Age is one factor in determining the amount available from a reverse mortgage. The best age to get a reverse mortgage depends on various factors. Is there an existing mortgage with payments that create a financial strain on the budget? What is important to the individual or couple, making the most out of life or retaining the most equity as possible for their heirs? Is your existing financial situation fine at this time and do you want to preserve your equity for later years when financial needs may be greater? The best time can only be determined by you and perhaps your family and your current financial status, your future needs, your concerns and personal attitudes and beliefs. If you are ready, we are approaching a great time to get a reverse mortgages as interest rates are declining and the lending limits will be increased soon.
I hear from people want to wait until they get older to get a reverse mortgage for the simple reason that reverse mortgage calculations provide more money at an older age. This strategy on the surface makes sense but this strategy could backfire as there are other factors in play to determine the amount available from a HECM reverse mortgage. The three factors in determining the amount available from the HECM reverse mortgage are age of the youngest borrower, current expected interest rate and appraised value of the home or FHA maximum claim amount, whichever is lower. Many people are not aware how dramatically the loan amount is affected with just a one point increase in the interest rate. It could be very disappointing to wait and find the amount available is dramatically lower after waiting a few years. Below is an example based on the amount available to a borrower at age 65 at the expected interest rate (current, and age 68 at one point higher and two points higher. Notice the amount available, whether lump sum or monthly stipend is dramatically lower when calculated at a higher interest rate.
Age Home value Rate Lump sum/LOC or Monthly Stipend
65 $350,000 5.56% $207,000 $1,180
68 same 6.56% $168,600 $1,077
68 same 7.56% $136,500 $969
The reason less money is available with the higher interest rate is because of the way a reverse mortgage is structured, in that payments are not made over the life of the loan. At a higher rate the lender assumes the balance will increase more rapidly, therefore they provide less money initially.
Let's look at an example with the home value appreciating to $417,000 by the time this borrower is age 68 but the rate is 2 points higher. (assuming the FHA maximum claim amount will be $417,000 by then). The amount available is $164,000, still much lower than the amount today at the current rate. But with the increased value, closing costs increase by $1,100. So waiting created less money available to the borrower but added more to the loan balance in fees because of the higher value. We don't know what interest rates or home values will be in the future, but we do know what is available today. And interest rates are at near historical lows. The best strategy may be to take out the reverse mortgage now, even if you don't need the money until later because you can leave the money in the line of credit which will increase at the same interest rate that's charged on the balance, so you can be certain the amount available will be higher in the future. This strategy minimizes the guesswork in timing your reverse mortgage transaction.
Other advantages of doing the reverse mortgage when rates are low is a lower cap on the adjustable rate reverse mortgage and if a fixed rate reverse mortgage works well for you, the low rate will certainly preserve equity for your heirs when the loan becomes due.
On the date this article was written, the Housing and Recovery Act of 2008 has been signed into law, but not yet implemented. Many prospective reverse mortgage borrowers with high value homes are waiting for the lending limits to increase, and for good reason. The increased limits will provide more money and the current economic situation does not indicate interest rates will jump over the short term. Let's hope home values don't slide before the new FHA lending limits are implemented. If your home value is within the current lending limits, your best bet is to do the reverse mortgage now.
Written on 9/16/2008 by: Maggie O'Connell, maggie@rmstore.net www.ReverseMortgageStore.com & www.ReverseMortgagesofNevada.com
Disclaimer: Reverse Mortgage Store Blog does not guarantee nor is in any way responsible for the accuracy of the information provided herein, and provides said information without warranties of any kind, either expressed or implied. Blog posts on the Reverse Mortgage Store Blog represent the opinions and ideas of the author(s). Reverse Mortgage Store Blog does not express the views of Reverse Mortgage Store or those of the broker.
