As Americans, we are typically very reactive versus proactive. I am here to tell you that nothing gets better with time except fine wine and cheese (at least that is what I am told). Let’s take a few examples that many of us can relate to in our everyday lives. Let’s talk about going to the Doctor…do you go to the Doctor more often when you are healthy or when there is something wrong? That’s right, we rarely go to the Doctor for a “healthy visit” except maybe once per year. Most of us wait to go to the doctor until there is a problem and in many cases, the problem has been there for a while and by waiting, the problem has gotten worse.
What about your car or truck? Do you bring your car to the mechanic when there is nothing wrong to simply check the vehicle out or do you bring your car in when you have a problem? That’s right, we usually wait to bring our vehicle in to get checked out until there is a problem, other than maybe an oil change every 6 months or so. The same mindset applies to our finances. Most people wait until there is a problem to call a financial advisor for help or get a financial check-up and by the time you need help, it could be too late.
This is why I believe it is important to get an umbrella before it rains. Why wait until a rainy day to go out and purchase an umbrella, wouldn’t you rather be prepared in the event of a rainy day? This is ultimately the philosophy that I take with my clients as it relates to their retirement plan…do not wait for retirement to then come up with your plan. Do not wait until your finances are in trouble to come up with a plan. Do not wait until “life happens” to figure out what options you have.
I typically recommend clients explore the benefits of a reverse mortgage before you “need” one. Getting a reverse mortgage earlier in life (closer to age 62) is generally better than getting one later in life. On the surface, you may be better off waiting to get a reverse mortgage but that might not be entirely true. The reason I say that is because three primary factors determine how much equity a homeowner can access via a reverse mortgage. These three factors are:
- Age of the youngest borrower
- Current home value or FHA Max claim amount
- Current interest rates
If you look at these factors on the surface, you could potentially conclude that it is better to wait to get a reverse mortgage. By delaying or waiting to get a reverse mortgage, two of these factors appear to work in your favor:
Getting older typically results in a higher percentage of the money you can access (referred to as a principal limit factor).
Homes historically appreciate, and one could assume access to more equity if the home value is higher in the future.
However, when you look at the benefit of each of these factors, they are usually small increases, especially compared to the risks of waiting. Let’s take a closer look at how each of these factors might increase your borrowing percentage:
Each year that you get older, your borrowing percentage increases by around 0.8% of your home’s value. If you consider a home value of $800K, that could mean an increase of around $6K or so per year.
If your home is $800K and it appreciates by 4% (this is the national average appreciation historically), that is a $32K increase in home equity and that would increase your available funds with a reverse mortgage by around $11K.
When you add these amounts up, the increase in your available equity would be around $17K for this scenario. That gain in available equity is nice, but it is relatively small compared to the risks and potential costs of waiting. So, let’s now compare the risks of waiting:
Interest rates—Remember, your borrowing percentage is also based on interest rates. If interest rates increase by 1%, that decreases your borrowing percentage by around 4.7%. Therefore, as we have seen interest rates go up over the last 9 months, this has significantly reduced the borrowing percentage homeowners have access to much more compared to the $11K above.
Compounding growth on the available Line of Credit (LOC). Your available equity can be placed into a growing LOC. The longer you have this LOC in place, the more growth you will see, and the more compounding growth you will also see in your available funds in the future.
Costs of ongoing mortgage payments—If you are still making mortgage payments, you must also consider the costs of continuing to make monthly payments. If your monthly mortgage payment is $1,000 per month, that is $12K per year that you will continue to spend on traditional mortgage payments. The longer you wait, the more money you will spend servicing your current mortgage and the ongoing costs are likely to be greater than the future benefit.
No guarantees for the future—There are simply no guarantees that these amazing loan programs will be available in the future with the same benefits and same structure as they are today. These programs have changed a lot over the years and have mostly gotten better and are much safer than they had been, but we do not know what will happen in the future.
Overall, the benefits of doing a reverse mortgage when you are closer to age 62 and not waiting, generally outweigh the benefits of waiting. Every situation is different and must be considered on a case-by-case basis to determine the best time for you.
Gabe Bodner is a retirement mortgage planner and licensed mortgage originator in Colorado. Gabe utilizes the latest research from the top researchers to assist his clients to live for today and plan for tomorrow. To reach Gabe, call 720.600.4870, e-mail [email protected] or visit reversemortgagesco.com.