Why would someone use a reverse mortgage while rates are up?!

Due to inflation, interest rates have been climbing since early this year and borrowers receive less money on the loan at today’s rates than they did even a year ago.  However, it may still make sense for seniors to consider a reverse mortgage over moving, and here’s why.  Senior equity has risen to over 11 trillion dollars in the US.

In many areas the market is getting much softer with the higher rates.  Houses are beginning to take longer to sell and prices in most markets are starting to fall.

advantage of getting a reverse mortgage now

Advantage of acting now

Getting a reverse mortgage now has one key advantage. While interest rates are higher the line of credit growth rate matches!  This means that the amount left on your line of credit grows faster giving you more money available because the rate at which the line is growing is based on a higher interest rate.

Borrowers who are contemplating cashing out their 401K’s to remain in their homes would currently be selling at a down time in the market.  The reverse mortgage may very well keep you from having to sell your stocks or liquidate accounts that would lock in as much as 23% losses if sold today.

What does a 7% line of credit growth rate look like?

For anyone not sure how the line of credit growth rate can benefit them, the line of credit growth rate is currently at 7%!  7% means that even though you are receiving less money initially with the lower funds available due to higher interest rates, the money left in your line of credit will grow faster than at any time in the recent past and can quickly add up.

This means that by acting now, you do not accrue interest owed on funds you do not borrow, but you can more quickly make up for funds you were not able to receive initially due to the higher rates.

Here is an example of how this would work:

If you have a line of credit remaining of $200,000, your line of credit will grow currently at a rate of 7% or roughly $14,000 in the first year (the actual numbers are even higher with compounding).

Growth Example

7% line of credit growth rate illustration

This means that the line of credit will start in year two at over $200,000 and will begin growing on that amount at the current rates in effect if you have not drawn down the balance.  With the higher growth rates, borrowers can get higher limits available to them on their lines of credit without any additional costs.

Also, if needed later, the funds are available. If not, the borrower or the borrower’s heirs do not need to repay them when the loan is paid off at the time the loan is settled.

What can you do with this “safety net”?

While the funds are building in the line of credit, you have many different options.  You can let them continue to accrue, making your borrowing power much greater later when you may need them for unexpected expenses such as long-term care.  Borrowers can draw slowly from their lines to keep their balances low while allowing their investments to recover, even when their main concern is maintaining equity.

By waiting for the next cycle, borrowers are not forced to sell into down markets and lock in losses which have the same result of loss of potential equity.  Having the reverse mortgage allows even borrowers who think they may wish to sell in the next 5 years, to pick and choose their right time.  They are not forced to move at any one point due to having their assets exhausted and can move at their choosing when the time and circumstances are best.

What if the market doesn’t recover for the next 10 years?  Getting a reverse mortgage now ensures borrowers of having the resources available to endure a long, protracted downturn before borrowers see their other assets disappear.

You can always refinance in the future

And finally, no one should ever go into the loan depending on a refinance later but let’s discuss the possibility.  Thousands of borrowers successfully refinanced their reverse mortgages when interest rates declined after the 2000’s and the 2010’s.  Will rates come down enough to refinance again after this spike we are experiencing now?  No one can say for sure what rates will be in the future.  But borrowers who have a reverse mortgage can always sell or refinance at any time without penalty.

The less money you receive on your loan today may mean that you have a lower reverse mortgage, but it also means that you have a lower loan amount, and the equity is always yours.  This is especially beneficial if you keep the balance owed down and let the principal limit grow on the unused portion but either way, it’s your house and your equity.

Will the financial times change in the near future?

Will the coming elections change anything?  What happens in future events is unknown to all of us and all we can do is go on the best knowledge we have available to us today.  We can see what the costs of selling or buying, cashing in 401K’s or other assets or seek other alternatives but if we are in a situation where doing nothing is not an alternative, a reverse mortgage still deserves consideration.

Selling as alternative? Be sure to weigh the costs!

If a reverse mortgage allows you to avoid a sale of your home now, you may save money by not selling into a declining market.  A sale of the property also means a move.  According to Open Door, when you factor in the costs to sell and relocation, most sales are roughly 10% of the home’s sale price.

That does not include the time and effort involved in repairs if needed, staging the home, selling the home and the inconvenience of always having the house ready for people to visit.  Then you need to find a new place, and of course there is the move itself.  If you need a new home, this might not be something you dread, but if you want to remain in your home, this is not something you are looking forward to.

5 Reasons why is now is smart time to secure a reverse mortgage 

  1. Senior equity recently rose to over $11 trillion dollars – It may be the best time to get your appraisal now, as some markets begin to cool.
  2. 7% Line of Credit GROWTH – Each month your available line of credit grows, currently at 7%! Over time, your line of credit growth will compound and may be used to fund a more secure retirement. (Use money to pay for home modifications, long-term care, etc.)
  3. Line of Credit FOR LIFE* – The HECM reverse mortgage credit line is insured by HUD for your lifetime (unlike a bank HELOC which lasts only 10 years). *You must continue to maintain property taxes, insurance, and occupy your home as your primary residence.
  4. Utilize Home Equity Rather than Selling Investments – The S&P 500 is down over 20% YTD and selling investment assets in a down market is never ideal. Allow time for your retirement accounts to recover into the next cycle by leveraging some of your home’s equity to meet your cash flow needs, tax-free.
  5. Funds are Tax-Free – Funds you draw are considered tax-free as cash out money from mortgages are not considered income.

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