When making big decisions, procrastination is only natural. I fight this battle every morning when I have to sort out which projects are IMPORTANT, and which projects are just EASY. Unfortunately, making estate planning decisions based on an understanding of Tax Law, Social Security strategies, Medicare guidelines, market conditions, and interest rate projections, is not easy. After 13 years in financial services, I only know a few individuals who have a comprehensive understanding of these topics. So, unless you happen upon a good Financial Advisor, these decisions can be difficult to make.
Therefore, 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 then. Otherwise, I will crack open the home equity nest egg by selling the home. I’ll then move into a retirement home or move in with family members.”
The easy solution, however, is rarely the best. Some of the brightest researchers in the financial planning community have been publishing guidance in the Journal of Financial Planning, stating that waiting and using the Reverse Mortgage as a “last resort” simply doesn’t pay. Waiting significantly reduces the amount of funds that could have been available to a homeowner who obtained one early in retirement, when interest rates were lower.
WHY DO WE FIND INACCURATE ADVICE IN THE MEDIA?
Unfortunately, few publications understand the factors that contribute to the financial planning advantages of the Reverse Mortgage program.
If you only have a BASIC understanding of Reverse Mortgages, then waiting appears to be the right advice. After all, older borrowers get more money, right? If I wait 5 more years, not only will I be older, but my home will be worth more, and I will have paid down my forward mortgage. These may seem like logical reasons to wait… to the novice.
In fact, while writing this blog, TIME.com published an article stating, “The older you are, the more you can get, so it benefits you to wait.” In the same article, the author references a Certified Financial Planner stating that if your retirement income covers your living costs, “There’s no reason to take out a reverse mortgage now. If you run short of money later on, you could take out a reverse mortgage then.”
HERE ARE A FEW REASONS WHY THEY ARE WRONG:
- Reverse Mortgage proceeds are based on interest rates
Why is this important? Because rates are low right now, allowing homeowners to maximize their proceeds. If a homeowner waits, and rates go up, HUD’s principal limit factor tables require the homeowner to get LESS with a Reverse Mortgage – in many cases, a lot less. The FED recently announced a rate hike, and their plan for more over the coming years. While there is no way to know future rates, most analysts believe they should, and will, go up. This could dramatically reduce the proceeds for future applicants.
- Waiting sacrifices compounding line-of-credit (LOC) growth
The available LOC grows at current interest rates plus 1.25%. If a homeowner gets a Reverse Mortgage now, the available line-of-credit (LOC) will grow faster as interest rates go up. In fact, the LOC is often projected to exceed the home’s value if held long enough. Unfortunately, homeowners who wait will sacrifice this compounding LOC growth that could have been working in their favor as interest rates go up.
- There is no guarantee one will qualify in the future
The Reverse Mortgage program changes periodically. While some changes can be advantageous, others may eliminate the program as an option.
Consider that many homeowners still believe that credit history and income do not matter. Even some outdated websites still state “no credit or income requirements.” Unfortunately, some of those who decided to wait until a Reverse Mortgage was desperately needed, found that they no longer qualify under the new financial assessment guidelines.
While we don’t want to create an unmerited sense of urgency, our clients need to be aware that research shows that waiting for a Reverse Mortgage generally isn’t optimal and that 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 – 2016.