Why Can I Not Wait Until I Need A HECM Reverse Mortgage?
The amount of money a borrower is eligible to receive is determined by:
The age of the youngest borrower when the loan is taken out.
In This Article We Will Discuss the Question…
Why can I not wait until I NEED a HECM Reserve Mortgage?
There are usually three things that work for potential HECM borrowers who delay getting Reverse Mortgages. Therefore, it could be assumed that the borrowers would get more funds by waiting, but it is not likely.
THE ADVANTAGES OF WAITING
- The borrower is getting older. This indicates a higher PLFs in the future.
- The home usually increases in value. This shows a higher principal limits in the future.
- The existing mortgage balance reduces. This usually indicates higher net principal limits. The above three items show why waiting will be rewarding.
Meanwhile, the following are two very strong forces that may disprove the three advantages.
THE COSTS OF WAITING
- Expected interest rates (ER) are estimated to be higher in the future.
- The homeowner would have lost the chance for compounding LOC growth.
Recall, the 10-year SWAP Rate is one element of the expected rate. Higher SWAP rates equal higher ERs, and minor rises in ER can have an overwhelming effect on principal limit features for new applicants.
Here’s A Fun Fact
The actual interest rate charged to the borrower which is established prior to closing and cannot be changed.
Gary is 80 years old, and according to the present SWAP rates he has an expected interest rate of 5.25%. Referring to HUD’s PLF Tables, this information can be used to state that Gary has a PLF of 62.7% now. Gary will be 85 years old in five years’ time.
Supposing HUD tables do not change; he should have higher PLFs of 67.1%. Meanwhile, an increase in expected rates within those five years to 6.25% will reduce his PLF to 57.0%.
As observed, a 1% change in expected rates in five years led to a severe decrease in PLF. When converted to dollars, Gary lost $5,700 in the principal limit for every $100,000 in home value. Moreover, due to the growth of line of credit over time, there is an opportunity cost of waiting that must be considered.
It is not different from the advice of a financial planner to a 30-year-old to start saving for retirement due to the power of compounding growth. The earliest age a homeowner can be eligible for a HECM and start the LOC is at age 62.
The value of the home may increase, and the homeowner gets older while waiting. But getting a HECM now will make the existing line of credit grow over an extended period of time.
Furthermore, expected rates are not expected to remain low. Although it is important not rush into leveraging your home equity for financial planning purpose, you may consider it as soon as possible for the reasons.
Well, it can be said that a 62-year-old with just a few years remaining to pay on a forward mortgage is the perfect time for a Home Equity Conversion as at the time of this writing. The reason is that a 62-year-old has a longer life expectancy allowing more LOC growth. Besides, most analysts believe that the interest rates will low for some time. During this time, the homeowner is making deposits for a loan balance. When interest rates increase, the LOC can increase rapidly as the mortgage loan balance remains at a low $100. Recall, HECM servicers may demand a minimum loan balance for the HECM to stay active or open.