In today's low-interest rate environment, John Salter says now is the time to take advantage of a reverse mortgage.
Salter, a certified financial planner and wealth manager with investment advisor Evensky & Katz and has co-authored studies on reverse mortgages in recent years, has advocated people who have never even considered a reverse mortgage to consider one as part of their overall risk management strategy.
The Great Recession showed that someone who owns a home with an equity line of credit can have that reduced or taken away altogether. Other restrictions can be placed on it as well. A borrower doesn't face this issue with a reverse mortgage, Salter says.
I once had the view that they were expensive and they were prior to 2011 and they were only a justifiable use if you had nothing else," Salter says. "Now, the reverse mortgage market has opened up where it is a much more reasonable cost to get one. I think for someone that owns a house and plans to stay there that a line of credit is something that they should look at for sure. Whether somebody does something with a portfolio because a line of credit grows over time -- and it can't be taken away or changed like during the recession -- it was common for traditional home equity line of credit to be cut or taken away. This was especially true if people weren't using it. You have those for emergencies and you want them to be there if you need them."
For Salter that's part of a risk management strategy where people have a portfolio in the stock market and can draw upon their reverse mortgage when the market is down and they're not reaching their goals. It gives people another option for cash to help with their living expenses, he says.
"For us, it's more for risk management than creating income," Salter says. "We have been looking line of credit and protecting a portfolio if it's down and rather than selling things for a loss." Should anything negative happen in the portfolio or run out of money, you have that option later down the road."
Salter says many financial planners don't understand reverse mortgages and therefore don't recommend it enough to clients. Too many people only use reverse mortgages out of necessity because they have saved little money, he says.
"It's widely publicized the baby boomers are asset poor and house rich so if they want to sustain their lifestyle, they are going to have to use their house," Salter says.
Salter says that's understandable, but that shouldn't be the only use people are getting recommendations for their use.
The dynamics of reverse mortgages are changing where the average age of those taking them continues to drop significantly, Salter says. One reason why those who have just turned 62 and are now eligible should consider them is that as the interest rates go up, the amount you can get as a line of credit goes down, he says.
"It makes more sense to look at it today," Salter says. "The amount you can get as a benefit is related to the forward expectation of interest rates. Since we are in the lower interest-rate environment, you can get more than if we were in a higher interest-rate environment. That means FHA takes on the risk of the product so you can't be upside down in the loan."
Salter says people get credit for their age by waiting, but with lower interest rates and compounding growth, it makes more sense to take it today than wait for an uncertain future.
Here's how Salter describes it:
Let's say I'm 65 and expect to live until 85. FHA is saying at some point in the future there's going to be a crossover where my loan value equals my home value. If rates are low, they will give me more upfront because it will grow at a slower rate to that point. And if interest rates were high, I would get less today because it's going to grow at a faster rate at that same point I the future. The higher rates are the less you get upfront because your potential loan balance will be higher. I think as interest rates start to go up and borrowing costs will go up that makes it a good time to look at them. It makes more sense to take it today than wait for the future.
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