It has been suggested that a reverse mortgage can provide good protection against a potential housing market bubble. The thinking goes along these lines: since reverse mortgages are non-recourse loans (meaning the total amount owed can never be more than the home’s value), homeowners who extract equity at today’s high home values needn’t worry if values plummet - no matter how much they’ve borrowed, they will never owe more than the home’s value

The idea sounds good and could work if you were able to pull close to 100% of your home’s equity out at the high-market level. But reverse mortgage program guidelines don’t allow this. Instead, the amount of cash you can receive through a reverse mortgage is actuarially determined based on several factors:

interest rates - the lower interest rates are, the larger the reverse mortgage;

age of homeowner - the older the homeowner, the larger the reverse mortgage;

home value - the appraiser will look at local market trends in determining a value;

geographic location - For HECM loans, there are maximum loan limits for each U.S county. No matter what the value of your home is, you cannot borrow more than these limits.

These factors are combined to generate a present value loan amount computed in a manner that provides substantial cushion for the lender to ensure there will be adequate home equity available for repayment when the house is sold or the owner dies.

Practically speaking, you may be able to get 30%-70% of your home’s value (depending on your age) in a lump-sum reverse mortgage. (You can use one of the excellent reverse mortgage calculators to project the amount you might qualify for.) This means only a truly catastrophic drop in values home values could justify the use of a reverse mortgage as a housing bubble safety-net.

In summary, reverse mortgage programs are designed in a manner that protects lenders ( and, ultimately, the federal government) from undue risk. There are cases where individual home values fall below the amount of the loan and the homeowner “wins” by having borrowed more than must be repaid. But this does not mean that reverse mortgages provide a sensible or cost-effective strategy for protecting against declining housing values.

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A Few More Related Articles of Interest:

Reverse Mortgage Friendliness Index Updated

OFHEO - Office of Federal Housing Enterprise Oversight

FHA - Federal Housing Administration

HPI - House Price Index

Top 10 States for HECM Reverse Mortgages