Since the end of World War II, the members of the Greatest Generation have been consumed with the hope and desire that their children would have a better life than they had. Much of that is a result of living through the Great Depression and the war years. If you listen to your parents and grandparents who survived those times, you’ll hear them talk about “getting by” with less, and not having any extra money or extra anything else for that matter. Sacrifice was a part of their lives, and even when times became better, they lived in a frugal manner in order that their children would have more. I can even remember my grandmother still saving balls of string in the 1970’s.
So, it is understandable when considering a Reverse Mortgage (which we know will increase in size over the years as the interest accrues) why our parents hesitate. They look at one side of the equation and see that if the mortgage balance increases over time, then the equity must decrease, thus leaving less inheritance for the children. If there were no such thing as appreciation, they would be correct. Fortunately, appreciation is alive and well, albeit hibernating in the early part of 2011, but alive nonetheless.
A quick look at some recent history is in order here. I am using figures for the New York Real Estate market derived from the House Price Index (HPI) which is “designed to capture changes in the value of single-family homes in the U.S.” and is published by the Federal Housing Finance Agency (FHFA). In the last 20 years, New York homes have appreciated by a total of 111% including 4 years where values went down. This gives us an average of 5.55% per year. If we look at only the past 10 years, area homes have appreciated by a total of 68%, for an average of 6.80% per year.
Now, without going into so much detail that your hair will start to hurt, let’s look a basic example of a Reverse Mortgage borrower. John and Mary Smith take a Reverse Mortgage on their $400,000 home at the age of 67. Their initial loan balance (on the Reverse Mortgage) is $259,200, leaving them equity of $140,800. Using a conservative appreciation rate of only 5%, at the end of 10 years, their equity has increased to $165,199 even after computing the interest accrual on the mortgage balance. Going out to 20 years, their equity is $148,722 after factoring in the interest accrual – still higher than the day they started, even with the interest accruing.
The bottom line is that John and Mary lived a much better life during the years after they closed on their Reverse Mortgage, and were still able to leave their children with a great inheritance. Something to think about.
Finally, it pays to get old.
(Cross-posted at Senior Security)
The Reverse Mortgage Gazette 