August 22nd, 2013 | by Elizabeth Ecker Published in Reverse Mortgage
I’ve got a financial proposal that is probably going to surprise you. Take out a reverse mortgage at age 62, even though you don’t need the money. In fact, take it especially if you don’t need the money. There will never be a better time. Terms will change in October, but the light is still green for people who want to use the strategy described here.
Reverse mortgages are called Home Equity Conversion Loans (HECMs). They’re designed to provide you with cash at a later age, to help pay your bills if your other savings run out. Normally, the smart play is to wait until your mid-70s or early 80s to take the loan. For some readers, this remains the right choice, as I’ll explain below.
But there’s a valuable new opportunity at hand, for borrowers who don’t need extra money now. You borrow as early as age 62 and take the mortgage in the form of a credit line instead of all-cash. You can borrow against the credit line at any time, but you don’t have to take the money now. More important, this credit line grows every year – greatly increasing your borrowing power in the future.
Before I go any further, let me give you some HECM facts:
At present, the credit line comes with one of two adjustable-rate loans – the HECM Standard, which provides a larger loan, and the HECM Saver.
With HECMS, you don’t have to make monthly payments, as you do with a regular loan. The mortgage doesn’t come due until you leave your home permanently. When the house is finally sold, the proceeds go first to repay what you borrowed, plus the accumulated interest. If there’s money left over, it goes to you or your heirs. If the house sells for less than the loan amount, the Federal Housing Administration, which insures HECMs, covers the lender’s loss.
Why take a HECM now? Because mortgage interest rates are so remarkably low. The lower the rates, the more you can borrow against your home equity. If interest rates rise, five or 10 years from now, you won’t be able to borrow nearly as much.
As an example, take a mortgage-free house worth $300,000. At this writing, a 62-year-old could get a $152,658 credit line on a HECM Standard, at an interest rate of 4.07 percent (including the mortgage insurance premium). If rates rise by 3 percentage points, you could borrow only $77,659. With a Saver ARM, which charges lower fees, you could borrow $131,029 today but only $47,329 if rates rise go 3 points higher..
But – and this is a big but – borrowers should not take out the full amount in cash. You’d be leaving nothing to help pay your bills in your older age. If you’re a spender, don’t take a HECM until your mid-70s or 80s.
If you won’t spend all the money now, a HECM credit line gives you tremendous financial flexibility. You owe interest only on the amount you actually borrow. For example, if you use $10,000 to take a trip, interest is charged on that modest amount, not on the entire credit line.
The magic in a HECM credit line is that your borrowing power isn’t fixed, says Jack Guttentag, founder of Mtgprofessor.com, a comprehensive mortgage information site. Your available credit rises every year, by roughly the mortgage interest rate.
For example, take that Saver $131,029 credit line. If mortgage rates plus insurance stay at today’s 4.07 percent , your borrowing power will rise to $196,710 10 years from now (assuming you’ve taken no money out). On the Standard, you could get as much as $229,182. The higher rates go, the more you can borrow.
As for the HECM’s upfront fees, I consider them worth it. They let you nail down a large pool of future borrowing power, at a time when inflation will have driven your expenses up. Our sample HECM Saver would cost about $5,771 and the HECM Standard, about $11,741. The fees can be rolled into the loan.
For a quick look at how much you might be able to borrow with a HECM, check the calculator at reversemortgage.org.
So what’s happening in October? The government will merge the Standard and Saver into a single program, says Peter Bell, head of the National Reverse Mortgage Lenders Association. Limits will be placed on the amount of cash a borrower can take out in the first year. But you’ll still be able to take the maximum in a credit line. The fee might be a tad higher but all the benefits will still be there.