"Should I wait to do a reverse mortgage"?  I get this question all the time from senior homeowners considering a reverse mortgage.  The answer is: "It depends..."

I then ask the borrower, do you need it now?  If the answer is "yes", then waiting may not be to your advantage.  Yet convincing these folks that it is in their best interest to move forward NOW is a very difficult task.  Of course, I realize that I have a built-in bias - I make my living originating reverse mortgages. However, I have a responsibility to help these folks understand that they may not have a better opportunity in their lifetime. 

Before we address why it may not benefit a borrower to wait, let's talk about why folks are taking a wait and see attitude about reverse mortgages.  Partly it is because we just came through a lending limit limbo while we all anxiously awaited HUD's decision on the new national lending limit that was signed into law with HR 3221, the housing bill.  Even when the legislation passed, the interpretation as to the new limit was vague at best and it took weeks before HUD finally announced on October 2^nd that there will be one national lending limit of $417,000.  So anyone with a higher valued home wanted to make sure they got the most from their reverse mortgage.  I don't blame them.  They were wise to wait. 

What is ironic is that the folks who have home values that would not benefit from the increase in the limit were also sitting on the sidelines waiting to see what the new limit would be.   Why was that?  I think it is partly because they didn't understand that the new limit would not impact the amount of equity they could access.  Or perhaps they were waiting for lower fees.  Although, unless they have a home valued over $300,000, the new law that reduces the origination fee won't affect them either.  But, these folks just didn't understand all that, nor should they. They aren't reverse mortgages specialists.

But now that HUD announced the lending limit and is tentatively shooting for a November 1^st effective date, many folks are still putting off taking out the reverse mortgage that they need so badly.

Perhaps they think that by waiting they will get more money down the road? I hate to disabuse them of that notion, but the fact is that by waiting they are risking further declines in the value of their home and an increase in the interest rates that affect the reverse mortgage. 

To understand how this works, consider that there is a formula for calculating the amount of equity that can be considered for a reverse mortgage.  The formula includes three very important variables:  1) The age of the younger borrower, 2)  the value of the home up to the lending limit, and 3) an interest rate that we reverse mortgage specialists call the expected rate which is based on the 10-yr. T bill or the Libor as an index. When any one of these variables changes, the amount of proceeds can be impacted.  For example, if the home value drops, the amount of money the borrower gets is less.  If the expected interest rate increases, the borrower will get less money. 

Let's say a borrower has a home valued at $300,000 and this borrower is 72 yrs. old.  At the time the borrower signs the loan application, the expected interest rate, which is based on the 10-yr. T-Bill is 5.4%.  Once the calculations are performed, this borrower is eligible for $195,500.

What if this borrower waits and the expected interest rate rises to 5.59%?  If the value of the home is still $300,000, the borrower is now eligible for $192,000, $3000 less.  Maybe that is no big deal, but what if the borrower has a mortgage of $194,000?  By waiting, he is now $2000 "short" and will have to bring in that money to close the loan (all liens, mortgages, etc. MUST be paid off with the reverse mortgage proceeds).  So waiting, especially for a borrower who needs the entire reverse mortgage proceeds to pay off their existing mortgage, can leave that borrower short-to-close.

Now, what if while this borrower was waiting, the home value fell to $290,000?  If the expected interest rate stayed at 5.4%, this borrower is now eligible for only $188,000!  This is a huge risk to take, especially if there is an existing mortgage to pay off.  Home values are predicted to continue declining throughout 2009.

What is most likely to happen is that this borrower will be hit with a double whammy - the home value will fall AND the expected rate will rise.  What if the home value falls to $290,000 and the expected rate rises to 5.59%?  Now the borrower is only eligible for $185,400, almost $10,000 less than he would have gotten had he not waited.

Of course, again, it depends on what the borrower's needs are.  If they don't have a pressing need such as paying off an existing mortgage or a need for income to make ends meet, then maybe the loss of access to the extra $10,000 won't make a difference to them and there is no need for urgency.

