Blog

  • Waiting Doesn’t Pay with a Reverse Mortgage

    When making big decisions, procrastination is only natural. We fight this battle every morning when we determine which activities are important, and which are easy. Unfortunately, making estate planning decisions based on tax law, Social Security strategies, Medicare guidelines, market conditions, and interest rate projections, is not easy. One thing we know for sure – if you are a homeowner 62 and older, waiting to get a reverse mortgage simply doesn’t pay.1

    When a Financial Planner tells a homeowner that their funds will run out at age “X”, the EASIEST solution is to say:

    “If I live to age ‘X’, I will consider a reverse mortgage. Otherwise, I’ll crack open the home equity nest egg by 1) selling the home and 2) either move into a retirement home or move in with family members.”

    The easy solution is rarely the best. Some of the brightest retirement researchers have been publishing guidance in the Journal of Financial Planning for nearly 10 years stating that waiting and using the reverse mortgage as a “last resort” is generally not a good idea.2 Waiting reduces the amount of funds available to a homeowner when they need the funds when compared to those who obtained one early in retirement. In addition, there are substantial risks of waiting that cannot be ignored.

    WHY DO WE HEAR INACCURATE ADVICE?

    If you only have a basic understanding of reverse mortgages, waiting appears to be the right advice. After all, older borrowers get more money, right? If I wait 5 more years, I’ll be older, which generally allows the homeowner to qualify for a higher percentage of their home’s value. In addition, my home will be worth more and I will have paid down my traditional mortgage.

    These may seem like logical reasons to wait… to the novice. But those who understand reverse know this is foolish and mathematically incorrect.

    HERE ARE A FEW REASONS WHY THEY ARE WRONG:

    • Reverse mortgage proceeds are also based on interest rates

    Long-term rates are still historically low, and that means homeowners currently qualify for higher principal limits. If a homeowner waits – and rates go up – they will qualify for LESS with a reverse mortgage. While there is no way to know future rates, most analysts believe they should, and will, go up. This could dramatically reduce an applicant’s proceeds.

    • Waiting sacrifices compounding line-of-credit (LOC) growth

    Homeowners who get a reverse mortgage at age 62 are not required to borrow the funds for which they qualify. In fact, unused principal will grow – in the borrower’s favor – at current interest rates plus 0.50%. If a homeowner gets a reverse mortgage now, the available line-of-credit (LOC) will grow even faster as interest rates go up. Many reverse mortgage applicants who understand this concept WANT interest rates to rise. This increasing credit line creates future security later in retirement.

    • There is no guarantee one will qualify in the future

    The federally insured reverse mortgage changes periodically. While some changes may be advantageous, most have created additional challenges. Consider that many homeowners believe reverse mortgages don’t consider credit history and income. That is not true, and since 2015 many who decided to wait until a reverse mortgage was desperately needed, found that they no longer qualify under HUD’s financial assessment guidelines.

    While we don’t want to create an unmerited sense of urgency, homeowners need to be aware that research shows that waiting for a reverse mortgage generally isn’t optimal and NOW may be the best time to obtain one.

    For more information on the strategic uses for reverse mortgages, please subscribe to this blog and purchase my book, Understanding Reverse.

    Dan Hultquist

    1. Pfau, Wade D. 2016. “Incorporating Home Equity into a Retirement Income Strategy.” Journal of Financial Planning
    2. Pfeiffer, Shaun, C. Angus Schaal, and John Salter. 2014. “HECM Reverse Mortgages: Now or Last Resort?” Journal of Financial Planning