Wait…what? Line of credit growth and reverse mortgage

Laurie MacNaughton | © 2018

There is was again, that same question: “Should we do a reverse mortgage now, or should we wait until our investments are gone?”

Turns out there is research on this – lots, in fact, some sponsored by retirement groups and some by academic institutions.

Regardless of the source, conclusions are consistent: homeowners who do a reverse mortgage early in retirement, while they still have healthy savings, benefit more than do those who wait until their finances are under stress.

This is largely due to two factors.

First is asset preservation during market downturns. Needless to say, the past few months have been a bumpy ride in the investment realm, and paper losses turn into real losses when you have to draw upon a 401(k) or other investments during a downtick. If you’re able to ride out a downturn you benefit financially in the long run.

Second is on account of what may be the most under-reported aspect of a reverse mortgage line of credit, namely the growth added to the unused funds in a reverse mortgage line of credit. If this causes you to say, “Wait…what?” it should, as this is something that does not exist with other types of home loans.

Here’s what this feature of an FHA-insured reverse mortgage means to you: each month a small amount gets added to the funds in your line of credit. This growth compounds over time, and it’s there for you to use when you need it. The growth is not based upon home appreciation, but rather upon prevailing interest rates. It’s counterintuitive, but if rates go up the line of credit actually grows more quickly.

What this tax-free growth may look like over time can be astounding. For illustration purposes let’s consider a husband and wife, both of whom are 68 years old, and whose paid-off home appraises for $400,000. If their line of credit at the time of closing contains about $168,000, in five years’ time it may have grown to over $206,000 – assuming interest rates remain steady. Again, growth is pegged to prevailing interest rates, and the line of credit grows more quickly if rates go up.

This line of credit can create a valuable hedge against having to sell investments in a down market. It can also create a safety net that forestalls the need to apply for Social Security before full retirement age.

Optimally, a reverse mortgage provides just one part of a long-range financial plan for retirement, because as life expectancies continue to increase, retirement is going to take more than your monthly Social Security check. It’s going to take more than a well-funded 401(k). In fact, it’s likely to take more than a pension, an annuity, an IRA, or a bank account – or a reverse mortgage – can provide. But when added together, these can combine to create a long-term means of maintaining financial wellbeing in retirement.

If you would like to discuss how a reverse mortgage might help your retirement plans, give me a call. I always love hearing from you.

 

Why This, Why Now?

I’m a teacher. I love to teach. I spent many years teaching high school in private schools, public schools, as a private tutor, as a public school tutor, and as a mother.

Unsurprisingly, one of my favorite things about being a reverse mortgage specialist is that I get to teach about a financial instrument that for many seniors makes possible a life of dignity, financial soundness, and independence.

There are two questions I am frequently asked. The first is why do a reverse mortgage (officially called “HECM”) instead of a home equity line of credit (or “HELOC”). The second is whether this is a good time to do a reverse mortgage.

Why This?

So why do a HECM rather than a HELOC? The first thing of note is that a HECM is a type of home equity loan. However, with a “forward” home equity line, there are employment, income, credit, and debt-to-income qualifications that must be met. These can be tough qualifications to meet for someone deep in the retirement years – or even for one nearing retirement.

A second important difference, and one of the main attractions of the FHA reverse mortgage, is that there is never a payment required, so long as at least one person on the home’s title remains in the home. This creates a stark contrast to a forward HELOC, in which the homeowner must make a monthly payment. Drawing down a forward HELOC only to make a payment at month’s end is like using VISA to pay MasterCard – not lots of benefit there.

Though I could point to many additional advantages of an FHA HECM, I will mention only one other, namely the issue of getting “upside down.” Though home values in much of our region have been steadily on the rise, most of us are still understandably wary. We all know homeowners whose lines of credit were frozen when housing prices tumbled.

A reverse mortgage, however, is a non-cancellable line of credit, and only becomes due when the last person on title permanently leaves the home. (Property taxes, homeowners insurance, and normal home upkeep are still required.)

Why Now?

The second most common question I am asked is whether this is a good time to do a reverse mortgage.

The answer is an unqualified “Yes!” and here’s why:

Interest rates have never been lower than they are right now, and property values in much of the mid-Atlantic region have enjoyed steady growth for four straight quarters. Since a reverse mortgage is calculated on age of the borrower, home value, and interest rates, right now might well represent the most favorable conditions that have ever existed in the HECM’s 30+ year history. I’m a geeky numbers person, but you don’t have to be very good in math to know that a rise in rates, or a drop in home values, makes a long-term difference in the amount of funds available.

Remember, reverse mortgage was never intended to be a replacement for a sound financial retirement plan. However, it can play an important role in augmenting what is already in place, and slow the burn-through rate on other retirement funds.

If you are, or someone you know is, looking into reverse mortgage, give me a call. I always love hearing from you.

Laurie

Laurie Denker MacNaughton [NMLS# 506562] · Reverse Mortgage Consultant, President’s Club · Middleburg Mortgage, a Division of Middleburg Bank · 20937 Ashburn Road, Suite 115 ·Ashburn, Virginia 20147 · 703-477-1183 Direct · LMacNaughton@MiddleburgBank.com · www.middleburgmortgage.com/lauriem

Visit my Informational Blog at https://middleburgreverselady.wordpress.com/