Reverse Mortgage Provides Hedge Against Stagnant Values

With all of this hoopla going on the real estate market the doom and gloom sentiment abounds.  Often I show the reverse mortgage amortization schedule to people which gives the customer a good idea of how the mortgage will affect the net equity of the property over time.

One of the assumptions is the home will appreciate at roughly 4% per year.  Is this a stretch?  To most of the people I speak with the answer is yes.  I don’t agree with them because I know what values have done over the last 45 years…  They’ve gone up at 4% and I know this trend will continue once we get out of this blip.

Regardless, for those that fear their home will stay the same value in 20 years as it is today the reverse mortgage offers help and hope.  Most reverse mortgage customers end up with sizeable lines of credit.  The loan allows them to draw cash from their line of credit any time they like. 

Not only does this line of credit not accrue interest against the equity of the borrower’s home it actually accrues interest and grows for the borrower’s benefit.   The growth rate of the line of credit is based on the same interest rate as the actual mortgage to be paid back to the lender.  The net result is the borrower can expect this unused line of credit to grow at roughly 7%. 

Think about that from the perspective of someone simply wanting to hedge bets.  Let’s say Joe Shmo is 62 years old and owns a $300,000 home.  He owns it free and clear and simply wants a line of credit o grow for his benefit to counteract a total breakdown in the home market. 

Since Joe is the youngest possible reverse mortgage borrower the lender will lend him the least amount of money; roughly $165,000.  Now Joe has $165,000 in a line of credit earning interest at 7%.   Now, regardless of his home reducing in value he can always count on that line growing for the just in case he absolutely needs the money.  In 20 years Joe’s line of credit will be worth $666,392.