Reverse Mortgages Not Just For Cash-Strapped Seniors

Many seniors have the misconception that reverse mortgages are only for those that don’t have enough retirement income. While reverse mortgages are very beneficial for cash-strapped seniors, they can also be equally beneficial for those that have sufficient incomes.

One of the key reasons all seniors should at least consider a reverse mortgage is because of the line of credit (LOC) option offered through a Home Equity Conversion Mortgage (HECM)—the most popular type of reverse mortgage and one that is government insured. The LOC offers guaranteed growth, access to money, and provides a hedge against inflation and a reduction in local property values.

Guaranteed growth. The LOC allows the senior guaranteed growth at much higher rates than those commercially available through CDs or Money Market Accounts. AARP writes on their web site, “The rate by which the HECM creditline will actually grow each month will be the same as the total periodic rate being charged on the loan’s balance.”

Consider this example: a senior couple each age 64 who have a home valued at $150,000 and do not owe anything on the home. Through the HECM reverse mortgage, they can qualify for an initial credit line of $69,580. Assuming the line is simply established and no withdrawals are taken, this creditline is guaranteed to grow at a rate currently above 7% (7.28% as of 3/7/07) and changes monthly. In 20 years, if no withdrawals are taken and we assume the same initial growth rate each year, the creditline will be worth $283,825. Meanwhile, if their $150,000 home appreciates at an average rate of 3%, in 20 years their home would be worth $270,917— almost $13,000 less than what their creditline is worth!

Access to money. It is much better to have access to money and not need it than to need the money and not have access to it. In the same example above if the senior couple did not obtain a HECM reverse mortgage, they would only be able to rely on their savings and investments in case of an immediate need for sudden and costly expenses such as those for home health care, assisted living facility care, or nursing home care. To access the money tied up in their home, they would either have to sell the property, which could take several months, or obtain a mortgage on the property.

Hedge against inflation and decreasing property values. Preserving purchasing power throughout a potential retirement of 20 or 30+ years is often a senior’s greatest risk. Purchasing power is eroded due to inflation or the continual upward movement of prices for the goods and services we need and want buy. The LOC with guaranteed growth provides an ideal hedge or risk reducer against inflation. Many seniors often find their homes do not appreciate as much as others in their local real estate markets. This is often because, after living in the home for a period of years, the home becomes outdated, since home styles change and features and materials become obsolete. Again, in this case, the LOC provides a very valuable risk reducer because of its guaranteed growth–which can overcome the value of the home itself.

While a reverse mortgage may not be for everyone, all seniors age 62 and over who plan on remaining in their home should explore this option and the LOC feature available. A good place to start exploring is AARP’s website.