In a recent post for Forbes, George Mason University senior fellow and reverse-mortgage researcher Mark Warshawsky explored the pros and cons of home equity conversion mortgages, and settled on a small sweet spot.
Warshawsky, who has performed research into various types of retirement products with the backing the Golub Center for Finance and Policy at MIT, uses the tenure option for this particular exercise. He claims that the origination and closing costs may negate any long-term benefits for borrowers with houses worth less than $100,000 and low net worth.
“The product is not appropriate for for those with little or no financial assets,” Warshawsky wrote in the post. “Mortgaging their house would leave them with no liquidity.”
Warshawky then defines a home-equity and asset parameters for which HECMs make sense, setting the low boundary at $3,000 of assets and a home value of $60,000, and the upper end at $290,000 and $250,000, respectively. Based on these definitions, Warshawsky claims that HECM products are “suitable” for about 14 percent of the retirement-age population, giving them an income increase of about 19 percent.
The fellow’s other research also includes a comparison of HECMs and life annuities, which found that reverse mortgages resulted in higher incomes for couples — while annuities led to greater incomes for individuals of most genders and ages.
At the end of his Forbes post, Warshawsky suggests lowering HECM transaction fees by half in order to expand the marketplace for reverse mortgages, and also calls for a lower home-value threshold for potential borrowers.
Read the full Forbes post here.
Written by Alex Spanko