Why reverse mortgages are more important than ever during economic uncertainty

Much damage has been to the U.S. economy in the last two years. The Covid-19 pandemic coupled with shutdowns, and central banks’ efforts to stimulate the economy have left the financial markets and world economies on the precipice of a deep recession or worse.

Just as economists in 2007 didn’t see the signs of the 2008 financial crisis, today most economists predict a “return to normal”. However, one man sees things differently. Ray Dalio, a billionaire investor who founded one of the largest hedge funds predicted both the 2008 housing and financial crisis and the fallout from the coronavirus pandemic.

On CNBC’s Make it Dalio warned that a new economic collapse is at hand. Such a prediction is not as far-fetched as one may imagine with Russia amassing troops for a possible invasion of Ukraine and China’s repeated threats to invade Taiwan. War is an expensive business. With inflation already at a 40-year high, Americans are now beginning to feel the brunt of price hikes and supply shortages. And should the Federal Reserve accelerate interest rate hikes, the financial markets are likely to fall leaving retirees in a precarious position.

Amidst this doom and gloom, there stands a glimmer of hope for older homeowners and retirees.

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The reverse mortgage. While generally dismissed and misunderstood reverse mortgages could be the saving grace for retirees who find themselves with diminished retirement savings in a market sell-off or pinched by inflation. How much equity are older homeowners sitting on? $9.5 trillion according to the National Reverse Mortgage Lenders Association and RiskSpan’s Reverse Mortgage Market Index. In fact, that figure surged by 8.3% in 2020 thanks to rising home values.

As one investor said, you only make money in markets you get out of in time. Financial professionals will tell you that attempting to time the stock market is a fool’s errand. But what about the timing of securing your fallback fund before home values fall?

Securing access to loan proceeds before you find yourself if a cash flow crisis is like buying an umbrella before it rains. That’s precisely what qualified older homeowners could do today by taking a reverse mortgage with today’s low-interest rates and high home values. Those with little or no outstanding mortgage balance can secure access to an open line of credit, which unlike a traditional HELOC cannot be reduced if home values should fall. Retirees then can take periodic withdrawals as needed either to offset the effects of inflation or losses in their retirement portfolio in a market sell-off.

Many chuckle at preppers or survivalists who prepare for a worst-case scenario; that is until a crisis hits. With today’s uncertain economy and the stock market poised for a reset, a reverse mortgage is truly a ‘loan of prudence’. Perhaps prepping for an economic crisis is the prudent course of action. Perhaps the days of treating a reverse mortgage as a ‘loan of last resort’ may no longer be in vogue. Even in a best-case scenario, those who’ve secured a portion of their home’s value stand to have financial flexibility stand prepared should hard times come.

What are your thoughts on using a reverse mortgage to prepare for an economic crisis and inflation? Share your comments below. [/read]