Debt & Liabilities

A: A reverse mortgage is the only way to borrow money against the equity in your home without ever having to make a payment. A reverse mortgage can reduce financial stress and/or improve a retiree’s standard of living. The loan, plus interest, gets paid back when the last remaining homeowner passes away or moves out of the home. Any remaining equity after paying off the loan passes to the homeowner’s beneficiaries. The loan is also non-recourse, so you and your heirs can never owe more than the value of the home. The youngest homeowner must be 62 and any existing mortgage must be paid off by the reverse mortgage. Read: Reverse Mortgage: An Underutilized Tool? &  Reverse Mortgages: The Latest Research.

A: The mortgage lending limit is determined by both your income and your monthly debt obligations (which includes all loan payments). These two numbers are used to determine your debt-to-income ratio (DTI). In general, the proportion of your gross income that can apply to debt service (principal, interest, taxes, insurance, and HOA) cannot represent more than 45% of your gross income for conforming loans and 43% on jumbo loans. For more, read: How Much House Can You Buy?

A: A general rule says you should not spend more than 30% of your income on rent. Read: Rents Increase, Spurred By and Falling Home Ownership.

A: This depends on how long you keep the mortgage. You can calculate the breakeven period quickly by dividing the cost of buying down the rate by the monthly savings. The longer you stay in the house (without refinancing again), the more it makes sense to buy down the rate. Keep in mind that, on average, people refinance every 5.5 years and sell after 10 years. You may also consider rolling the points (the price you pay for the lower rate) into the loan so you do not have to come up with that money out of pocket. Read:  Interest Rate: Buying Down Your Mortgage Rate.

A: There is no consensus among well-known financial planners on this issue. My advice would generally be to try to pay your mortgage off by the time you retire. This gives you the mortgage interest deduction while you are working, acts as a form of forced savings, and gives you the opportunity to downsize or take a reverse mortgage if you need to tap your home equity to supplement your income in retirement. For more tips on debt management, read: Household Debt: How Much Is Too Much?