For many Americans, home equity is the single largest component of net worth. It can be a valuable contributor to retirement and financial well-being, especially during this pandemic and extraordinary time of monetary strain.
The current economic conditions might make this a particularly interesting time for a reverse mortgage.
What Exactly is a Reverse Mortgage?
A reverse mortgage is a type of tax-free home equity loan for homeowners age 62 and older. Unlike a traditional “forward” mortgage, reverse mortgages do not require monthly payments toward the loan balance. In addition, reverse mortgages pay off existing mortgages and eliminate monthly mortgage payments.
Advantages of a Reverse Mortgage Right Now
You Can Stay in Your Home
Having the confidence that you can stay in your home is more important now than ever before. With a reverse mortgage, you retain home ownership and the ability to live in your home no matter what. You must keep up insurance, property taxes and maintenance for your home.
Home Values Have Not Fallen (Yet)
The more your home is worth, the more money you can tap with a reverse mortgage loan.
Home prices in most areas have been historically high recently but it is unclear whether home prices will remain strong, or not.
A new report from Fannie Mae optimistically projects that though home sales will fall by 15% in 2020 due to issues with both supply (not many houses for sale) and demand (few buyers), home prices will remain stable. However, many experts predict that the severe downturn in the economy will eventually cause home values to fall.
Acting now might lock in a higher loan amount than you could get in the future.
Interest Rates are Currently Very Low
Interests rates are another factor that impact eligibility and how much money you can receive from a reverse mortgage loan. Interest rates also impact how much the loan will cost you.
Low interest rates mean you are eligible for more money at a lower cost.
A Reverse Mortgage Line of Credit Can Be a Good Hedge Against Uncertainty
None of us know what is going to happen in the future. How long until: We are out of quarantine? People find work again? Stock prices rebound?
With a reverse mortgage line of credit, money is available to you – but you are not charged interest until you withdraw funds. A reverse mortgage line of credit acts as an excellent back up source of funds.
Line of Credit Grows, Protecting You From Falling Home Prices
In addition to being a great safety net option, other key benefits of a reverse mortgage line of credit include:
- Growth: Your untouched reverse mortgage line of credit can grow in value. Money in a reverse mortgage line of credit grows at a higher rate than the interest rate on the loan. This means your safety net will grow each year and be larger in the future to help cover upcoming unexpected expenses.
- Hedge Against Falling House Prices: The growth in a reverse mortgage line of credit is guaranteed — without withdrawals, your line of credit is guaranteed to grow. This growth is unique to reverse mortgage lines of credit — a standard Home Equity Line of Credit for example does not grow.
This feature can be an interesting hedge to the potential of falling home prices. If you think home prices will be stagnant or potentially fall, then a reverse mortgage line of credit allows you to lock in the current value of your home and continue to see your assets grow.