Well there’s no doubt that the United States’ housing market is softening. And although prices may not continue to drop, and some markets may remain relatively strong, as a whole, the robust gains in real estate value across the country are over. Maybe not forever, but certainly for now. Housing starts have been down, and the number of houses being sold each year has been decreasing. Houses are sitting on the market for weeks, months, even longer, and long gone are the days where sellers got 25% over their asking price within a matter of days.
So What Does This Mean For Reverse Mortgages?
A reverse mortgage is a loan that is not paid back until the home owner/borrower no longer occupies the property (through death or a permanent move). Moreover, the borrower can never owe more than the value of their house. Therefore, reverse mortgage lenders must be careful with how much money they lend. The amount of money they lend is based on a number of factors, including the borrower’s age, the location of property and more importantly, the value of the property.
The first two factors determine a percentage of the property value. So a reverse mortgage is based on the value of the property, and the property value is determined by an appraisal. As the real estate market weakens, these appraisals result in a lower value, and therefore less money for the reverse mortgage borrower.
Over time, real estate values have gone up relatively consistently, but this doesn’t necessarily mean that real estate will always go up. There is no guarantee that home prices will be higher five, or even ten years from now. History shows that values will not always increase, even if its just for a brief time.
This doesn’t mean that you should rush out and get a reverse mortgage before the value of your home goes down, it just means that you shouldn’t assume that your home will be worth more five years from now. A reverse mortgage should be obtained when the time is optimal for your financial situation. When that time is depends on many factors.