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.

 

The cost of bankrolling Mom

Laurie MacNaughton [NMLS ID #506562]

The topic under discussion was the cost of aging in America.

“How many here want to leave their kids an inheritance?” Nearly every hand went up.

“How many here are likely to have an inheritance to leave?” Not as many hands went up. In fact, not many hands went up, period.

The speaker, a Virginia Circuit Court judge, wasn’t asking these two questions of just any group; this was an assembly of some 200 attorneys, presumably a demographic with greater-than-average net worth.

As a reverse mortgage specialist, I would make this observation: not leaving kids an inheritance is one thing; having adult children bankroll parents as they age is another thing altogether. Zero inheritance looks great compared to adult children prematurely tapping their 401(k) so they can cover a parent’s medical bills. I know firsthand – I’ve been there.

According to a Pew Research study, more than forty percent of adult children with a parent aged 65 or older helped that parent financially within the past year. If percentages remain constant, the number of adult children bankrolling parents is likely to get worse, a lot worse, because by 2030 one in five Americans will be 65 or older.

This statistic becomes important when talking about reverse mortgage because, for many people, the go-to objection to is that the homeowner might not have equity left to leave the kids. But this is very flawed reasoning…on many counts. I’m going to point out just a couple.

First, current federal guidelines make it all but impossible for new reverse mortgages to deplete a home’s equity. But even if a homeowner were to use all available funds, this likely means there were no other funds to draw from – and that the reverse mortgage was a lifeline.

Second, an alternate scenario is that the parent does indeed have other funds but does not want to consume those funds, which presumably will go to the kids. Under either scenario the kids are the big beneficiaries. After all, every dollar of her own money mom can use to meet her financial needs is a dollar the adult kids do not pay out.

Of course, negative equity is by no means a foregone conclusion. There very well may be equity left for the kids. But is it true there might not be equity left for the kids? Yes. The pertinent issue is that the parent relieved the adult children from draining their own financial reserves – or at very least, the parent delayed the time the kids had to step in to help financially.

The critical nature of an aging parent’s financial decisions are likely to become ever more conspicuous as Gen X’ers themselves edge toward retirement and the solvency of Social Security runs low. Anything a parent can do to remain “self pay” throughout the retirement years is a blessing and gift to their heirs. And, thirty years’ worth of data shows that homeowners with reverse mortgages tend to enjoy significantly greater odds of financial survivability in retirement.

If you have questions about how a reverse mortgage may benefit your loved one, give me a call. I always love hearing from you.

 

President's Club Business Card - Updated Picture

 

And…It’s Good News!

Laurie MacNaughton © 2016

So, first the technical mumbo-jumbo (and it’s good news): FHA just announced the Reverse Mortgage loan limit will go up to $636,150, effective January 1, 2017.

Why You Care

Starting January 1, homeowners aged 62 or older who have higher-value homes (i.e. homes that appraise for $636,150 or more) will have access to more equity – potentially meaning a bigger line of credit or a larger monthly stipend.

Reverse for Purchase

For those looking to purchase a home using Reverse for Purchase, this new lending limit means homebuyers may be able to consider extra aging-in-place amenities or other upgrades.

Rates Are Low, Housing Values Are Strong

If you are considering a Reverse Mortgage, now is a really great time to move forward, as you may qualify for more than ever before. So give me a call – I always love hearing from you!

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