This month’s scenario is on Rick and Darcy, both in their mid-sixties. They are pretty well off financially. They owned their $630,000 home free and clear, have several hundred thousand in retirement and bank accounts. And to top it all off, they also have a pretty nice monthly income.
These are not the typical clients I meet with; however, I am starting to see more and more people like Rick and Darcy. They are part of a growing group of savvy seniors who view the reverse mortgage as a financial tool instead of a last resort.
They called me about a reverse mortgage to see how it could help them accomplish what they wanted to do with their lives for the next 10 to 15 years. They wanted to spend their liquid assets over the next 10 to 15 years and then utilize the reverse mortgage after their liquid assets were exhausted. This is the complete opposite of what most people do, which is spend their liquid assets first and then get a reverse mortgage last.
They wanted to help their kids buy homes and start businesses, and they wanted to travel more. I don’t know about you, but I would rather enjoy the experience of giving to my family while I am still alive. And I would like to travel while I am still physically able to do so.
Based on their age, value of their home and the fact they owned it free and clear, they qualified for a $331,258 line of credit. One of the really cool features of the line of credit is that the unused portion of the line of credit grows at the current interest, rate plus 1.25%.
Because of this growth rate and assuming they do not use it; their line of credit availability is expected to grow to $582,059 in 10 years and $771,556 in 15 years.* I say expected because this is a variable rate loan and future growth is determined by future rates. If interest rates rise, they are going to have an even larger line of credit available.
Now, if they had waited until they exhausted their liquid assets to get a reverse mortgage, which is what most people do, the numbers would be drastically different.
Assuming current interest rates, loan limits, fees and product guidelines and they waited until they were 75 or 80 years old to get a reverse mortgage:
Their initial line of credit would be $377,632** when they are 75, a potential difference of $204,427.
Their initial line of credit would be $404,707** when they are 80, a potential difference of $366,849.
Those numbers clearly show why waiting to get a reverse mortgage until you need one is usually the wrong way to utilize a reverse mortgage. In most cases, it makes sense to get a reverse mortgage early on in retirement.
This scenario also explains why you should consider getting a reverse mortgage even if you do not have the need for one. The reverse mortgage line of credit creates liquidity in the home, an additional layer of financial security and a growing source of funds for future needs.
The line of credit is open ended. This means that even if Rick and Darcy used funds from the line of credit, any payments they make towards the line of credit are then available for future use.
Do you live in Oregon? Have questions about reverse mortgages in Oregon? Give me a call! I am happy to answer all of your questions about reverse mortgages and provide you with as much information as I can. Give me a call at 541-773-3131.
* Initial interest rate and APR of 4.332%. Expected rate of 4.4%. Growth of line of credit calculated at expected rate plus 1.25%, 4.332% + 1.25% = 5.582% growth rate as of 11/1/2016. Based on max claim amount of $625,500 and youngest borrowers age of 66 at time of loan.
** As of 2017 max claim amount is $636,150.