Take a moment to consider the following. If you took out a $100,000 loan in 1990 at 7% and you continue to make monthly mortgage payments you’ve paid more than $112,000 in interest to the bank and you still owe $61,000. Your current payment is the same as it was in 1990- $665 a month and $305 just went to principle this month in 2008 and $360 goes to interest. The home’s value in 1990 was $200,000 and is now worth $500,000 in some parts of the country. You could figure the information for your scenario using this amortization table.

You are paying $7980 a year plus taxes and insurance of which $4440 went to interest this year, next year $4160 will go to interest and the year after that $3888 and then $3600 in year 4 and then $3300 in year 5. In 5 years you paid almost $19,000 in interest that went to the bank but had no impact on your equity only an impact on your monthly cash flow. You paid a total of $39,900 over the past 5 years on your mortgage and reduced your principle by $20,000. Half of that payment went towards interest you’ll not be getting back.

Lets say you are now 68 years old, recently retired and you’re holding off taking social security until you are 70 to maximize your benefits because you understand how all this works. Since your payments will be the same ($665 a month) you will continue to decrease your cash flow by $7980 a year until the loan is paid in full in 2019, you die or you move away. Do you really want to keep this going for that long?

Stay with me now.

What if you did not have to make that mortgage payment, you will now have that $665 a month for yourself to do with what you want. You may be doing alright to begin with but in 5 years instead of having paid $39,000, you could have had access to that money to supplement your income. Or what if in that same time frame you needed to access some additional cash but it was tied up in your retirement portfolio and you risk taking a tax hit or charge on the early withdrawl? Or what if you’ve been retired for years, you’re now 75 and even though property values have fallen, your property taxes have not and your retirement portfolio is now half its former value? Where do you find the money you need to pay the taxes or keep your long term care in place or continue to make that mortgage payment?

You’ll be able to find that answer in a reverse mortgage. A reverse mortgage is not for everyone but it can do quite a bit for someone looking to increase their monthly cash flow. In addition, the money that is left after this mortgage is paid will not just sit idly by, it will grow over time and even at almost historically low Treasury rates (of which reverse mortgage rates are tied) the borrower will still be able to see growth in the 3.5% to almost 4% range. In our example above for the 68 year old paying off the $100,000 mortgage will not only free up $7980 a year, it will also give him a credit line availability of $154,000 that can grow to $185,000 in just 5 years. He keeps title to the home, lives in the home and it provides him access to cash for whatever the occasion and it doesn’t have to be paid back until the borrower moves away or dies while still the owner of the home. There’s no telling the quality of life concerns that are set aside when that person knows he has complete access to that much equity.

So if you’re over 62 and still making monthly mortgage payments, consider whether keeping that payment amount in your pocket each month makes sense over giving almost half of it away to interest payments?

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A Few More Related Articles of Interest:

Potential Reverse Mortgage Market – How Large?

Reverse Mortgage Loan Borrower Characteristics

HECM Pay Off Rates for Different Age Borrowers

AARP – Formerly, American Association of Retired Persons

How Can Reverse Mortgages Discriminate by Age?