Reverse mortgages used to be the last
recourse of the little old lady: A way for her to get money
for household help and stay in her home until she died.
now, baby boomers are sniffing around these backwards loans,
looking for a way to pay off other debts and provide bridge
funding for the early years of retirement. In a reverse
mortgage, a lender pays money to a homeowner, but the
homeowner has no monthly payments. The loan, plus interest,
is repaid when the home is sold.
Almost half of the people now considering a reverse mortgage
are under the age of 70, and 21 percent are ages 62 to 64,
according to a new study by the MetLife Mature Market
Institute and the National Council on Aging. The average age
of borrowers is 73; in 1990 it was 76, according to the
Department of Housing and Urban Development.
MetLife hypothesizes that the increased demand from younger
borrowers is a result of the punishing economy: Reverse
mortgages don't require borrowers to have income or healthy
credit scores because they don't make payments. But there's
something else in play, too. As the Federal Housing
Authority has issued more consumer-friendly standards and
lower cost options for reverse mortgages, they are having
some appeal to a broader demographic.
Americans 62 and older (that's the minimum age for
qualifying for a reverse mortgage) have $3.19 trillion in
home equity, according to the National Reverse Mortgage
Surely among them are some young retirees who may want to
stay in their homes for a few years, but not forever. By
using a reverse mortgage for those few years, they can wipe
out their existing regular mortgage, make home repairs,
defer starting their Social Security benefits and more.
Those are the kinds of strategies that experts see coming to
"In the future it is likely that tapping home equity will be
viewed as part of the entire retirement planning process,"
said Barbara Stucki, vice president for home equity
initiatives for NCOA. "It is likely the reverse mortgage
option will be considered alongside some of the more
traditional methods of saving and investment."
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So, it's a strategy, but is it a smart one? Here are some
-- 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 percent a year for each
of the three years he defers, and that makes it worthwhile.
There's another way for a reverse mortgage to fill gaps. A
couple who expects to downsize and live off the proceeds of
their home sale in retirement can defer their move for a few
years by pulling money from a reverse mortgage and paying it
back when they sell the house.
-- 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.
Here's an example from Norberto Maldonado, a Paramus, New
Jersey, mortgage banker who acts as a broker for reverse
loans: A couple of 66-year-olds with a $500,000 home and a
$100,000 balance on a traditional mortgage could get
$304,513 in a reverse mortgage. They would pay (after a
rebate from his company) around $10,000 in closing costs.
Their interest rate would be 5.06 percent, and after paying
off their original loan and closing costs, they would
receive $194,513. After one year, they would owe $321,000;
after two years they would owe $341,000. After five years,
they would owe $412,000, and after 10 years, $565,000. After
20 years? "They would owe about a million... it just keeps
going up and up," he said.
-- 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.
-- You could keep it in the family. Joan Gagnon, a
Mansfield, Massachusetts, financial adviser, once helped
clients do an intrafamily reverse mortgage. The children,
who (along with siblings) expect to inherit the home, loaned
money to Mom so she could stay in it. Once she leaves and
the home is sold, they will get their principal and interest
back, first, and then the remaining value in the home would
be divided among her heirs. If family members can afford
this, it can be a much cheaper solution than a bank loan,
says Gagnon. But siblings and parents should all agree, work
with a lawyer to make sure the paperwork is done right, and
know exactly what they are getting into.
-- 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.
-- There goes the backup plan. Traditionally, reverse
mortgages were viewed as last-ditch emergency funds. "People
need to understand that if they tap their home equity at a
young age, they may not have any left in 10 or 20 years,
when they are facing a different kind of financial
emergency," says Lori Trawinski, a reverse mortgage expert