Go Ahead With That Reverse Mortgage

Go Ahead With That Reverse Mortgage

NEW YORK (MainStreet) — Is this a good time to get a reverse mortgage? Yes — even if you don’t need one.

That’s the recommendation from Jack M. Guttentag, an emeritus finance professor at The Wharton School at the University of Pennsylvania. On his website, The Mortgage Professor, he says homeowners old enough to have a reverse mortgage — 62 or older — should think about getting a reverse mortgage credit line now even if they won’t use the money for years. Reason: Today’s low interest rates make reverse mortgages something of a bargain, allowing you to borrow more if you lock in before rates rise.

A reverse mortgage is a loan against the homeowner’s equity, which is the current value of the home minus any debt against it such as a mortgage or home equity loan. Like an ordinary mortgage, the reverse loan charges interest, but the borrower makes no monthly payments. Instead, the debt, plus the gradually growing interest charges, are paid off when the borrower moves permanently, sells the home or dies.

The debt can never exceed the proceeds of the home sale, so the reverse mortgage debt does not endanger the borrower’s other assets. The most common type of reverse mortgage is the federally backed Home Equity Conversion Mortgage.

Because there’s no telling how large the borrower’s debt could grow, reverse loans manage the lender’s risk by providing less than 100% of the homeowner’s equity at the time the loan is approved. A key factor in this calculation is the “expected interest rate.” The lower it is, the more the homeowner can borrow, and rates are quite low today.

“For example, at an expected rate of 4%, which has been a common rate during 2013, a senior of 62 with a home worth $300,000 can draw an initial credit line of about $174,000,” Guttentag says. “At an expected rate of 6%, the line drops to $140,000 and at 10% it falls to $54,000.”