Should You Do a Reverse Mortgage Now or Later
Frequently, I hear clients think long and hard about doing a reverse mortgage now or waiting until later. With all things being equal, there is more money as you age. But all things are not equal.
Here are some of the issues:
1. Reverse Mortgages are constantly changing. Who knows what the future will hold. For instance, there used to be a bunch of 'jumbo' reverse mortgages. Then due to the huge mortgage losses, investors went away. So without someone to buy the jumbo from them, lenders stopped doing jumbos. So those with high home values and large mortgages (larger than the HECM amount available to them) could not do a reverse mortgage. If the timing became right for them after the jumbos went away, they could not do a reverse mortgage at all.
2. Depending on how you structure your Reverse Mortgage, it may come with a Line of Credit (LOC). Unlike other Lines of Credit you may know about, this one grows at the same rate the lender is charging you for what you use. Ten years after you get the Reverse Mortgage with a LOC, it may be nearly double what you started with and 20 years later may have more than tripled. This is an excellent way to protect from your portfolio running out before you do.
3. Recently, some financial planning experts with Doctorates in Economics have been looking at Reverse Mortgages integrated with a retiree's portfolio and through many simulations found this risk management strategy improves portfolio survival rates (i.e., how long will an investors retirement nest egg last) by a significant amount.
4. When total HECMs (the FHA version) reach the max allowed by Congress, HUD has to go back to Congress to request a new cap. This has happened a number of times in the past few years. It has always been approved but there is discussion each time.
5. All things being equal, if interest rates go up, there is less money available in a Reverse Mortgage. For a 70 year old with a $400,000 home, just 0.5% (one half of one percent) higher interest would reduce the amount available by $22,000 and by $39,000 at 1.0% higher interest.
6. Three times in the past 5 years, Congress and/or HUD have reduced how much you received, all things being equal. In 2009 by 10%, in 2010 by 10% and in 2013 by 15%. It may happen again.
7. Home values could go down. For 6 years of my reverse mortgage career, that never entered my thought process. Most of my clients probably didn't consider that. We've now seen that to be a reality.
8. If someone spends down certain types of savings, they lose income from that item, may pay taxes on it, may lose possible growth on it and may lose a stepped up cost basis. See Using Savings.
9. One may lose the life style benefits of doing something sooner rather than later.
10. The obvious - some people need the money now. Foreclosures. Poor economic climate. Loss of a spouse and one or more income checks.
11. I'm the analytical type and like working with numbers. One thing I learned early in this business was that reverse mortgages were not just dollars and cents. There are emotional concerns. The peace of mind issues are the most frequently mentioned benefit a year or two after my clients have done a RM.