New Thinking About Reverse Mortgages ~ Younger retirees may benefit from using a reverse-mortgage line of credit as interest rates rise ~

seniors hiking    Rising interest rates could make reverse-mortgage lines of credit more appealing to younger retirees.

A reverse mortgage is a type of loan taken against equity in a home, available to borrowers who are at least 62. It requires no monthly payments, with interest charges instead added to the loan balance and paid only after the homeowner sells or dies. The loan can be taken as a lump sum or as monthly income, or as a line of credit, with no interest charges on unused amounts.

Many homeowners wait until well beyond 62 to take a reverse mortgage, because generally the older the borrower is the more he or she will be qualified to borrow.

In recent years, though, more financial advisers have warmed up to the idea of homeowners taking a reverse-mortgage line of credit when they are as young as 62, as a way to boost their nest egg. The key to this strategy is that the credit line grows over time, by amounts tied to the course of interest rates, and the unused portion can be converted to a substantial monthly income years later. And today, with inflation and interest rates widely expected to rise, these credit lines could be particularly valuable.

“Now is an exceptionally good time to be considering adding a [reverse-mortgage] credit line to the retirement blueprint,” says Shelley Giordano, chair of the Funding Longevity Task Force at the American College of Financial Services. Interest rates are low, which increases the credit limit on reverse mortgages, she notes, and if rates rise over the life of the loan, that will add to the growth of the credit line. Since interest rates tend to rise alongside inflation, the growing line of credit would provide an inflation hedge, she says.

Running the numbers

“Research has shown that setting up a line of credit as soon as possible, age 62, in order to let it grow and only tapping into the line of credit when needed can substantially improve the long-term sustainability of a retirement-income portfolio, meaning you can make your money last longer,” says Jamie Hopkins, associate professor of taxation at the American College of Financial Services.

The strategy—called a standby reverse mortgage, or SRM, by some—has been pushed in financial journals by a number of academics, starting with a 2012 paper by Barry H. Sacks, a tax attorney in San Francisco, and his brother Stephen R. Sacks, a professor emeritus of economics at the University of Connecticut. They recommend drawing from the credit line when investments like stocks and bonds are down, so the homeowner enjoys a steady income and gives other investments time to recover, allowing them to last longer.

They said the strategy was successful in 1,000 Monte Carlo simulations, which run calculations over and over while varying key factors like interest rates and investment returns. Not only did it improve the borrower’s chances of enjoying steady income to an advanced age, it could also produce a larger income along the way, they reported.

Not for everyone

The chief downside: Sums taken through any reverse mortgage, including any amount actually borrowed through a line of credit, reduce the equity available for other purposes—like moving to another home or buying into an assisted-care facility—or for the homeowner’s heirs.

“It may not be best for a short-term play” because of the time it will take for the growth of the credit line to offset the cost, “or if one wishes to leave a home free and clear [of debt] to their heirs,” says Steven Klein, reverse-mortgage director with AmCap Mortgage, in Greenville, S.C.

But over many years, the credit line can grow to be quite large, especially if interest rates rise. Here’s how it works: These credit lines carry adjustable interest rates that typically reset every month or every year. Once the initial credit limit is set—based on interest rates, the homeowner’s age, the home’s value and its location—it grows each year by the current interest rate on the loan plus 1.25 percentage points, which is the loan’s annual mortgage-insurance charge.

For example,  a 62-year-old borrower with a $400,000 home in the Philadelphia suburbs a credit line starting at $200,668, at an initial rate of 5.70%—a 4.45% interest rate on the loan plus the 1.25% insurance charge. If the interest rate doesn’t change, the credit line will grow 5.70% a year, reaching more than $600,000 in 20 years. It could then be converted to a monthly income of nearly $5,000—less if any of the credit has been used—based on standard industry formulas. If interest rates go higher, the credit line would be larger; if they fall, it wouldn’t grow as much.

Taking a credit line at an early age could also mitigate the danger of the home’s value falling, a decline that would reduce the amount of credit available through a reverse mortgage taken later. And the credit line grows regardless of changes in the home’s value. If the home’s value soars, the homeowner could scrap the old credit line and take out a new, larger one against the higher value.

