It used to be that reverse mortgages were seen as a last resort. Tapping into home equity was often reserved as a last-ditch effort once other options had already been taken among the 62-plus population who qualified to borrow against their home.
But today, reverse mortgages are actually being used in a very different way and among a very different population: savvy investors who are using home equity to weather market storms and other unexpected financial events.
Several renowned finance professionals and academics including famed finance columnist Jane Bryant Quinn are beginning to make headlines with this new strategy. Instead of reverse mortgages being used among households who lack wealth, they’re being advocated for households that have wealth—specifically to help preserve it.
Tapping home equity with a reverse mortgage line of credit
Among the reverse mortgage options available, one way for borrowers to access their loan proceeds is through a line of credit. Like other credit lines, the borrower can draw on the funds when he or she needs them and can make repayments at any time.
There is a unique feature of a reverse mortgage line of credit, however, that a typical home equity line of credit does not offer. This is known as the “growth feature” of the reverse mortgage LOC, and it means that borrowers can actually access more proceeds (in other words a larger line of credit) the longer they wait to access it.
The untouched line of credit gets bigger over time at a rate based on the current interest rates of the loan. For this reason, finance experts recommend taking the reverse mortgage as early as possible in order to maximize the potential benefit it offers.
Home equity should be viewed simply as a bucket of money, like any accessible funds, this new wisdom says. In other words, it should be considered alongside any other accessible funds, such as market investments or 401(k)s. The key is tapping into home equity at the right times—when other investments aren’t doing well, or when there are steep penalties in order to do so.
Financial planners consider a concept called sequence of return risk. The idea is that an individual’s financial situation will be impacted differently based on the order in which different events take place. For example, for an individual who is heavily invested in the stock market, a market crash will be much harder to recover from when the individual is 65 years old than when the individual is 35 years old.
Home equity should be seen as an alternative to selling market investments prematurely, financial planners say.
Weathering market swings
For most retirement age people today who have investments, the recent financial crisis took a toll. During 2008, U.S. equity indexes were down sharply, according to the Employee Benefit Research Institute (EBRI), noting that the S&P 500 index lost 37% over the course of the year, and greatly impacted 401(k) plan balances.
Of course, the financial crisis was an extreme event, but subsequent years have also been turbulent for many investors. Nearly 70% of investors lost money in 2015 year, according to Openfolio, an investment performance tracking app. Those who fared best financially during the year held cash or took substantial risks—neither of which is advisable for retiree or pre-retirees.
These swings can be tied to global events or domestic ones, and in most cases no one can predict them. Home equity can be the answer to weathering these storms via a reverse mortgage line of credit.
If you are interested in tapping into your home equity or to learn more about how a reverse mortgage can help you weather market swings, contact a reverse mortgage expert for more information.