Reverse Mortgage

Is This A Good Time To Get A Reverse Mortgage?


from Chris Farrell, Next avenue


The numbers are worrying. The typical 54-64 year old with a 401 (k) or IRA has an average portfolio valued at about $ 135,000 and more than a quarter of employees don’t have retirement accounts (mainly because their employer doesn’t offer one). . Is it any surprise that older Americans fear their quality of life may deteriorate in retirement?

On the flip side, the home ownership rate for households 65 and older has risen to 81% and their average home equity is $ 143,500, according to the Harvard Joint Center for Housing Studies.

All of this raises two key questions: Could leveraging that home equity through a reverse mortgage help older Americans achieve a financially secure retirement while staying in their homes? If so, given today’s low interest rates, is this a good time to get one?

“For many retirees, home equity is a significant part of their wealth,” said Shai Akabas, director of economic policy at the Bipartisan Policy Center think tank, at a Senate hearing for health, education, labor and pensions last spring. “Many of these older Americans can – and must – rely on home finance to supplement their social security benefits.

Experts advocate reverse mortgages

No wonder many retirement researchers and a growing number of financial planners are endorsing the idea that some homeowners 62 and older are using reverse mortgages to convert home equity into income (62 is the minimum age the US government allows).

However, less than 1% of eligible households have taken out a reverse mortgage, according to a report by the Brookings Institution. Common criticisms of these loans include high fees and the notion that only desperate elderly Americans cancel mortgages as a last resort.

However, given the current drive for greater economic security in retirement, it seems to me that reverse mortgages should be more than a niche product. So, in late March, I dropped a webinar headline titled “Distinguished Economist Changes His View on Reverse Mortgage”.

The convert was Laurence Kotlikoff, a noted Boston University economics professor, personal finance and retirement expert, president of software-driven personal finance planning company MaxiFi, and something of a provocateur. I’ve spoken to Kotlikoff over the years and I’m a fan.

So I asked him: Are reverse mortgages going mainstream anytime soon?

“I didn’t like them anymore, just thought they weren’t as bad as I thought,” he told me.

But not for long. “Then I took a closer look at our software and it made me again not think positively about reverse mortgages,” said Kotlikoff. “It’s a complicated product to get your brain around. If you have no other option to stay at home, use a reverse mortgage.”

What is stopping reverse mortgages from going mainstream?

My own opinion: reverse mortgages like the ones currently being sold are too complicated to go mainstream.

Before I go any further, let me pause to explain how reverse mortgages work.

To qualify for government-secured reverse mortgages known as Home Equity Conversion Mortgages or HECMs (which make up about 90% of the market), you must be at least 62 years old, fully own the property, or have paid a majority of the mortgage. You’ll need to review your income, assets, and monthly living expenses, and show that you can afford the running costs of home ownership – home insurance, property taxes, and maintenance.

The amount of reverse mortgage you get is determined by a formula that takes into account your age, home value, and interest rates (recently, reverse mortgage rates have been hovering between 3.25% and 7% for flat rate loans, fixed rate loans, and 2% to 5.5% for adaptable loans).

All Reverse Mortgage Inc.

You will never owe more than the house is worth, but the fees are sizeable and add up to around 7% – although you can do better by browsing around. You must go through a mandatory counseling session to get a reverse mortgage loan.

Once you qualify, you can withdraw your equity in the form of a lump sum, a line of credit, or monthly payments. Instead of making out-of-pocket repayments, the reverse mortgage is paid off when you move out or die. (You can lose the house if you fail to meet property tax and insurance payments.)

The reverse mortgage loan business has cleaned up quite a bit after the bad press and initiatives by Congress in the 1980s. Still, scientists find that homeowners are not convinced that a reverse mortgage is the way to turn home equity into income.

Why Many Older Homeowners Nix Reverse Mortgages

Many older homeowners prefer to leave their home alone as a long-term insurance against unexpected expenses such as healthcare costs and instead take out a home equity loan when needed.

The desire to leave their home to their heirs is also particularly strong, and the complexity of reverse mortgages is a widely recognized deterrent.

What could these better options be?

Kotlikoff’s upcoming book. “Money Magic: An Economist’s Secrets To More Money, Less Risk, And Better Life” lists a number of alternatives, including creating a multigenerational home, earning income by renting rooms on Airbnb or one of its competitors, and downsizing.

Another interesting alternative is the so-called sale-leaseback transaction. This is financial jargon for selling your house to a company and then letting it back.

A company called Truehold started a sale-leaseback pilot program in St. Louis in July aimed at senior homeowners. Truehold buys the house and the resident rents it back from the company. Like every landlord, Truehold takes care of maintenance and repairs. The transaction fee: 5% of the sale price of the house.

The main attractions are that the owner receives equity, stays in the house and no longer has to worry about maintenance. However, the company has found that some potential customers are concerned about how Truehold sets a sale price and are unaware of current rental rates as many have not rented in years, if not decades.

“We know it’s a great option for many, but not for everyone,” said Nick Machesney, Head of Product and Experience at Truehold.

Machesney hits the right note with both sale leasebacks and reverse mortgages. Some older homeowners like these offers; others prefer to downsize or live in a multigenerational house.

The key is not which product is the best, but which choice fits well into a general retirement plan. Fortunately, the ecosystem of home equity options is expanding, and this could help increase the financial security of retired homeowners.