Mortgage Professor: ‘Time to act on reverse mortgage’

If you are a senior who has been contemplating a reverse mortgage, this may be the time to act, according to Jack Guttentag, professor emeritus of finance at the Wharton School of the University of Pennsylvania and one the nation’s premier mortgage analysts.

Guttentag, creator of The Mortgage Professor, a syndicated column and website that provides advice to consumers on mortgage-related issues, said the likelihood of increasing rates in the future means less cash to seniors.

The nation’s most popular reverse mortgage product is the Home Equity Conversion Mortgage (HECM) insured by the Federal Housing Administration.

“The expected rate on a HECM is used to calculate the amount the senior can draw under the different options,” Guttentag wrote. “Seniors can draw cash, take a credit line, or receive monthly payments for life or for a specified term. The higher is the expected rate, the smaller is the amount obtainable under any of these options.

“For example, at an expected rate of 4 percent, which has been a common rate during 2013, a senior of 62 with a home worth $300,000 can draw an initial credit line of about $174,000. At an expected rate of 6 percent, the line drops to $140,000; At 10 percent, it falls to $54,000.

“Now is a good time to take a HECM because the probability that expected rates will decline from current levels is very low while the probability that they will rise within the next few years, perhaps steeply, is very high. The current expected rate is only slightly above the low point of 3.81 percent reached in July of 2012, but it is far below the highest levels reached in earlier years. In July, 2000, it was 9.60 percent.”

Guttentag pointed out that seniors never give up title to their property under a reverse mortgage. Seniors who take out a “reverse” make no monthly payments as long they live in the home. Property taxes and homeowner’s insurance must remain current.