Posted: 10:54 a.m. Thursday, April 25, 2013
Normally, I’d say “no way.” But, at this moment, you might consider the loan even if you don’t need the money right away.
First, a few words on how reverse mortgages work.
You take out a loan against your home equity. But the loan doesn’t have to be repaid until you leave your house — for example, because you move, enter a nursing home or die. At that point, your house is sold and the loan is repaid, including all the accumulated interest. If the house sells for more than the loan amount, you or your heirs get the difference. If it sells for less, the Federal Housing Administration, which insures the loans, swallows the loss.
The earliest you can get a reverse mortgage is age 62, and the usual advice (including mine, in the past) is to wait. These loans were designed to help much older people stay in their homes if money ran short. The smart play was to ignore this loan until you reached your mid or late 70s, and consider it then. Your home-equity savings are the very last asset you should use to pay your current bills.
That is still good advice, if you’re 62 and thinking of using a reverse mortgage to repay debt and finance other spending. You are too young to be stripping your home of value that you’re probably going to need in the future.
But there’s a different kind of play, says mortgage expert Jack Guttentag. Take a reverse mortgage, in the form or a credit line, and don’t spend the money (or don’t spend much of it). Your credit line will grow every year, by same percentage as the interest rate you can be charged for the loan. But if you’re not taking money from the credit line, you’re not paying interest. Meanwhile, the money available in your credit line, grows every year. That’s a nice hedge against expenses in the future.
Why open the credit line now? Because interest rates are so low. As a result, the percentage of home equity you can borrow against is around historic highs. Ten years from now, if interest rates are up, you might not be able to borrow as much.
I repeat — cashing out your home equity and spending the money is a bad idea at 62. But opening a credit line and not using it is a good idea. To evaluate your options, I highly recommend Guttentag’s mortgage information site. Click on “Reverse Mortgage Shoppers Begin Here.”