Note: This update on John Salter’s thinking about reverse mortgages originally appeared on NowItCounts.com April 7, 2015.
In today’s low-interest rate environment, John Salter says now is the time to take advantage of a reverse mortgage.
Salter, a certified financial planner and wealth manager with investment advisor Evensky & Katz and has co-authored studies on reverse mortgages in recent years, has advocated people who have never even considered a reverse mortgage to consider one as part of their overall risk management strategy.
The Great Recession showed that someone who owns a home with an equity line of credit can have that reduced or taken away altogether. Other restrictions can be placed on it as well. A borrower doesn’t face this issue with a reverse mortgage, Salter says.
“I once had the view that they were expensive and they were prior to 2011 and they were only a justifiable use if you had nothing else,” Salter says. “Now the reverse mortgage market has opened up where it is a much more reasonable cost to get one. I think for someone that owns a house and plans to stay there that a line of credit is something that they should look at for sure. Whether somebody does something with a portfolio because a line of credit grows over time—and it can’t be taken away or changed like during the recession—it was common for traditional home equity line of credit to be cut or taken away. This was especially true if people weren’t using it. You have those for emergencies and you want them to be there if you need them.”
For Salter that’s part of a risk management strategy where people have a portfolio in the stock market and can draw upon their reverse mortgage when the market is down and they’re not reaching their goals. It gives people another option for cash to help with their living expenses, he says.
“For us it’s more for risk management than creating income,” Salter says. “We have been looking line of credit and protecting a portfolio if it’s down and rather than selling things for a loss.” Should anything negative happen in the portfolio or run out of money, you have that option later down the road.”
Salter says many financial planners don’t understand reverse mortgages and therefore don’t recommend it enough to clients. Too many people only use reverse mortgages out of necessity because they have saved little money, he says.
“It’s widely publicized the baby boomers are asset poor and house rich so if they want to sustain their lifestyle they are going to have to use their house,” Salter says.
Salter says that’s understandable but that shouldn’t be the only use people are getting recommendations for their use.
The dynamics of reverse mortgages are changing where the average age of those taking them continues to drop significantly, Salter says. One reason why those who have just turned 62 and are now eligible should consider them is that as the interest rates go up, the amount you can get as a line of credit goes down, he says.
“It makes more sense to look at it today,” Salter says. “The amount you can get as a benefit is related to the forward expectation of interest rates. Since we are in the lower interest-rate environment, you can get more than if we were in a higher interest-rate environment. That means FHA takes on the risk of the product so you can’t be upside down in the loan.”
Salter says people get credit for their age by waiting but with lower interest rates and compounding growth, makes adds it makes more sense to take it today than wait for an uncertain future.
Here’s how Salter describes it:
“Let’s say I’m 65 and expect to live until 85. FHA is saying at some point in the future there’s going to be a crossover where my loan value equals my home value. If rates are low, they will give me more upfront because it will grow at a slower rate to that point. And if interest rates were high, I would get less today because it’s going to grow at a faster rate at that same point I the future. The higher rates are the less you get upfront because your potential loan balance will be higher. I think as interest rates start to go up and borrowing costs will go up that makes it a good time to look at them. It makes more sense to take it today than wait for the future.”
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Hello, At this time in the market, if you were taking out a reverse mortgage would you select a variable rate or a fixed rate? Would you buy the rate down? Thank you in advance for your response.
Intriguing topic, but no general answer. The considerations are importantly different between how one thinks about reverse mortgages and traditional mortgages. I’d want to know more about the rest of your financial plan, including how long you might stay in the house and other financial assets like investment portfolios and Social Security claiming that could be aided by the reverse mortgage. Do you need all the money now or some now and some later. And tax rates matter also – reverse mortgages are tax-free draws. An important difference between fixed and variable loans is you can pay down a variable/line of credit loan and later access that money plus what it has grown to; you can pay down a fixed loan but don’t have access future access to what you put in. This is a great topic for an off-line three-way thoughtful conversation with a financial planner and a reverse mortgage loan officer. You’ll benefit from lifetime projections of what happens to your home equity and very importantly other financial assets like portfolio balances.
That is an important difference to understand between the fixed and a variable/line of credit with a reverse mortgage and the tax free draw. Indeed it requires a thoughtful conversation.There are many considerations to think about in relationship to the whole portfolio. Thank you for sharing your knowledge.