollars to your mortgage payment. This requires that you go through the analysis each and every month, but it also keeps the control of your money in your own hands in case an emergency arises. The other option is to liquidate enough of your holdings to pay off the entire mortgage. Then you can invest your old mortgage payment amount into the market at today’s steeply discounted prices or purchase that CD we talked about earlier.

Mr. Guttentag offers a spreadsheet to help you conduct your analysis. If the idea intrigues you, take a look at www.mtgprofessor.com/spreadsheets.htm and click on ‘Loan Repayment Versus Investment.’ Before you make the decision to go forward, however, make sure to consider the opinions of your investment broker (who probably wants you to keep your investments intact); your income tax advisor or accountant, who can help you understand the income tax consequences; and of course, your friendly neighborhood attorney, who can help you analyze all of this.

Christopher M. Abernethy has been practicing law in Hampton Township since 1976. He focuses on elder law, which includes wills, trusts, powers of attorney, living wills and probate matters. He also is proficient in all aspects of real estate law and business law. He is a member of the National Association of Elder Law Attorneys and the AARP Legal Services Network. He can be reached at (412) 486-6624 or by email at cabernethy@aaylaw.com.