But there is another argument for not waiting to do a reverse mortgage that is often overlooked and that is quality of life and the time we have left on this earth.  I call this "lost life opportunity".  What if because of a lack of money the borrowers miss out on the opportunity to visit family in another state, to eat out more often, to take all the grandkids to the movies, and just simply be able to pay all the monthly bills without robbing Peter to pay Paul - how do you put a price on that?  Reverse mortgages aren't always about numbers and dollars and cents - they are about what the money will DO for us. No amount of waiting will ever make up for these lost opportunities.

So back to my original question:  Why do people put off doing something what is in their best interest, other than a lack of understanding of how the reverse mortgage works, as explained above?

I believe it is simply fear.  Fear of making a decision because it may be the WRONG decision.  And this fear comes out in spades when society in general is in turmoil and the only thing that is certain is uncertainty itself.  Fear creates paralysis.  Even though rationally it may be in a person's best interest to make a decision and move forward, inaction tends to be the human response to fear.  When there are perceived threats, our biology tells us to sit quietly, don't draw attention to yourself, and don't move in any direction (thus the "deer in the headlights" syndrome).

And there is plenty of fear to go around.  Credit crunches, Wall Street woes, bank failures, declining markets, foreclosures on every corner - it is enough to make a person want to go to bed and stay there until everything is normal again (which is an illusion!).

My advice to my senior clients is that we have to overcome this emotional paralysis and try to make decisions based on logic and reason.  The reverse mortgage program is just as safe as it was a year ago or twenty years ago when it first became insured by the FHA.  The program is still highly regulated, has built-in guarantees, and is insured by the full weight of the government.  None of that has changed.  What has changed are our economic situations, our home values, and an increase in the climate of fear.

Another question I get from seniors is "What if I need the equity in later years and I have used it all up with a reverse mortgage?"  My response to them is this:

First of all, what are "later years"?  The average reverse mortgage borrower is 72 yrs. old.  That seems late enough for me.  How much longer should they live a life of sacrifice waiting for some unknown need for equity in the future?  Now seems to be a good time to start living life. Life is short.

As for "using up" all the equity, if the distribution of funds is set up correctly, there should be money left on a growing line of credit.  In fact, many of my clients use the reverse to "lock in" some equity and preserve it for future years.  That way, if home values plummet, they are guaranteed the equity in their line of credit.

Also consider that many borrowers use some of their reverse mortgage proceeds to pay off existing liens, as we discussed earlier, thereby freeing up cash flow.  The house payment they no longer have to make could be saved or invested for a "rainy day" if that is a concern for them.

Equity is really an illusion.  As we have so painfully seen in recent months, equity can come and it can go based on market conditions.  Who's to say that the senior will even have a substantial amount of equity in their home in the future?  Even if they did, we are back to how are they going to access it.  Short of selling the home, they will most likely get a reverse mortgage. 

This concern, that there may not be equity in future years "when they need it", is based, I think, on fears that they may need funds for long term care or need to sell and move into assisted living.

Let's think about this:  Even if they did not do a reverse mortgage, there isn't enough equity in the average person's home to cover very many years of paying for assisted living or other long-term care facilities anyway!  Once their funds run out, if they don't have a long-term care insurance policy, they will have to apply for Medicaid to pick up the slack.  So the equity they could have used a few years ago, to make life more enjoyable, is used up anyway! 

So, why not use the equity now, set up a line of credit, pay off existing mortgages, and use some of the proceeds to purchase a long-term care insurance policy? (I realize this is not always realistic based on health and age, but a person in their 60's and perhaps early 70's, should consider this as an option).

The unused balance on a reverse mortgage line of credit grows each month and can literally double in 10 years.  Many reverse mortgage borrowers are setting these up to use for in-home care when and if they should need it.

Every borrower's situation is different.  Anyone considering a reverse mortgage must get all the facts and rely on the advice of not only a reverse mortgage specialist like myself, but also get unbiased professional advice from someone who also understands reverse mortgages.  While waiting sometimes make sense in certain cases, for the most part, very little will be gained by waiting.  And remember, there is nothing to fear but fear itself.