In my 35 years in the mortgage business I’ve learned that homeowners hold this to be self-evident; When I need a mortgage my home equity will rise and interest rates will drop.
If only that were always true!
Home equity, like stock prices and interest rates are subject to the mood swings of the financial markets. We only have to go back to 2008 to see what effect the markets had on your home equity. Many Californians saw 50% of their equity evaporate in a very short time. Fortunately we’ve made a comeback and your equity is probably pretty close to what it was before the bubble burst. But we never know what the future will hold.
When your equity is still in your home it’s trapped!
Accountants and financial planners refer to your equity as a non-liquid asset, meaning it’s not readily converted to cash if you should need it for emergencies or other life events. A reverse mortgage can “free” that equity. To maximize the benefit the equity in your home brings, it’s important to understand how market changes will affect you.
I remember my first business class professor telling us to “buy low and sell high”. Good advice and it applies to Reverse Mortgages as well.
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. Marcia has decided that now is a good time to finally apply for a Reverse Mortgage. John on the other hand wants to think about it and all of a sudden it’s 2008 again and his home has declined in value by 30% (closer to the 1989 crash than 2007). The good news for John is that his interest rate is the same as Marcia’s.
Note: this is not a rate quote and interest rates are used for demonstration purposes only
So the net effect is a 30% decline in his home value, reduced the value of John’s “trapped asset” by more than $80,600. That could have a significant impact on John’s retirement plans.
If you think that “buy low and sell high” is good financial advice, we are in a rare place where interest rates are near all time lows and your home’s equity is approaching all time highs.