Reverse Mortgages are no longer of interest to only older retirees, but rather an increasing number of younger baby boomers have begun looking toward the equity-tapping loans as a retirement asset, Fox Business reports.
The demand among younger borrowers, Fox hypothesizes, could be the product of a “punishing economy,” as well as an increasing number of reverse mortgage loans offered by the Federal Housing Administration.
Fox Business writes:
It can fill gaps. Ken Weingarten, a financial adviser from Lawrenceville, New Jersey, had one couple in their mid-60s take out a reverse mortgage so the 67-year-old husband could defer his Social Security benefit for three more years. He expects the couple, who had little savings, to pull no more than $60,000 out of their reverse mortgage. But that 3-year delay will increase the husband’s permanent Social Security benefit by about 8% a year for each of the three years he defers, and that makes it worthwhile.
It still isn’t cheap. Even though FHA has created a lower cost reverse mortgage called a “saver” loan, closing costs can approach $20,000 or more on some reverse mortgages. And the interest rates run higher than they do for typical mortgages. Finally, because borrowers make no monthly payments, the balance on these loans actually grows as interest is assessed.
These are no-recourse loans. That means that you won’t owe the lender more than the sales price of the home, even if the loan eventually outstrips that. So if the couple above build a loan balance of $1 million and sell their house (at a fair market rate) for $700,000, it would be as if they got away with a free $300,000. That could theoretically offer a strategic opportunity for young borrowers, suggests David Hultstrom, a financial adviser from Woodstock, Georgia. But it would be risky.
Couples have to be careful. Sometimes a married couple will remove one partner from the home deed so the other can take out a reverse mortgage. That’s not a good idea: If the borrowing spouse dies, the remaining spouse may be stuck with a balance due and no affordable way to repay it.
In the past, where reverse mortgages were viewed as “last-ditch” emergency funds, borrowers should be conscious of when the right time is take out the loan, as tapping home equity at a young age may not leave enough left down the road in 10 or 20 years, Fox Business writes.
Written by Jason Oliva