When is the best time to get a Reverse Mortgage?
I was thumbing through a past edition of the AARP magazine and came across an article discussing the pros and cons of Reverse Mortgages and whether it was better to get a reverse mortgage now or wait until you are older when you will be able to get more money.
I’ve always heard the longer I wait the better
As with almost everything, the truth is a little more complicated. The FHA HECM (Home Equity Conversion Mortgage) is the industry leader when it comes to Reverse Mortgages and they have a “secret formula”. Just like the formulas for your FICO score and Coca Cola the actual ingredients are closely held secrets.
How is my loan amount determined?
Your loan amount is determined by mixing together your age, current reverse mortgage interest rates, the appraised value of your home and the maximum FHA loan for the county in which the property is located. The result is your Principal Limit Factor (PLF). HUD uses other terms for some of these ingredients but in the interest of clarity I’ve given you the generic versions.
To determine your principal limit factor, all you need are your expected rate and the age of the youngest person in the home. The principal limit factor is useful in determining what kind of loan you can get. The size of the loan you can expect to receive is equal to your home’s value multiplied by the principal limit factor.
How do interest rate increases affect my reverse mortgage?
Because none of us will be getting any younger, let’s focus on interest rates and equity. No one can say for sure the direction of interest rates, but we know they will either go up, go down or stay the same. Since 2009 we’ve been floating along at historical lows for interest rates and if the economy is going to fully recover they will have to rise eventually.
Let’s take a look at two reverse mortgage eligible homeowners, John and Marcia. Both are 64 years old. Their homes are each worth $500,000 and they both own them free and clear. When Marcia applied interest rates were around 5% but John waited and his interest rate will be 7%
(This is not a rate quote and the interest rates used are for demonstration purposes only)
|Name||Interest Rate||PLF||Reverse Mtg Amt.|
Only a two percent change in interest rate, netted John a reverse mortgage $107,500 less than Marcia!
Your home’s value is equally important
Until just a few years ago California homeowners would never have believed their home value could go down. But they can and did. From 2007 to 2009 home values in California declined by as much as 50%.
Unfortunately seniors who were retired or on the cusp of retirement saw their dreams of a safe retirement disappear before their very eyes.
Home prices have risen steadily since the housing bubble burst and in many areas have made a full recovery and are on a level equal to the pre-bubble years. Where they go from here is anybody’s guess but most of the experts feel a correction is overdue.
I’m not ready to retire, why should I get a Reverse Mortgage now?
The simple answer is because you can
If retirement is just around the corner it might be a good time to “lock in your equity” now. One feature of the New Reverse Mortgage is the Retirees Equity LIne of Credit or RELOC. Similar to a traditional bank line of credit the RELOC is an open ended source of tax free funds for you to use as needed (or not to use).
But unlike traditional lines of credit, the RELOC is guaranteed not to be frozen in the event home values decline AND (this is the big one) has a guaranteed growth rate of approximately 1.5% over your loan interest rate. With today’s rates hovering around 4.5% your RELOC (the unused portion) would grow at approximately 6%.
Wondering who would guarantee such a program?
The terms of your New Reverse Mortgage are backed by “the full faith and credit of the United States government”. No other loan program on the planet carries with it such an ironclad guarantee of protection.
The New Reverse Mortgage isn’t for everyone…but it could be!
How do I know if the New Reverse Mortgage is right for me?
If you’re still wondering if The New Reverse Mortgage is the right solution for you but you’re not ready to sit down with one of our Reverse Mortgage Experts, then we’ll be happy to mail (or email) you Use Your Home to Stay at Home which is the official federally approved consumer booklet for those considering a reverse mortgage.