Why Open A Reverse Mortgage Before It’s Needed?
Would the line of credit ultimately be larger if opened earlier rather than later? We can further explore this question with a more realistic example. Exhibit 1.1 below provides an illustration of the impact of opening a reverse mortgage at different points in time using a few basic assumptions.
For more information, download our Reverse Mortgage 101 Cheatsheet.
Still keeping matters relatively simple, I assume that the one-month LIBOR rate stays permanently at 1.25 percent and the ten-year LIBOR swap rate remains permanently at 2.25 percent. The lender’s margin is assumed to be 2.75 percent, and home inflation is 2 percent.
Finally, Exhibit 1.1 also shows the available principal limit if the reverse mortgage is not opened until each subsequent age rather than at age sixty-two. By delaying the start of the reverse mortgage, and assuming that the expected rate of 5 percent remains, the principal limit grows because the principal limit factor is higher at advanced ages, and because this factor is applied to a higher home value.
Nonetheless, even at age ninety, the available principal limit for a new reverse mortgage is only $284,222, which is based on a PLF of 65.3 percent applied to a current home value of $435,256. The message from this example is that opening the line of credit earlier allows for greater availability of future credit relative to waiting until later in retirement.
Exhibit 1.1: Comparing Principal Limits Based on When the Reverse Mortgage Opens
Admittedly, Exhibit 1.1 does look less impressive in terms of the potential value of opening the reverse mortgage early compared to the same exhibit from the first edition, before the October 2017 rule changes. Exhibit 1.2 compares the growth in the principal limit for loans from before and after the October 2, 2017, change in program parameters. Under the old rules, the principal limit could grow more rapidly, as it started from a higher initial base and included an ongoing mortgage insurance-premium of 1.25 percent in the effective rate instead of the current 0.5 percent. By age eighty-three, the principal limit exceeded the value of the home—twenty-one years after the loan was initiated. More broadly, Exhibit 1.2 shows how the pace of principal limit growth was substantially slowed by the October 2017 rule change.
Exhibit 1.2: Comparing Principal Limit Growth Beginning at Age 62 for HECMs before and after October 2017