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Reverse Mortgage: Yes or No?

The older people who either consider a reverse mortgage or actually get one don’t have much else to fall back on.  Their primary assets – outside of their homes – are a car worth no more than $7,000 and about $2,000 in a checking account.

This was one salient fact unearthed about reverse mortgage users – or people who’ve looked into them – in a 2014-2015 survey led by Stephanie Moulton at Ohio State University. This supports a later study by Moulton that found that people who take out the loans tend to be in worse shape financially than other homeowners. The survey provides a more complete picture of who is turning to reverse mortgages – and why other people find alternatives to solve their financial issues.

Federally insured reverse mortgages, known as Home Equity Conversion Mortgages, or HECMs, allow homeowners over age 62 to borrow against their often-substantial home equity. These loans do not have to be paid back until the older homeowners sell the house or die.

Despite these attractive financial features, reverse mortgages are not popular: fewer than 60,000 were sold in 2015.  Many elderly homeowners are appropriately wary of a complex financial product. The fees and interest rates are also higher than on a standard mortgage.  But the idea behind HECMs is to allow cash-strapped seniors either to pay off their existing mortgages, eliminating house payments, or to create a readily accessible pool of cash or a new source of monthly income. Either way, they free up money that retirees can use to meet their expenses, emergencies, or medical bills.

The researchers interviewed some 1,800 older households after they had received the counseling required under federal law to apply for a HECM reverse mortgage.  About two-thirds of those counseled proceeded with the loans, and one-third decided against it. Here’s what these two groups look like:

  • Widows and single women made up a disproportionate share of those who received HECM counseling.
  • The counseled households were also mainly white, with an average age of just 70 and average retirement income of about $2,400 per month.
  • Among those who took out reverse mortgages, the average amount owed was $156,500. The mortgage debt of the typical person who went through counseling was about 30 percent of the value of their homes, but those who decided against taking out a HECM tended to owe more.
  • Their primary use for the proceeds was to help pay daily expenses, either by paying off mortgage or non-mortgage debt. Some also used the proceeds to make home improvements and for health or disability expenses.
  • Three out of four borrowers said reverse mortgages “improved the quality of life.” One out of four said the money they received didn’t last as long as they had anticipated.
  • A small minority of those surveyed felt pressured by a counselor to obtain a loan.
  • The reasons for deciding against reverse mortgages included HECM’s relatively high fees, not having enough equity to make it worthwhile, wanting to own their homes free of any mortgage, and wanting to leave their homes to their children.
  • Many said they found other ways to solve their financial issues, either by reducing their expenses or refinancing their primary mortgages.
  • Those who instead decided to sell their homes said they did so to avoid maintenance costs (50 percent); because their property taxes or homeowners insurance were too high (42 percent each); and because they needed a more accessible or smaller home (39 percent each).

The full survey can be read here.

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14 Responses to Reverse Mortgage: Yes or No?

  1. ROBIN FAISON says:

    Those that have higher loan amounts most likely could not do the loan. Many assertions within this article are misleading, as usual. If you want to know more about the reverse, need to talk with a specialist. Counselors are not within the mortgage industry, and sometimes can be biased on many fronts.

    • Dave G. says:

      Did you read the 90-page survey? It is as in-depth a study I’ve seen on the reverse mortgage, and anything but misleading. Among many findings, it reported that 83 percent were satisfied or very satisfied with decision to take out the loan. Hard to see that as biased. As a survey of prospective and actual borrowers, it reflects their perceptions and responses, accurate and informed, or not.

  2. Gary N Lansman says:

    When we looked into a reverse mortgage to fund my mother-in-laws stay at an assisted living facility, we learned that the borrower must be a resident in her home, not an assisted living facility.

    • Dave G. says:

      Correct. The whole idea of the reverse mortgage is to help the borrower remain in their own home. Otherwise, a short-term stay at assisted living does not disturb an existing reverse mortgage, provided borrower returns to the home within 12 months. If you already had a reverse mortgage in place, there is nothing to prevent the use of available funds for any purpose, including living expenses while in an assisted living facility.

  3. Wendy Weiss says:

    The survey of reverse mortgage recipients (as well as those who simply received counseling) provides important data for financial planners to consider. The paucity of their liquid assets at the time of consideration is striking. Their decision to use the equity in their homes to pay off debt, and meet health and disability expenses is quite rational.

