Is it better to get a reverse mortgage when you’re older?
Aging comes with a few distinct benefits. With age comes wisdom, experience and hopefully financial security. It also comes with larger reverse mortgage benefits.
How Age Affects a Reverse Mortgage
With a reverse mortgage, the borrower – who must be at least 62 years old – takes out a loan against their home’s equity and receives payments (referred to as loan proceeds) instead of making payments to the lender. The loan does not have to be repaid until the last surviving borrower on the loan no longer lives in the home, or the borrower fails to make their property tax and homeowners insurance payments. There are many other details about reverse mortgages, but for the purposes of this article, we’ll focus on how a borrower’s age affects the amount of loan proceeds they can receive.
The amount of funds a reverse mortgage borrower is eligible to receive depends on multiple factors, age being key among them. Other factors include the borrower’s spouse’s age, current interest rates, and the appraised home value or FHA lending limit. These factors each influence what is known as the principal limit, which is the maximum amount of money a borrower can take out on a reverse mortgage. The principal limit essentially determines how much home equity a reverse mortgage borrower can actually access.
Age is a very important consideration when it comes to reverse mortgages, as the older the borrower, the more equity he or she is likely to access and thus the more loan proceeds he or she can receive.
Should you get a reverse mortgage at 62, or wait?
Unfortunately, this is one of those questions that simply doesn’t have a definite answer that works for everyone. Each borrower’s situation may be different. In many instances, it makes more sense to wait until you’re older and have established more equity in your home before taking out a reverse mortgage. For example, your loan proceeds may be significantly higher if you wait another 10 years and take out the mortgage at age 72 versus 62.
In other situations, waiting too long to get a reverse mortgage may put you into hardship or force you to make difficult sacrifices. For example, if you are having a hard time paying your bills but you want to stay in your home, a reverse mortgage could mean the difference between aging in place and keeping your home versus downsizing or moving to an assisted living facility. Although you may receive higher proceeds if you wait 10 years, you may not be in a position where you can do so. Likewise, you may have found that alternatives to reverse mortgages (cash out refinancing, home equity lines of credit, personal loans or credit cards, etc.) are either not a possibility or are too financially risky for your situation. If either of these scenarios apply to you, then waiting may not make sense.
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A Third Option
If you’re torn between waiting for a reverse mortgage to access higher proceeds and applying right away to get the ball rolling, there is a third option worth considering: The HECM Line of Credit.
The Home Equity Conversion Mortgage (aka reverse mortgage) Line of Credit allows borrowers to convert their home equity into a line of credit that can be used for whatever the borrower wants, whenever they want; however, the borrower doesn’t necessarily have to start using it right away. In fact, the best thing about the HECM Line of Credit is that any amount that is not spent actually grows over time. In other words, the longer a borrower leaves their HECM Line of Credit alone, the more it can increase. It works similar to a savings account, but with a higher growth rate.
As of December 2017, the HECM Line of Credit growth rate is the interest rate on the mortgage plus the FHA’s 1.25% annual mortgage insurance premium rate. So if your mortgage rate is 4.00%, your HECM credit line can increase by 5.25% every year.
For homeowners who aren’t in need of additional cash right away but anticipate needing it in the future (and who will want to stay in their homes), the HECM Line of Credit may make sense.
Contact Us or a Financial Advisor for More Information
If you are unsure whether or not a reverse mortgage makes sense for you, and you want to know the best time to apply, discuss your concerns with a financial advisor or one of our reverse mortgage specialists. We are always happy to answer questions from prospective borrowers in a pressure-free environment and can also provide a free, no-obligation rate quote. Contact us via our online form or give us a call at (855) 367-4326.