The HECM reverse mortgage program can play a key role in helping Americans who qualify to avoid outliving their savings in retirement.
But the time to act is now, says “The Mortgage Professor,” a.k.a Jack Guttentag, in a recent article, noting the current low interest rate environment.
“A favorite planning tactic [of financial planners] is to calculate an annual asset liquidation plan that is consistent with a target probability of running out – 3 to 4% are numbers I have seen,” writes X, a.k.a The Mortgage Professor. “The problem is that a 3-4% probability of becoming impoverished at an advanced age is not acceptable to many if not most seniors. “
A HECM reverse mortgage program generates an income stream that becomes larger the longer the borrower lives, he advises, noting that “it is urgent to act now because the window for doing these deals will begin to close when interest rates begin their inevitable rise.”
The size of the initial HECM credit lines that can be drawn are inversely related to interest rates, while the growth rate of existing unused lines is directly related to rates.
“Hence, a senior with a specified amount of equity gets the maximum insurance coverage by taking out the HECM while interest rates are still low, and letting it sit unused as rates rise in the future,” he says.
In fact, interest rates have a much larger impact on the initial credit line a senior can command than his age.
“The senior of 62 with $200,000 of equity in his home can command an initial credit line of $97,800 at the current rate of 5%,” he says. “If he waits for interest rates to begin their inevitable rise, the credit line will drop precipitously. At 10%, the initial line available to the same borrower would be $19,000, or 80% less. A borrower of 92 at 10% cannot command as large a line as a borrower of 62 at 5%.”
Read the article here.
Written by Cassandra Dowell