Is now a good time to tap into home equity?


Questions one should ask before getting a reverse mortgage

Older homeowners aged 62 and older are sitting on a mountain of equity. Over $11 trillion dollars according to the National Reverse Mortgage Lenders Association’s Risk-Span Reverse Mortgage Market Index.

With seniors awash in home equity is this a good time for older homeowners to tap into their home’s value? With home prices on average up 42% since the pandemic and the housing market showing signs of a reset or even a crash, the use of equity is a decision that should be approached with full consideration of the risks and benefits.

What considerations should be weighed before tapping into one’s home with a reverse mortgage? Here are just a few, and as always, homeowners should seek the advice of a trusted professional and work with an experienced and skilled originator.

Questions to ask before getting a reverse mortgage

Will there be a future need for equity at the end of the reverse mortgage?

If equity is needed to move into another home or obtain long-term care and that equity is the only means of paying those expenses, then a reverse mortgage may not be right the best choice. With most reverse mortgage borrowers not opting to make voluntary payments the loan’s balance increases each month with interest charged and insurance being added to each month’s balance. 

Is a move likely in the next 5 years?

If a move is in the works or highly likely, then the costs of the reverse mortgage should be closely examined. The longer a homeowner lives with their reverse mortgage the lower their loan’s total annual costs would be since closing costs, upfront FHA insurance, and other fees are financed into the loan.

10 times when it may be a good time to get a reverse mortgage

  1. When the homeowner intends to live in the home for the foreseeable future.
  2. If there’s no strong desire to leave the property or its equity for their heirs.
  3. If there’s a significant and practical need for monthly cash flow without having to sell stocks or other assets at a loss.
  4. When the homeowner wishes to secure a line of credit * for unforeseen contingencies in the future and have the peace of mind that the line of credit will not be frozen when home values fall. * This only applies to the federally-insured Home Equity Conversion Mortgage (HECM) that’s administered by the Federal Housing Administration.
  5. When inflation has increased monthly retirement withdrawals that significantly reduce the number of years a retirement nest egg will last. (Sustainable withdrawals).
  6. When the homeowner wishes to secure access to a portion of their home’s value at its present appraised value instead of when the price of the home has fallen in a down market.
  7. When a reverse mortgage is part of one’s overall retirement plan created by a financial professional.
  8. When the elimination of required monthly payments by refinancing a traditional mortgage into a reverse provides a bonafide economic benefit that outweighs other risks.
  9. When a slightly higher interest rate would disqualify a homeowner who is already considering a reverse mortgage.
  10. When a reduction in the home’s value would disqualify the homeowner who has already considered taking the loan.

With home values at record highs and interest rates still below market norms, older homeowners should at least consider the benefits of a reverse mortgage before higher interest rates and lower home values may prevent them from qualifying for the loan. 

Additional reading:

NRMLA’s Risk-Span Reverse Mortgage Market Index

3 comments

Gary Guarino August 23, 2022 at 8:08 am

“If equity is needed to move into another home or obtain long-term care and that equity is the only means of paying those expenses, then a reverse mortgage may not be right the best choice” This quote is not exactly true…..there should be a caveat.

If a client has little to no mortgage balance, then the “growing” back end credit line taken out early in retirement guarantees access to more home equity even if the housing market declines in the future. This is due to the fact that the “growing” HECM credit line can NEVER be cut, closed, frozen or reduced. It just keeps increasing year after year! which in turn, gives seniors guaranteed Tax-Free money that can be used for long term care or many other needed things. Some of my clients used it for in-home nursing so they didn’t have to move out of their home and into a facility that costs way more than just staying in their own home.

So, that statement is only for clients that have a large mortgage that takes up all of the remaining PL and there’s no additional LOC left.

Reply
James E. Veale,, MBT August 27, 2022 at 11:05 pm

Gary,

I have no idea why so many of our originators after emphasizing how much a prospect’s home has risen in value, immediately begin discussing the “benefit” of getting an adjustable rate HECM as early in retirement as possible, other than as a means of making a sale that might otherwise slip away from that originator. Most then present the very questionable reasoning that the growth in the line of credit due to increased age is not as much as the potential growth in the line of credit in the same period of time and leave out one of the most (if not, the most) crucial elements in determining the principal limit, the value of the home.

For example, if the value of the home of $600,000 at age 70 (on 8/22/2021) goes up to $660,000 twelve months later at age 71 and the principal limit factor stays at 0.522 (based on an expected interest rate 4%), then the principal limit on an adjustable rate HECM taken at age 71 will increase by $31,320. To get an increase in the line of credit of $31,320 on a HECM taken at age 70 requires that the maximum line of credit [$313,200] at closing would have had to have risen by a growth rate of 9.57% [to get to a line of credit of $344,520, assuming no line of credit payouts to the borrower] based on monthly compounding. But if the line of credit of credit was just $200,000 at closing when the borrower was 70, then the growth rate would have to have to be 14.64% (assuming a starting line of credit of $231,320 if the borrower waits until age 71to originate the adjustable rate HECM). So please explain why the prospect should get that HECM when home values were climbing at rates greater than 10% annually in many, many places along both the East Coast and the West Coast as well as much of the rest of the country where this borrower lived? Using an average effective growth rate of 4.5% and a $200,000 line of credit, the most the line of credit would have risen to is just $209,188 at age 71 for a difference of $22,132 less in the line of credit by not waiting until age 71 to originate the HECM. So why is it that the prospect should have obtained the line of credit a year earlier at age 70 other than for the benefit of the originator? Yes, one cannot count on home values rising but that is why borrowers do not have to wait even two days to start originating an adjustable rate HECM if, in the mind of the prospect, there is little hope of her home value rising more than $17,600 by the time that she reaches age 71.

Due to the rise in the 10 year CMT index so far this year, getting the adjustable rate HECM now may have a better result than waiting to get it. Most prognosticators of home value do not expect home values in most Metro Statistical Areas to rise by much, if any, this year. So originators should be helping prospects to see the value in originating now rather than a year from now. When pushing for early origination of an adjustable rate HECM, facts and circumstances should come into play.
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Tax Free??? That is not so cut and dry as you believe

Based on the USSC (US Supreme Court) decision in Commissioner v. Tufts [461 U.S. 300 (1983)], how are you so sure that the HECM will be income tax free at termination if FHA reimburses the lender from either the GI&SRI Fund or the MMI Fund (which fund depends on the date the HECM was endorsed)? Yes, I have read IRS Publication 936 but the publication is not binding on either the USSC or the IRS and if the issue is pursued by both the IRS and a taxpayer, the underlying issue could easily end up in court yet again. However, heirs will rarely have additional taxable income from any reverse mortgage even when it is “under water.” The only ones confronted with this potential issue are borrowers when termination occurs in their life time and the UPB (Unpaid Principal Balance) on the reverse mortgage immediately before termination exceeds the value of the home at the time of termination. How the Tufts decision works is beyond the scope of this comment.

Reply
JIM WARNS August 29, 2022 at 6:54 am

The question of ‘now or later’ is one of whether to base a decision on facts or assumptions. Home values and interest rates today are known facts, so HECM benefits can be clearly identified. Home values and interest rates in the future are assumptions, so potential HECM benefits are speculative. I, for one, as an originator believe interest rates are headed higher in the short/intermediate term and home values will not continue their recent meteoric ascent. Those two beliefs alone, IMO, argue for a HECM today to maximize the benefits, both current (high home values, low 10-year) and longer term (home value irrelevant, rising CMT) A different view of those two items leads to a different conclusion, but then one should factor in program risk and qualification risk as additional uncertainties.

Reply

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