Someone asked me to explain what happens to a homeowner who takes out a Reverse Mortgage at 62 when they are 90. Someone who starts the Reverse Mortgage at the youngest age of 62 after 20 to 30 years will possibly owe more than the value. The current interest rate of 4.99% plus MIP of 1.25% equals 6.24%, and average appreciate in a normal market is 4 to 5%, so we will say 4.5%. This is why they are only able to borrow 55-70% of the value based on their age, as opposed to 80% or 90%.
I show my clients that if they were to take whatever their mortgage payment was before the Reverse Mortgage or would be if they were to take out a new Traditional Mortgage for the same amount. Then if they were to invest it in the historical average for a CD (which is a 5% average in the US over the last 15 years) during that same time, they will end up with close to the same amount of debt. Disclaimer: I am not recommending that anyone withdraw money from their home via the Reverse Mortgage and invest it. I am simply comparing apples to apples in an example.
THIS OPTION IS BETTER FOR THE BORROWER EVEN THOUGH THE CD RATE IS LOWER THAN THE INTEREST ACCRUED ON THE REVERSE MORTGAGE! WHY?
Let’s fast forward to when this 62 year old turns 90. If the mortgage debt is 500k and the value is 400k, and let’s assume they have saved the payments and gained interest on their savings totaling 450k. If they pass away and leave the home to the heirs, the heirs DO NOT have to pay the 100k loss as that difference is insured with FHA’s Mortgage Insurance Premium (MIP).
So the heirs will have 450k cash and won’t have to worry about selling and paying any realtor fees or closing costs, etc. for selling that property at 400k.
Which would you rather have?
450k cash OR a property to sell valued at 400k
I’ll take the cash! This doesn’t work out this way for every situation, but it’s a good comparison for those who want to leave money to their heirs, but also want the security of not having to make payments on the mortgage.
There are a lot of benefits to the Reverse Mortgage. I have my grandparents on it, and my aunt, uncle, and I are the heirs. We understand that they are using THEIR money now to live better, and what ever is left in the end, IF ANY, is ours.