“A reverse-mortgage line of credit can be a saving grace for the baby boomers who simply do not have enough retirement savings” if home equity is ignored, Prof. Hopkins says. “If home equity is incorporated more strategically in the future, we will see vast improvements in the financial security of retirees.”

This is a reprint of an article written by Jeff Brown in February of 2017.

https://www.wsj.com/articles/new-thinking-about-reverse-mortgages-148695516

LEARN ABOUT REVERSE MORTGAGES IN THE COMFORT OF MY GRASS VALLEY OFFICE…WE CAN ALSO EXPLORE WHAT YOUR APPROXIMATE QUALIFICATION NUMBERS ARE ALL ABOUT, CALL 530-497-3010 FOR A PERSONAL APPOINTMENT.

~Shawna

Things to Consider About Aging In Place

Seniors in home remodeling

Retrofit my Existing Home or Move?

Reprint from Article Written for The Union Grass Valley Newspaper on April 28, 2015

A recent survey by Genworth Financial, a long term care insurer, noted that while overall long term care costs continue to rise, paying for care services in home is still the cheapest option*. Being close allies here in Grass Valley with local and may I say, beautiful assisted living communities, aging in place in one’s home is not for everyone, the thought of having meals prepared by gourmet chefs and lots of activities to choose from is enticing indeed. However, some of my clients complete a reverse mortgage credit line to tap into their home equity for funds to retrofit their homes for the next stage of life’s journey.

What is the typical cost of a retrofit? The MetLife Report on Aging in Place 2.0** recently reported the cost for design and structural modifications for a one story home will cost an average of $9,000 to $12,000.

What are smaller projects to consider? Replacement hardware, sturdy handrails, grab bars, single handled faucets, higher sitting toilets, rollout shelving in kitchens, and lighting in hard to see spots are all relatively easy and cost conservative.

If I funds are available, larger projects for electric scooter or wheelchair access; widening doorways, corridors, and ramps are bigger picture retrofits.

In home health costs are reportedly rising at a slower pace than facility-based care. According to the Genworth study, in-home health aide costs rose approximately 1.27% over a one year period compared to assisted living and semi-private nursing home care rising an average of 2.86% and 3.77% respectively.

Seniors in home with in home care provider

There’s no pre-determined correct path in this next stage in a senior’s life, it’s all about hopefully having the financial ability to exercise a conscious choice. In addition to a reverse mortgage credit line being used to retrofit a senior’s existing home, a reverse mortgage can fund assisted living/dementia care for one owner on title, as long the other owner on title to the home remains in the home as their principle residence. Also, an existing home can be sold to buy, via reverse mortgage for purchase, an already senior retrofit home.

One of my clients commented recently that they felt I conducted my business more like a consultant, not only a loan officer: someone who would listen to concerns and offer options, this after we spent time going over their future living and financial considerations; preparing for big picture changes for them as they entered their mid-70’s. Aging is not for the faint of heart, we all are moving forward in the journey of maturing and entering into new life stages. If you’d like to sort through some of your options with me, call for a personal appointment or attend one of my monthly Reverse Mortgage Workshops held in my local Grass Valley Office, lunch is catered and the last comment from several of the April workshop group: ” Shawna, that was fun!”

A closing thought: the recent HUD reverse mortgage program change requiring me to do a borrower financial assessment at the time of loan application is no reason to allow any lender to panic or pressure you, give me a call, I’ve got you covered for explaining this change!

Shawna McDonald has successfully completed hundreds of reverse mortgages and is approved with 8 reverse mortgage lenders. Her office, Sierra Foothills Reverse Mortgage, is located at 412 E. Main Street Suite N, Grass Valley, (530) 497-3010. Her website is www.SierraFoothillsReverse.com.

The opinions expressed here are solely those of Shawna McDonald, Loan Officer/Real Estate Broker. Copyright © 2015. All Rights Reserved, duplication and distribution prohibited. Shawna McDonald NMLS #271335 CA-BRE # 00585530 DBA Sierra Foothills Reverse Mortgage and Borba Investments Inc, DBA MLS Reverse Mortgage Auburn, CA NMLS #76801 BRE #01456165 ~ HUD approved lender. * 2015 Genworth Financial annual Cost of Care Survey     ** MetLife Report on Aging in Place 2.0, 2013