Not only do seniors’ ages and net worth determine their eligibility for a reverse mortgage, but these factors also play a significant role in the likeliness of older households obtaining Home Equity Conversion Mortgages, a recent study suggests.
Past studies on reverse mortgage utilization have indicated that as much as 80% of seniors could benefit from getting a HECM, however, only about 2% of eligible elderly homeowners actually report borrowing agains their housing wealth.
Furthermore, while previous research has found that households with low incomes and modest wealth were most likely to benefit from reverse mortgages, the opposite may actually be true, according to research from the University of Georgia’s Department of Financial Planning, Housing and Consumer Economics, published in the International Journal of Financial Studies this month.
To determine the factors influencing elderly households’ participation in the reverse mortgage market, lead researcher Swarn Chatterjee used the 2012 Health and Retirement Study (HRS) for this empirical analysis, as well as to provide a nationally representative dataset of households age 50 and older.
The HRS dataset, which is maintained by the University of Michigan and is funded by the Social Security Administration and the National Institute of Aging, contains information on the respondents’ participation in the reverse mortgage market, as well as their household assets, and their demographic and socio-economic characteristics.
The HRS study included 10,625 respondents, however for the purposes of the University of Georgia’s reverse mortgage analysis, Chatterjee used homeowners age 62 and older. Age played a significant factor in the probability of having a reverse mortgage, with older adults more likely to have a HECM than their younger peers.
Seniors ages 74-79 had the highest likelihood of having a reverse mortgage (42%), followed by those ages 68-73 (36%) and 80-104 year-olds (13%). Meanwhile, the youngest cohort between ages 62-67 were least likely to have a reverse mortgage (9%).
“It is possible that at a later stage in their retirement many households understand the potential inadequacy in their retirement savings and thus explore options, including reverse mortgages, to supplement their income later in retirement,” Chatterjee writes.
While previous studies have suggested that reverse mortgages could be useful financial products for people with modest savings, poor health and unmarried people, the University of Georgia study finds that households with higher net worth, higher education levels and higher income were more likely to obtain reverse mortgages.
“The results of this study indicate that households with a greater stock of human capital—higher net worth, better educational attainment, and higher income—were more likely to have reverse mortgages,” Chatterjee writes.
As the Baby Boomer generation continues to age and enter retirement, reverse mortgages have the potential to benefit this large cohort of the American population. And as numerous retirement studies repeatedly underscored the financial unpreparedness of this group, the need for additional solutions and resources is now greater than ever.
A lack of awareness, however, continues to hamper reverse mortgage utilization among potential qualified seniors who would benefit from getting a HECM. The study’s authors conclude that further research is also needed to examine reverse mortgage awareness and demand for the HECM product.
“This provides an opportunity for financial planners, non-profits, the government, and advocacy groups for retirees to educate elderly households about the potential benefits and pitfalls of using reverse mortgages as a retirement tool,” Chatterjee writes.
Written by Jason Oliva