A reverse mortgage is a loan that is specifically designed for people who are 62 and over that allows you to convert a portion of the value of your home into money that you can use. The FHA insured reverse mortgage program, called the Home Equity Conversion Mortgage (HECM) is by far the most popular.
There are a lot of benefits to this program but it is very interest rate sensitive. The percentage of the equity in your home that is available from the HECM depends upon three factors:
- The age of the youngest spouse/homeowner
- The value of the home
- The interest rate
Interest rate is the variable that changes most often. Generally speaking, the lower the interest rate, the more money you can receive. Conversely, the higher the interest rate, the less money you can receive.
Interest rates are currently on the high side. So why should you get a reverse mortgage now? Here are five solid reasons:
1. Stop paying your mortgage payment
You must continue to pay your property taxes and homeowners insurance when you have a reverse mortgage, but you are not required to ever make a principal and interest payment like you do with your existing mortgage. Also, if it takes another 12 -18 months for rates to drop back down into the 5% range, you have saved the principal and interest payment over all that time by paying it off with a reverse mortgage instead of waiting for the perfect time. For example, if your principal and interest payment is just $800 per month and you wait 12 months to get a reverse mortgage, you would have paid an additional $9,600 waiting for the rate to drop to do a reverse mortgage.
2. The line of credit grows at 0.5% above the rate you are charged on the loan balance
If you have a very small mortgage balance or no mortgage at all, you will most likely have a substantial amount of money left over from the reverse mortgage. You can leave this money in a line of credit that increases at a rate of a half percentage point higher than the rate you are charged on the loan balance. For example, if you have a loan balance and are charged 7.50%, any additional funds left over in the line of credit are growing at 8.00%. This amount will change as the interest rate changes.
3. Consolidate high interest debt
Unfortunately, with the inflation we’ve seen over the past year, a lot of older households have acquired a lot of credit card debt. That debt is on adjustable rates and as the rates increase over time, so have the payments. Since reverse mortgages have no required minimum payments* they work great as consolidation loans. You can use the funds from a reverse mortgage to pay off high interest loans saving yourself money every month.
4. Lock in your home equity
Home values are still high, but as we know, there is no guarantee they will stay there. I don’t know which way home values will go in the future, but you can lock in access to a portion of your equity now. Even if you don’t need it at this moment, the line of credit growth rate discussed in point #2 explains the benefit to this strategy. Even if values do drop, your line of credit will continue to grow. The Home Equity Conversion Mortgage is 100% non-recourse, meaning that even if your loan balance grows to exceed the value of the home, the lender can never come back on you, your estate or your heirs to collect a loss.
5. The rates may not drop, but if they do, you can refinance – either way, you win
We all are planning on interest rates to drop soon, but what if it takes longer than we think or they don’t drop as much as we think? If you do a reverse mortgage now, you can save money by not paying a mortgage payment, and take advantage of the higher rate with the line of credit growth. However, if they do drop, you may be able to refinance the reverse mortgage with a new reverse mortgage and gain access to additional equity at that time. Also, the closing costs are much less when you refinance, compared to the original reverse mortgage.
A reverse mortgage can be an excellent program as long as you understand the pros and cons.
Please feel free to contact me with any questions.
*Homeowners still own the home and must continue to pay their own property taxes and homeowners insurance. They must also maintain the home, keep their name on title and occupy the home as their primary residence.