Teaching an Old Dog a New Trick
This article is being written specifically for the senior homeowner that absolutely does NOT need a reverse mortgage. Please set your preconceived notions to the side for a few minutes and let me introduce an idea that few have considered. I will explain why obtaining a reverse mortgage, especially if you don’t need one, may be the smartest financial decision you have ever made.
Most already know that a Home Equity Conversion Mortgage (or HECM) is a HUD insured reverse mortgage. The HECM program is reserved for homeowners 62 and older and (for the moment) does not have any income or credit score requirements. The homeowner retains ownership and the house is typically passed on to the heirs. Nothing new here; it has been this way since 1989.
However, did you know that the unused Line of Credit actually gets bigger over time? The HECM Line of Credit has the ability to grow beyond the original loan amount. Think about this carefully for a moment and take a look at some real numbers using the Nu62 calculator with data provided by Moody’s Analytics and Research.*
Today, we will assume you are 62 and own a $200,000 home free and clear. In 20 years, Moody’s projects that the property will be worth $360,000. If you get a reverse mortgage Line of Credit established today for $100,000 and did not utilize it, the Line of Credit is expected to be worth about $415,000 in 20 years. The Line of Credit is now $55,000 more valuable than the home itself!
At this point (age 82), let’s pretend that you need some assistance and are considering an assisted living development. You have two choices. If you did not do a reverse mortgage 20 years earlier, you would need to sell your home. After listing and showing the property for months (and all that goes with it) and after typical agency fees and closing costs, you would net $328,000. However, if you had established a reverse mortgage, you could request the entire $415,000 and it would be immediately deposited into your bank account tax free. Remember, reverse mortgages have a “Non-Recourse Clause” written into the mortgage and is guaranteed by the government. This means that you cannot be held responsible and could give the house to the bank and move on with your life with a clean slate. You were selling your home anyway, so why should you care if it becomes the property of a new owner or a bank? You don’t.
But wait, you have $415,000! You only sold your home to get your equity out to pay for assisted living. You now have the needed cash to comfortably afford home healthcare (instead of assisted living) AND you get to stay in your home.
As an additional exercise and to show you the power of compounding, let’s take the unused Line of Credit out another five years to look at the numbers when you are 87. Your property would be worth about $435,000 and the Line of Credit is now valued at $595,000. That is a much bigger number and demonstrates the power of compounding.
So, here are your choices…
- You don’t get a reverse mortgage and your heirs inherit a property that they will ultimately sell. If you never want to consider a reverse mortgage, this is the outcome. It is plain and simple and historically how an asset is passed to heirs.
- If you get a reverse mortgage and never take the opportunity to tap it, your heirs simply inherit the home and its value (minus the reverse mortgage closing costs and the costs involved in selling a property). Yes, some equity was spent on closing costs and you never utilized the benefit other than knowing you had a large Line of Credit that you could quickly rely upon in a time of need. You can liken this scenario to an insurance policy that you paid for but never used. Yes, money was spent but it bought you peace of mind and there certainly some value in that.
- You get a reverse mortgage and use the funds as you see fit (pay for medical issues, remodel, vacations, going out to dinner, etc.). Have fun!
- Or, you get a reverse mortgage and do not use it for many years while the Line of Credit grows and is compounding silently behind the scenes. Years later, you liquidate it and have a big pile of tax free cash to spend however you like. Of course, whatever you do not spend still is passed onto your heirs (who, frankly speaking, would probably rather have the cash over a house anyway).
Did you learn a new trick?