Reverse mortgages are even worse with inflation

For simplicity, the examples used in the other posts in this blog assume no home appreciation and no change in interest rates. A conniving salesperson might attempt to distract a potential borrower from the issues herein raised and bring up home appreciation as a savior to the reverse mortgage problems. Theoretically, a rise in the market value of a home could lead to higher credit limits and additional cash flow.

Of course, home prices do not always go up. There are vast regions where home prices have stagnated for years and even declined.

Still, prices may in fact appreciate. However, a rise in home prices would be a manifestation of inflation; and inflation – often merely the fear of inflation – brings higher interest rates. These higher rates will outstrip any potential benefit of extra cash flow.

All term and tenure reverse mortgages have variable interest rates. So do loans in which a line of credit is tapped after the first year. The only type of reverse mortgage with a fixed rate – a rate that would not ever go up or down – is a loan in which all money is taken up front as a lump sum. If a home’s value rises, the availability of extra cash would be moot if one wants to keep the fixed interest rate. If a lump sum borrower pulls out more cash any time after the first year, the rate will lose its fixed status and become variable, just like all other reverse mortgage types. Thus any scenario trying to demonstrate the effect of home price appreciation must include the impact of higher rates.

Importantly, rates as of this writing are near historic lows; which means the examples provided at this time are basically best case scenarios. Introduce an environment with inflation and rising interest rates, the extent of the rip-off explodes.

reverse mortgages are even more harmful with inflation

To demonstrate, assume at age 65 you decide to get the maximum lump sum a 5% reverse mortgage can provide. Assume further annual home appreciation of 4% and interest rates that are higher by only 2%, half the inflation level, bringing the interest rate from 5% at closing to 7% soon thereafter.

At closing, using H.U.D. (the U.S. Department of Housing and Urban Development) guidelines, the bank could approve you for a beginning balance of 54.2% of your home value, or $162,600. Note that this setup is already generous using the initial 5% interest rate. If the rate at closing was already the ‘inflation adjusted’ 7% you could only receive 31.2% of the value, or $93,600.

inflation worsens the harm of a reverse mortgage

But allowing the higher level, using H.U.D. guidelines and industry norms net of closing costs about $149,348 would be available. With appreciation, your rising home value multiplied by the H.U.D. percentage limit will render higher maximum lending amounts. You decide to take out the maximum allowed monthly.

One year out, you will have received an extra $6,625 for total value received of $155,973. You will owe $183,413. In the second year you get nearly $7,000 more, but your debt rises by about $23,000. As of the end of year 5, you will have received total payments of $185,282. You will owe $289,276 – practically the entire original value of your home. Your financial situation has worsened by over $100,000.

With appreciation, more cash is indeed received, but the cash is worth less due to inflation. The higher interest rates meanwhile protect the bank.

In a non-inflationary environment if you get a lump-sum reverse mortgage on your $300,000 home you can get $149,348 and know that after 16 years your bank will own all of your home equity. You needlessly gave the bank over $150,000.

With annual appreciation of 4% and interest rates only half as much higher, after only about 8 years and 7 months your bank will effectively own your house. As of that time, you will have received a total of $215,063 but your debt will surpass your home’s appreciated value of $422,645. You forfeited over $200,000!

Reverse mortgages are horribly damaging in a stagnant, low interest rate environment. With appreciation, inflation, and higher rates, they are even worse.

Get the whole picture. Read The Final Rip-Off: Reverse Mortgages available at Amazon and Barnes & Noble.

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