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Q&A: Are Biweekly Mortgage Payments a Good Idea?

Question: My wife and I are in our early 80s and are looking ahead. We thought that a reverse mortgage line of credit might be a good idea for us at some point. We own a $450,000 house free and clear, and we have about $400,000 in savings and investments. We have total income of $44,000 a year from a pension and Social Security, but our annual expenses run about $80,000, so we need another $33,000 per year — or $2,750 per month. We’ve been taking that from our investments, but we realize that we’re probably withdrawing too much and too fast. We aren’t willing to sell the house and move into a smaller, cheaper one. Can you offer any suggestions?

Ric: First of all, I love the fact that you are in your 80s and yet still looking ahead: You get the applause of the day.

You’re withdrawing about 8% yearly from your investments. It’s unlikely your portfolio will earn enough to keep even, which means you are slowly eroding its value. We want to make sure you never run out of money, so it does make sense for you to consider the $450,000 of equity you have in your home.

Thus, you don’t have merely $400,000 in investments and savings. You actually have $850,000. Based on that, you’re withdrawing only 4.5% yearly — and that’s great. You’re in excellent financial condition.

The real question is when and how to begin tapping into that home equity. You’re fortunate to have the option of keeping your home. Many retirees who need income feel as you do — they don’t want to sell their houses — but unlike you, they must sell.

So I’m going to give you two answers. The first is that, yes, you can consider a reverse mortgage as you indicated. That’s a viable option for you because of your age and net worth. The reverse mortgage can generate supplemental income, although there will be limits as to how much. You would need to shop around for the best offer.

I get nervous when people turn to reverse mortgages when they are in their 60s, already have mortgages or don’t have other savings. They’re terrible candidates (because they often can’t get enough income from the product or they end up losing their home anyway), yet they are the very people often targeted by the reverse mortgage industry.

Your second option, which is equally viable, is to get a traditional mortgage — a 30-year loan. It’s called a cash-out refinance. You’d simply get a loan of $200,000 or $300,000 and add that to your savings.

You’d have full liquidity, which you’d use to make the monthly payments. Essentially, you’d be borrowing from your left pocket, putting it into your right pocket — and then slowly dribbling it back into the left.

You must evaluate the two strategies to decide which is better for you overall. Which has a better tax benefit? Which gives you the income and cash flow you need? I suggest you talk to an objective, fee-based financial advisor who could perform this analysis for you. We’d be happy to help you with that. It’s something we routinely do for our clients who are retired.

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