Although there are costs and caveats with reverse mortgages, it turns out his pitch is especially timely right now. Thanks to historically low interest rates, reverse mortgages have new appeal for people in or nearing retirement who need cash but can’t afford monthly payments on a loan.
“With retirement, low interest rates usually make everything worse. They make retirement more expensive,” said Wade Pfau, a professor at the American College of Financial Services. “The reverse mortgage is the only tool I’m aware of that benefits from low interest rates.”
Applying for a reverse mortgage can also help stabilize your overall financial portfolio, particularly if some of your other investments are taking a hit.
The loans have gotten a bad rap over the years in some circles, but if you’re considering applying for a reverse mortgage, here are some things to know.
What is a reverse mortgage?
Essentially, reverse mortgages operate like a loan. They allow the consumer to tap into the equity in their house, and carry a balance without making payments until the term of the loan is over.
“It’s a mortgage, but it allows you to make your home equity a liquid resource that you can use to help you fund your retirement expenses,” Pfau said.
A reverse mortgage can be set up as a line of credit, a lump sum or a series of monthly payments to the homeowner, which can help people who need cash on hand without relying on their other investments or savings. It’s targeted at older people because you have to be at least 62 years old to qualify for a reverse mortgage. You also must have substantial equity in your home.
Some reverse mortgages are proprietary to the companies that issue them and others are federally backed by the Department of Housing and Urban Development.
Is now a good time to consider a reverse mortgage?
It’s all about the interest rate, according to Evelyn Zohlen, a certified financial planner and founder and president of Inspired Financial in Huntington Beach, California.
“If you need to borrow money right now, happy days!” she said. Low interest rates mean money can be borrowed cheaply. Those same low rates can also hurt other investment products.
“The low interest rate environment is a mixed blessing,” she said. Some of her clients are seeing interest rates on bonds, which are meant to help stabilize their investment portfolios, as low as 2 percent.
“It’s not a very happy place to be,” Zohlen said. “At that interest rate, you may not even be keeping up with inflation.”
That means reverse mortgages can be uniquely positioned to help people balance their portfolios at a time when other investments may be underperforming. Also, reverse mortgage holders only get charged interest when they draw funds out of the loan, so setting one up means money will be available without having to incur ongoing interest charges.
John Holmgren, a branch manager for Finance of America Mortgage in Oakland, California, said that reverse mortgage interest rates tend to mirror traditional rates pretty closely. Right now, he said, his firm is offering a product with a rate of 2.99 percent. But, rates go up if you need to apply for a jumbo loan, which is valued above $765,600.
Who should apply for a reverse mortgage?
For a long time, reverse mortgages have been considered a financial tool of last resort — something people turn to only when they’ve exhausted other options and need cash urgently. The fees involved in reverse mortgages have been and remain substantial. But, both Pfau and Zohlen said now is a good time for any retiree who needs more liquidity to look at a reverse mortgage, even if they have other assets on hand.
“A reverse mortgage is an important tool for a client to consider if they are concerned that they will have to tap into an investment portfolio at a time when the market is on a downturn,” Zohlen said.
“The markets recovered pretty handily since their downturn in March, but if the markets had really tanked in March and then continued to bump along at that level,” she added, “folks may have been forced to sell at a time when it would have been really painful.”
For retirees who rely on other investments, a reverse mortgage may ultimately help protect the value of those other assets.
“I always like to write about them as part of a responsible retirement income plan,” Pfau said. “You’re building an overall retirement strategy.”
Holmgren said the exact rate on a reverse mortgage is tied to a number of factors, including the value of the home and the applicant’s age.
He recently closed a deal on a single-family home valued at $800,000 in Richmond, California. The applicant secured an adjustable reverse mortgage for $454,510 at a starting interest rate of 2.74 percent.
Holmgren said he usually advises clients to pursue adjustable-rate reverse mortgages if they don’t need the full balance of the loan immediately.
“The fixed-rate reverse mortgages do not have the same flexibility that the adjustables do,” he said. Fixed rate loans are always paid out in a lump sum when the deal closes, but adjustable-rate reverse mortgages have more variable payment options, including a fixed monthly sum and a line of credit.
Are there any drawbacks to a reverse mortgage?
“It’s important to just note that the setup costs can be substantial, especially since the 2017 rule change where there’s that 2 percent mortgage insurance premium,” Pfau said.
He added that it’s important to be disciplined about how you spend the funds from your reverse mortgage, too.
“When I do simulations about this, by helping to better manage the risk for your investments, they’re able to grow more, so that more than covers the cost of the reverse mortgage,” he said.
When you use a reverse mortgage to let your investments grow, you’ll still have to pay off the balance of the mortgage at the end of the loan, but if you play your cards right, the other parts of your portfolio can possibly grow to grow to more than the debt you owe.
“That’s the key piece that tends to get missed. If you look at the reverse mortgage in isolation, all you see are the costs and the growing loan balance. It’s how that interacts and how that impacts your other investment balances” that’s the key to getting the most out of a reverse mortgage.
A reverse mortgage doesn’t ever have to be repaid as long as the borrower lives in their home, which is a good part of the appeal. If there’s any equity after the borrower’s estate sells the home, that would go to any heirs.
Reverse mortgage closing costs can be fairly high, but those expenses can be rolled into the loan itself, so despite the cost, many reverse mortgage applicants wind up paying nothing upfront.
How do I get a reverse mortgage?
Your best bet is to speak to a HUD-approved financial counselor to learn about your options and shop for providers.
With interest rates at historical lows, now could be the right time to consider a reverse mortgage, depending on your financial situation.
“If you’ve dismissed them out of hand, check them out,” Zohlen said. “You may be looking to integrate a reverse mortgage as part of your long-term financial plan, and now’s the time that you can take it out at a generationally low interest rate.”
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