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Bankrate: Low Interest Rates Fuel Renewed Reverse Mortgage Appeal

As the mortgage rate environment and the finances of seniors have gained renewed focus during the COVID-19 coronavirus pandemic, so too has the interest in and potential value proposition of tapping home equity to create cash flow with a reverse mortgage. This is according to a new column published at Bankrate.

“Although there are costs and caveats with reverse mortgages, it turns out his pitch is especially timely right now,” writes Bankrate’s Zach Wichter. “Thanks to historically low interest rates, reverse mortgages have new appeal for people in or nearing retirement who need cash but can’t afford monthly payments on a loan.”

For those in retirement, reduced interest rates could make conditions worse according to Dr. Wade Pfau, professor of retirement income at the American College of Financial Services and founder of RetirementResearcher.com.

“With retirement, low interest rates usually make everything worse. They make retirement more expensive,” said Pfau to Bankrate. “The reverse mortgage is the only tool I’m aware of that benefits from low interest rates.”

In terms of determining whether the time is right for getting a reverse mortgage, the rate environment should be a factor in the ultimate decision according to Evelyn Zohlen, founder of Inspired Financial and 2020 chair of the Financial Planning Association (FPA).

“If you need to borrow money right now, happy days!” she told Bankrate. “[However,] the low interest rate environment is a mixed blessing,” she said. Some clients are seeing interest rates on bonds as low as 2%, she explained, which is not great news for instruments designed to stabilize investment portfolios.

This means that a reverse mortgage could be used to help balance out a portfolio, especially since borrowers are only charged interest when they take a draw from the loan, Wichter writes from Zohlen’s input.

“A reverse mortgage is an important tool for a client to consider if they are concerned that they will have to tap into an investment portfolio at a time when the market is on a downturn,” Zohlen told Bankrate. “The markets recovered pretty handily since their downturn in March, but if the markets had really tanked in March and then continued to bump along at that level, folks may have been forced to sell at a time when it would have been really painful.”

Read the column at Bankrate, and listen to recent episodes of The RMD Podcast featuring Wade Pfau and Evelyn Zohlen as respective guests.