Should I Do a Reverse Mortgage Now
Making a decision on when to do a reverse mortgage can be difficult at times. It seems that everyone has an opinion they wish to share, yet the decision and its effects are ultimately yours. In this article we will point out the benefits of doing the reverse mortgage now as well as the benefits of waiting. We hope this information will assist you as you make your decision.
Before we give the specific reasons for and against starting your reverse mortgage now, we will recap a few or its basics. A reverse mortgage is approved based on your age, and the location and value of your home. Credit is not a factor, nor is income. The loan size you qualify for is based on the interest rate in addition to your age, location and value of your home.
The older you are the higher the loan to home value ratio can be. Basically, All other things equal, the older you are the bigger the loan size you qualify for will be. Interest rates also play a big factor in determining loan size. Thus when making a decision on when to get your reverse mortgage it is important to understand how interest rates affect the loan size that you will qualify for. As a reminder you have no payments on a reverse mortgage, so the impact of the interest rate falls entirely on the loan size you qualify for. The lower the interest rate, the greater the loan size.
To illustrate this point lets compare a reverse mortgage to a standard forward mortgage, the difference of course being you will have no payment on a reverse mortgage. If you were purchasing a home using a forward mortgage and you fix in your payment at 800.00 per month with a 30 year term, the only factor left in determining the loan size you will qualify for (outside the appraised value of course) would be the interest rate. At 5% the $800.00 payment would yield a loan size of approximately 149,000.00, and a 7% rate a loan size of approximately 120,000.00. As a result that 2% change to interest rate makes a $29,000.00 difference in loan size on the exact same payment. That difference is all lost interest to the bank. Because there are no payments on a reverse mortgage the same effects applyand balance you may borrow will increase or decrease inversely to the interest rate. Even an 1/8th percent change in interest rate can change the loan balance by several thousand dollars.
With that said, the benefits of doing a reverse mortgage now are:
· The housing market is not likely to significantly rebound within the next 3 years (as of March, 2011). Many experts even believe we may yet see further reductions in home values. As a result waiting a few years will not likely result in a higher home values to help increase the loan size.
· The interest rates are currently at historic lows. This means you will likely qualify for a larger loan size now than later as interest rates are projected to increase with the volatile markets.
· A reverse mortgage can actually help protect you from falling home prices. Once your reverse mortgage is complete, you cannot be displaced from your home or be forced to move, nor will you have monthly mortgage payments regardless of how long you live. If you owe more on the reverse mortgage than the home is worth when you pass away your heirs will not be obligated to pay the difference. They may choose to have the bank keep the home and take the loss, or if there is equity in the home they may keep it and the equity or sell it and pocket the remaining equity.
· If home values increase in a few years and rates are still low, you can streamline your reverse mortgage (with reduced closing costs) to get more cash out of the home at that time.
· If you wish to move, you may sell the home at any time and keep the equity. You can even purchase a new home using a new reverse mortgage at that time.
· If you are making mortgage payments on a current mortgage, you can pay that mortgage off and live mortgage payment free leaving you free to save your money and have more liquid funds available.
· Most products and services are cheaper today than they have been for some time. As a result you will likely be able to make your dollars go further today than you will be able to down the road if the housing market rebounds. Costs of construction, travel and even groceries will likely cost less now than in the future.
The benefits of waiting to do a reverse mortgage are:
· The older you get the larger the loan to home value ratio that you qualify for. If interest rates do not go up and home values stay the same or increase you may qualify for a larger loan later. However if rates increase or home values decrease you will likely qualify for less.
· If you have a tendency to spend whatever money you have, and you don’t need the benefits of a reverse mortgage right away then you may protect yourself from burning through cash unnecessarily by waiting- however there are reverse mortgage products that will pay you over time to protect you if you feel you have this weakness.
· Closing costs on a reverse mortgage are higher than on regular mortgages. As a result, if you are considering a move in the next year or two to a new home you could lose some equity to closing costs.
Call us to get full customized advice on the right time for you to do a reverse mortgage. Too often we make big decisions without having all the facts only to discover later on that we missed out on a great opportunity. Knowing all the facts will give you the ability to know what is best for your personal situation and help you make an informed decision that you feel good about. Our commitment is to give you the facts and the best advice available. Don't forget, if you decide to do a reverse mortgage now- we guarantee the best closing costs.
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