Miller’s The First Law of Real Estate Finance

Bill White writes and discusses the recent Wall Street Journal advice to someone able to pay off a $50,000 mortgage. Bill raises the idea of a reverse mortgage as a solution to the problem.

Bill says:

“This is a perfect example of how a reverse mortgage can be used as a retirement planning tool. My recommendation would be for the gentleman to take minimum withdrawals to make the monthly payments on his existing mortgage and avoid any penalties. When he turns 62, take out a reverse mortgage to payoff the remaining balance of his forward mortgage. If the monthly savings were not sufficient to meet his needs, he could take the remaining proceeds from the RM and supplement his income with a tax free, monthly payment. Thereby, eliminating the need to withdraw funds from his investments and pay taxes at a time when the stock market is in decline.”

Let me offer a different view:

I’m not sure the owner needs any loan. He does not say he’s stressed or behind on his mortgage payments for the $50,000 mortgage.

He now has a 5.375 percent interest rate. Can he get a better rate with a reverse mortgage?

If he gets no loan he pays no fees. Why is that a bad situation?

In basic terms, Miller’s first law of real estate finance says this: The goal is not to create more debt.

As to the point of not cashing in stocks which have declined in value, alas in many areas real estate values are also falling. I like the sentiment but each homeowner has to consider their specific situation and preferences.

This entry was posted on Thursday, January 24th, 2008 at 5:18 pm and is filed under Reverse Mortgage . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.