    Equally rational are the reasons for deciding not to take a reverse mortgage. The fees, home equity value may be too low to make it worthwhile, as well as the decision to sell to capture the equity, avoid maintenance and property taxes, were also important for financial planners and advisors to know.

    Thanks for providing this data to your readers.

    • Dave G. says:

      I see problems where the reverse mortgage becomes a band-aid for a frank discussion of long-term living arrangements. You need to be able to stay in the home about 7 years to reasonably amortize up-front costs. So for many, better to sell and downsize while still retaining enough equity to move to more suitable housing. Those lacking other resources (most borrowers) risk losing choices as equity erodes or goes to zero.

      Funny, like any type of loan, the people who can do the most with the money are often those who least need it. Reverse mortgage funds can work great when used to create or preserve other assets, or as an additional asset class in planning for “decumulation” in retirement.

  4. Paul Brustowicz says:

    In another article about reverse mortgages, the author claimed that affluent retirees were using the proceeds to purchase second or vacation homes. I guess that if your retirement income and assets are more than adequate for your life-style than why not hock the house for some more fun?

    Has anyone seen an amortization schedule for a reverse mortgage? The interest column should be pretty scary looking at the 10 year mark.
    Thanks for another good retirement report.

    • Dave G. says:

      I’ve seen quite a few amortization schedules. It is possible (but not common) for equity to increase while carrying a reverse mortgage. Besides interest rates, the other key factor is the property itself. A desirable property in a good location could see increase in value that grows faster than the loan amount due. How the loan is structured is also important. Borrowers taking large lump sums up front vs. those drawing funds incrementally for monthly income are not likely to show increasing or even steady amounts of retained equity.

  5. Josh says:

    With the statistics highlighting the fact that single women and widowers made up a disproportionate amount of borrowers, it seems likely that these women are using these loans in an effort to keep their homes after their husband’s income has gone or to keep their former standard of living.

    I wonder if it wouldn’t be a better decision overall to swallow their pride, sell the home, and “downgrade” to an apartment that demanded less upkeep and maintenance costs.

  6. Scott says:

    It seems like a viable option for folks who have no heirs. Better to take out the equity and have fun spending it than to let it all go elsewhere afterwards.

    A person or couple with no heirs should be trying to leave the least amount of assets as possible. Most people won’t fall into this category because most older couples have children and grandchildren, siblings, etc…to leave their estate to, however, there are exceptions.

    Childless couples and/or those who aren’t close to immediate or extended family members come to mind. If these folks die with $10 in the bank…………….that’s $10 too much because their situation is different. A reverse mortgage can give them the additional cash without forcing them to move from their primary residence. And, the fees are just the cost of doing business.

    • Tom says:

      Scott is absolutely correct regarding couples with no children or close heirs. A few years ago there was a popular book called “Die Broke” arguing that all couples (with or without children) should use up their assets and enjoy themselves while alive. Sounds like good advice.

  7. Although outcomes will vary, reverse mortgages can play an important role in a senior’s finance. As with any asset, there needs to be a concerted effort over time to build its size and strength so it is valuable at a later date. In other words, building sufficient equity to leverage over time is key; people over 62 who have been in their homes for a long time, haven’t refinanced multiple times to draw out equity, have prepaid their mortgages (or took shorter terms at each refinance) are arguably the best candidates with the greatest likelihood of a successful outcome, as they have the greatest asset strength on which to rely.

    If nothing else, a sizable equity position can help meet the requirement that any remaining forward mortgage against the property will be paid off, freeing up cash flow that would otherwise have been committed to paying down the loan.

    Structured properly and used cautiously, they can also have great value in the preservation of other assets (i.e. stocks) at times when these investments aren’t performing well or throwing off enough cash to support a given standard of living. Drawing equity via a reverse mortgage at times like these can prevent the need to sell assets in a down market, leaving them in place to capture the next upcycle. This can preserve future flexibility.

    These are complicated and costly instruments, and many seniors remain highly skeptical and wary of them. More and better education is needed, and there is plenty of space in the market for more single-purpose offerings (dedicated home improvement, age-in-place or transportation-centered packages, for example). Helping folks accumulate assets and equity and teaching them how they can be used to support them as they age is going to require a serious change in thinking and planning in our debt-centric society.

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