Should I wait to get a Reverse Mortgage? —The wrong answer could cost you thousands!
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. The New Reverse Mortgage is endorsed by AARP and they would like all seniors to make an informed decision on whether it is the right retirement vehicle.
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. They have a “secret formula” they use and like all good government programs it has an acronym APL (Available Principal Limit). It is a combination of age, interest rates and equity when combined in the pot determine your APL and the amount of money for which you might be eligible.
Just like the formulas for your FICO score and Coca Cola the actual ingredients for APL are anybody’s guess but every year HUD makes changes to the APL that could affect how much money you can get with a reverse mortgage.
How does my age affect my reverse mortgage?
None of us are getting any younger, waiting until you are older (assuming you can afford to do that) will make you eligible for a larger reverse mortgage. That is, assuming that interest rates and property values remain the same. HUD makes changes to the APL based on overall economic conditions including the performance of the reverse mortgages they have in their portfolio. In October of 2017 HUD made such change and future reverse mortgage applicants will see a decrease of approximately 10% in the amount for which they are eligible.
How do interest rates 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 and living in Orange County, California. 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)
Only a two percent change in interest rate, netted John a reverse mortgage $107,500 less than Marcia!
How does my home’s value affect my reverse mortgage?
The same is true for your home’s value. Home prices have risen steadily since the housing bubble burst and in many areas have made a full recovery. Where they go from here is anybody’s guess but most of the experts feel a correction is overdue.
For many qualified homeowners, the combination of record low interest rates and increased property values have made this the opportune time to investigate a reverse mortgage.
If you would like to come in for a free, no cost or obligation consultation give us a call, we’d love to meet you and help you determine if a reverse mortgage is right for you.