The most important factor in the size of your reverse mortgage loan (other than your age and your own personal inclination) is the value of your home. As a result, it’s important to understand how the fluctuation of home prices affect reverse mortgage financing, so that you can make an optimal decision.

Basically, HUD – which, through the FHA, administers/insures the majority of reverse mortgages – has calculated a table of “multipliers,” based on your age and prevailing interest rate levels. This multiplier is essentially a ratio of your home equity that HUD has determined you are eligible to borrow at the time you obtain your reverse mortgage. Basically, take the value of your home, multiply it by this ratio, and voila, you have determined the maximum amount (prior to fees and other adjustments) that you can borrow under current market conditions. For example, if you are 65 years old and your lender has quoted you an interest rate of 5.5%, and your home is valued at $300,000, then you can borrow a maximum amount of $175,200 (based on a multiplier of .584) before fees.

Perhaps I’m getting ahead of myself. After all, I keep referring to the value/worth of one’s home, and haven’t yet defined how this is determined. Well, it’s actually quite simple. The value of your home (aka the lender’s collateral) is determined by an appraiser at the time of origination. Remember that with a conventional mortgage, the appraisal serves a tangential function: to merely confirm that the price you paid for the home is supported by market fundamentals. With a reverse mortgage, on the other hand, the appraisal is everything! The lender doesn’t care what you paid for your home, or what you think it’s worth; it only cares about the appraisal. (This distinction between price and worth is especially important when using a reverse mortgage to purchase a home).

If the appraisal is higher than you expected, then Congratulations! As I alluded to in the opening of this post, however, you don’t have to borrow the full amount that you are eligible for. If the appraisal, came in lower than expected, you have a few options. The first is to wait a couple years. During that time, home prices may have appreciated, and you will certainly have aged. Unless interest rates also rise, then, you will almost certainly be eligible for a larger loan when you go to re-apply. Another option, mainly for those that need the cash now, is to go ahead and obtain a reverse mortgage now, and simply re-finance if/when conditions improve. Of course, there are costs associated with this option (just like with a conventional mortgage refinancing) so the first option is probably the most economical of these two, especially if you can afford to wait. The final option is to simply forget about a reverse mortgage for your existing home, and instead, downsize into a smaller home. If you are still dedicated to taking out a reverse mortgage, the decline in home prices would work to your advantage, since the loan would fund a larger portion of the purchase price.

In the end, there is no way to beat the system. If your appraisal is high (presuming that you borrow the full amount you are entitled to), then your equity position will be lower over time then if your appraisal was relatively low. Really, the only way that you can “win” is if your house depreciates over time to such an extent that your mortgage is underwater, and the FHA – thanks to the mandatory insurance policy – picks up the tab for difference. But this is certainly a dubious gain, as it would be better for all parties if your house appreciates so that you still have some remaining equity when the mortgage is repaid.

The only time you really need to pay attention to your appraisal is if you are planning to use the proceeds from the reverse mortgage to repay a large amount of debt associated with a primary mortgage. For those of you to whom this applies, and for whom the fall in home prices has precluded your obtaining a reverse mortgage, my advice is to continue paying your primary mortgage and re-evaluate the situation in a few years. Regardless of how the housing market performs over that time, your own personal financial situation will be more conducive to obtaining a reverse mortgage of adequate size.

For the rest of you, don’t worry too much about trying to time the market. [That’s why I didn’t include any forecast about the direction of real housing prices in this post. It would have been irrelevant, distracting, and probably inaccurate]. Instead, focus more on whether a reverse mortgage is appropriate, given your personal financial situation. Ask yourself: If home prices stay exactly where they are for the next five years, would it appropriate for you to obtain one now, in five years, or never?