Let me introduce you to, Mary, a Minnesota Reverse Mortgage borrower whose home value, as most homes, had decreased over the last few years. While she didn’t have any mortgages to pay off and didn’t have immediate needs for the funds she decided to do a reverse mortgage now instead of waiting. Her decision was based on the fact that if she waited her home value may continue to decrease whereas if she did the loan now she would have the funds in the line of credit for future use and they would grow so more funds would be available when she needs them. Additionally if she waited the Expected Interest Rate (used to determine how much can be loaned) may be higher making less funds available to her to her in the future.
Over the last few months we have talked with seniors whom we originally talked with 2, 3 or 4+ years go and had educated them about the reverse mortgage option. At that time they decided to wait and not do a reverse mortgage. Some even did a conventional mortgage or what we in the industry call a “forward” mortgage. Now “life has happened” and they decide they now want to do the reverse mortgage. Unfortunately with many of these seniors we have to tell them the sad news that less funds are available now and in some cases there aren’t enough proceeds to pay off their current mortgage, sometimes they are short $20, 000, $30,000 or more. This is due to decreased home values and changes in the Expected Interest Rate, the interest rated used to determine how much can be loaned. We are finding this can also be the case for even those we talked with just 6 months ago.
Let’s compare doing a reverse mortgage now to waiting 5 years before doing your reverse mortgage.
To determine how much is loaned with a reverse mortgage we use your age, your home value, and Expected Interest Rate. With FHA Reverse Mortgages the Expected Interest Rate is calculated weekly by the Federal Government and is used to determine initial funds available. The Expected Interest Rate is currently based on the LIBOR SWAP, as this is considered a long term projection of future interest rates. As the Expected Interest Rate changes to a higher rate, in the future less initial funds could be available to borrowers.
While home values are a little lower right now home values will most likely rise in the future. It is also likely the Expected Interest Rate will go up. This means that even with the future increased home value, the amount available on the reverse mortgage could be the same or less if you wait to do a reverse mortgage. For example:
|TODAY||5 Years from now||Initial Interest Rate is currently below 4%|
|*Based on Expected Rate of||7.14||8.14|
|AVAILABLE (Approximate net after fees)||$92,710||$88,199|
|These are all estimates. Different assumptions would result in different numbers. Interest rates are based on rates of 8/4/09.|
Keep in mind, funds left in a Line of Credit grow. So if you have $92,710 in your line of credit today, in the future you could have more funds available to you. Here’s an example:
|Line of Credit Growth*||No Draws||Draw $4,000 each year|
|Year 1 Balance||$96,515||$92,515|
|Year 2 Balance||$100,476||$92,312|
|Year 3 Balance||$104,600||$92,101|
|Year 4 Balance||$108,893||$91,881|
|Year 5 Balance||$113,362||$91,662|
|*Growth Rate based on Assumption of Expected Interest Rate of 3.529% in this example. Actual Line of Credit Grows based on current interest rate plus .5%.|
Consider having security knowing you readily have funds available in your Line of Credit without paying additional closing fees in the future. When you use the funds each year you will be taking advantage of having the money you need during your retirement years and the benefit of improved financial health.
As Jerry stated, “The Reverse Mortgage enables us to live in our home without mortgage payments. Line of credit will grow for our future needs. The whole package is a win-win for my wife and me.”
Let’s look at a scenario if you are currently making payments on a mortgage, lien, or bank line of credit. There is still an advantage to doing the reverse mortgage now. As an example, if you owe $75,000 and are paying 7% interest:
|Interest Expense for next year on your current loan||$5,422|
|Interest Expense based on reverse mortgage rate of 4% (4% is the approximate current interest rate on the adjustable rate program)
Plus .5% for FHA Annual Mortgage Insurance Premium (MIP)
|Interest Expense based on reverse mortgage fixed rate of 5.56%
Plus .5% for FHA Annual Mortgage Insurance Premium (MIP)
In addition to lower interest with a reverse mortgage, eliminating your monthly payment will improve your cash flow. While the loan balance will rise because you are not making payments, the reverse mortgage is non-recourse which means there is no personal liability to you or your estate if the loan balance is higher than what the home can be sold for if you or your estate are not retaining ownership.
My borrower, Mary was happy with her decision to do her reverse mortgage sooner than later because she now has security knowing she has funds available for her needs, independence to live on her own without relying on others for financial support, she’s maintained her dignity of being able to pay her own bills, and continues having control of her life and the ability to make her own choices.
Waiting to do the reverse mortgage may not be the best decision. Doing a reverse mortgage now may be more beneficial. Are you ready to live with more now?
© 2009 Beth Paterson, Beth’s Reverse Mortgage Blog, 651-762-9648
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