The Federal Reserve may be taking its time with interest rate hikes, straining the finances of some seniors who depend on investment income. But the go-slow approach also offers a potential silver lining for older Americans: low interest rates make it easier to generate income from a reverse mortgage.
When borrowers take out a reverse mortgage, they receive cash from the lender that represents a sort of advance payment on the equity in the home. The money is generally tax-free, and you can even set up the loan as an equity line of credit, drawing down only what you need.
Lower interest rates can translate into a larger mortgage amount: At an interest rate of 5 percent, a 65-year-old homeowner could take out a reverse mortgage of up to $270,500 on a $500,000 house. When rates are 7 percent, the maximum would be just $182,000, according to the Center for Retirement Research at Boston College.
For many seniors whose home is their largest asset, that difference could be meaningful. The median net worth of householders aged 65 and over is roughly $170,000, according to Census Bureau data. But when home equity is excluded, that figure drops to roughly $27,000.
"There are a large number of households entering retirement that are not going to have sufficient resources to maintain a standard of living and pay medical bills," said Steven Sass, program director at the Center for Retirement Research. If their "biggest source of savings is the equity in their homes, not their 401(k), and there is a way to access that equity, that seems like a good thing to do."