While a reverse mortgage may be a viable option for a senior in retirement to complement cash flow that is primarily sourced from Social Security benefits, it could be a costly way for certain seniors to delay taking Social Security payments until later in life. This doesn’t mean that the product is without potential merit for some people, but such a tool should be considered with a full understanding of the potential benefits and drawbacks.
This is according to Paul Brandus, a financial columnist in a new piece published by MarketWatch. A reverse mortgage comes with a degree of reputational baggage, he says, but that doesn’t mean that such an option should be dismissed out of hand.
“Given how heavily dependent millions of seniors are on Social Security—the average monthly check this year is a modest $1,543—a reverse mortgage could make quite a difference to many folks,” he writes. “Of course, there’s much more to it than this, and while a reverse mortgage could be a wise decision for some seniors, it could be a poor one for others.”
For instance, reverse mortgage advertisements aimed at seniors don’t include information on what constitutes a maturity event for a reverse mortgage, Brandus says. If a borrower dies, moves or sells the home, the negatively amortizing loan balance becomes due and payable. The borrower is still liable to continue paying for maintenance, property taxes and homeowner’s insurance, which the columnist also says is left out of industry advertisements.
Commercials for the reverse mortgage industry also do not explicitly mention that taking such a loan may negatively affect a borrower’s ability to pass the home down as a bequest asset, depending on the manner in which the balance is satisfied after becoming due and payable, he says.
One source of information that may be useful is the Boston College Center for Retirement Research (CRR), which recently posted information about seniors’ habits relating to the use of home equity in retirement.
“Addressing both sides of the issue, [CRR] notes that ‘home equity has great potential to ease retirees’ financial problems – after all, roughly $8 trillion of wealth is locked up in older people’s houses,’” Brandus writes, citing CRR research. “Tapping into this can indeed reduce financial stress that many retirees may feel as they continue to age.”
One of the reasons that reverse mortgages have yet to “catch on” with the senior demographic could be due to lingering reputational issues, Brandus says in citing CRR research. The angle of Social Security is also one that may lead a senior to explore a reverse mortgage option, he says.
“The longer you wait to take Social Security, the bigger the benefit,” he says. “Why not take a reverse mortgage at, say 62, and use that cash while your Social Security benefits grow? Sounds like a bridge loan. But [Consumer Financial Protection Bureau] (CFPB) number-crunchers calculate that this generally isn’t a good idea because of the above-mentioned interest and fees.”
The expense of this option as laid out in a 2017 report released by the CFPB is cited by Brandus, the findings of which were criticized by officials with the National Reverse Mortgage Lenders Association (NRMLA) and by retirement researcher Jamie Hopkins.
Read the editorial at MarketWatch.