When making big decisions, procrastination is only natural. Most people fight this battle every morning when they have to sort out which projects are IMPORTANT, and which projects are just EASY. Unfortunately, making estate planning decisions based on an understanding of Tax Law, Social Security strategies, Medicare guidelines, market conditions, and interest rate projections, is not easy. It would take decades of experience in the financial industry to master all of these. So, unless your clients happen upon a good Financial Advisor, these decisions can be challenging to make.
Therefore, when a Financial Planner tells a homeowner that their funds will run out at age “X,” the EASIEST solution is to say:
“If I live to age ‘X,’ I will consider a Reverse Mortgage then. Otherwise, I will crack open the home equity nest egg by selling the home. I’ll then move into a retirement home or move in with family members.”
The easy solution, however, is rarely the best. Some of the brightest researchers in the financial planning community have been publishing guidance in the Journal of Financial Planning, stating that waiting and using the Reverse Mortgage as a “last resort” doesn’t pay. Waiting significantly reduces the amount of funds that could have been available to a homeowner who obtained one early in retirement when interest rates were lower.
WHY DO WE FIND INACCURATE ADVICE IN THE MEDIA?
Unfortunately, few publications understand the factors that contribute to the financial planning advantages of the Reverse Mortgage program.
If your clients only have a BASIC understanding of Reverse Mortgages, then waiting appears to be the right advice. After all, older borrowers get more money, right? Your clients may think, “If I wait five more years, not only will I be older, but my home will be worth more, and I will have paid down my forward mortgage.” These may seem like logical reasons to wait… to the novice.
In fact, TIME.com published an article stating, “The older you are, the more you can get, so it benefits you to wait.” In the same article, the author references a Certified Financial Planner stating that if your retirement income covers your living costs, “There’s no reason to take out a reverse mortgage now. If you run short of money later on, you could take out a reverse mortgage then.”
HERE ARE A FEW REASONS WHY THEY ARE WRONG:
- Reverse Mortgage proceeds are based on interest rates
Why is this important? Because rates are low right now, allowing homeowners to maximize their proceeds. If a homeowner waits, and rates go up, HUD’s principal limit factor tables require the homeowner to get LESS with a Reverse Mortgage – in many cases, a lot less. The FED recently announced a rate hike, and their plan for more over the coming years. While there is no way to know future rates, most analysts believe they should, and will, go up. This could dramatically reduce the proceeds for future applicants.
WAITING SIMPLY DOESN’T PAY when getting Reverse Mortgage
- Waiting sacrifices compounding line-of-credit (LOC) growth
The available LOC grows at current interest rates. If a homeowner gets a Reverse Mortgage now, the available line-of-credit (LOC) will grow faster as interest rates go up. In fact, the LOC is often projected to exceed the home’s value if held long enough. Unfortunately, homeowners who wait will sacrifice this compounding LOC growth that could have been working in their favor as interest rates go up.
- There is no guarantee one will qualify in the future
The Reverse Mortgage program changes periodically. While some changes can be advantageous, others may eliminate the program as an option.
Consider that many homeowners still believe that credit history and income do not matter. Even some outdated websites still state “no credit or income requirements.” Unfortunately, some of those who decided to wait until a Reverse Mortgage was desperately needed, found that they no longer qualify under the new financial assessment guidelines.
While we don’t want to create an unmerited sense of urgency, our clients need to be aware that research shows that waiting for a Reverse Mortgage generally isn’t optimal and that NOW may be the best time to obtain one.
Oregon Only:·When the loan is due and payable, some or all of the equity in the property that is the subject of the reverse mortgage no longer belongs to borrowers, who may need to sell the home or otherwise repay the loan with interest from other proceeds. FAR may charge an origination fee, mortgage insurance premium, closing costs and servicing fees (added to the balance of the loan).·The balance of the loan grows over time and FAR charges interest on the balance.· Borrowers are responsible for paying property taxes, homeowner’s insurance, maintenance, and related taxes (which may be substantial). We do not establish an escrow account for disbursements of these payments. A set-aside account can be set up to pay taxes and insurance and may be required in some cases. Borrowers must occupy home as their primary residence and pay for ongoing maintenance; otherwise the loan becomes due and payable. The loan also becomes due and payable (and the property may be subject to a tax lien, other encumbrance, or foreclosure) when the last borrower, or eligible non-borrowing surviving spouse, dies, sells the home, permanently moves out, defaults on taxes, insurance payments, or maintenance, or does not otherwise comply with the loan terms. Interest is not tax-deductible until the loan is partially or fully repaid.
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