So says the Mortgage Professor, Jack Guttentag, an emeritus finance professor at the Wharton School of the University of Pennsylvania. Guttentag’s main argument is that interest rates are so low that it’s a good idea to snap up the cash now. Low rates let you borrow more than you could borrow at higher rates.
Guttentag recommends taking the loan even if you don’t need the cash. You can simply establish a line of credit so the money is available in the future when you need or want it. In fact, he says the ideal strategy is to set up the largest line of credit you can now and avoid using it for as long as you can. Keep in mind you don’t qualify for a reverse mortgage unless you’re at least age 62, and using a reverse mortgage generally means your heirs will receive little or none of your home’s value.
A key factor in this calculation is the “expected interest rate.” The lower it is, the more the homeowner can borrow, and rates are quite low today.
“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,” Guttentag says.”At an expected rate of 6 percent, the line drops to $140,000, and at 10 percent it falls to $54,000.” In other words, get a reverse mortgage now and you can borrow more than if you wait until rates rise, as most experts expect over the next few years.
But wait, there’s more — a second interest rate called the “accrual rate.” Like the interest rate on a regular mortgage, it is the rate charged against the loan balance. If you use the reverse mortgage to borrow a lump sum, it is a fixed rate for the life of the loan. If you take out a line of credit to draw on in the future, or select a regular monthly payment, the accrual rate is adjustable — it will rise or fall as market conditions change.