The low interest rate environment currently being observed in the mortgage world can be difficult for retirees to navigate, due to the likelihood of their reliance on sources of fixed income. A reverse mortgage tailored to the specific needs of homeowner retirees may be able to help seniors in this situation, so long as the product they use is properly selected.
This is according to Jack Guttentag, aka the “Mortgage Professor,” in a new column at Forbes.
“Low interest rates were great when you were young and needed to finance the purchase of a car or a house,” Guttentag writes. “Now that you are older, and at least partly dependent on the income generated by the assets you accumulated earlier, the low rates that exist today pose a challenge. The challenge is to find the best options of those that are available.”
The options available to certain retirees is dependent on where the majority of their wealth lies: if it’s in financial assets, or if it’s in the home. Guttentag has tailored his recommendations for the estimated 30 million American retirees whose wealth is primarily tied up in their homes. For some of these homeowners, a Home Equity Conversion Mortgage (HECM) may provide sufficient options while also providing for increased borrowing power in the current climate, he says.
“Where reduced interest rates have an adverse impact on retirees who are dependent on financial assets, lower rates can benefit retirees that are dependent on their home,” Guttentag writes. “These retirees draw their spendable funds by borrowing against their home using a HECM reverse mortgage, which is not repayable so long as they live in it. Lower rates allow them to borrow more. For example, in the current market, a 62-year old male could obtain a credit line 15% to 26% more than on August 7, 2016 (the earliest date for which I have data), depending on the size of the initial loan balance.”
There are two options available to a HECM borrower in terms of finding a source of spendable funds: taking a tenure payment, or having a line of credit (LOC) in reserve, using part of the credit line to purchase a deferred annuity, Guttentag says.
“[T]he balance [of the credit line can be] drawn on monthly during the deferment period,” Guttentag says. “The credit line approach generates significantly more spendable funds than the tenure payment approach.”
However, the impact on an estate for the credit line/annuity approach Guttentag proposes should be fully understood, he says.
“While rising interest rates allow retirees to draw more spendable funds, the increased growth rate on HECM loan balances reduces estate values,” Guttentag says. “With any given rate scenario, the credit line/annuity approach results in lower estate values than do tenure payments.”
Read the article at Forbes, which includes projections of each particular scenario.