Will a Reverse Mortgage eat all of the equity ?

Another concern among potential reverse mortgage clients is that all the equity in their home will disappear over time since no payments are required and the balance will grow just as with a negatively amortizing loan.  While that's possible, it's not at all likely.  Just as with the housing value collapse that began in 2008, it's possible it could happen again.  If that did occur, it would have the same affect on the equity in any home...not just those with reverse mortgages.

 

Further, given the lower LTV allowed for reverse mortgages, it would have to be a very major decline before all the equity disappeared.  However, in such a severe down market it's likely job security would suffer making it more likely that a loss of income might occur.  For a reverse mortgage client, however, since no payments are required, they would be free from any worry of foreclosure, or the need for a modification or for a HARP loan in order to keep their home.

 

As a final point of information, just as life insurance companies keep a close eye on related statistics, such as average life expectancy, lenders have calculated average growth in home values, including the period with declining values, along with the anticipated average interest rates for reverse mortgages going forward and the associated resulting increases in balances.  They are not in the business of losing money so, especially since the lines of credit option chosen by some (most) reverse mortgage clients grows each year, that's a clear indication that they expect equity in homes with reverse mortgages to grow so, by extension, clients should expect the same.