And how a reverse mortgage could help in the future.
The situation: older Americans are entering retirement with a greater amount of debt.
Paying off the mortgage used to be a source of pride among older Americans, celebrating the accomplishments of their hard work and signaling the start of a relatively worry-free retirement.
Times sure have changed. While people are still working hard, more and more Baby Boomers are having to carry mortgage payments, and other types of debt, into retirement.
According to the Consumer Financial Protection Bureau (CFPB), the percentage of homeowners age 65 and older with mortgage debt increased from 22% in 2001 to 30% in 2011. And even among homeowners age 75 and older, the rate jumped from 8.4% to 21.2% during the same period. The median mortgage debt for all seniors skyrocketed by 82%, from $43,400 to $79,000.
In its report, the CFPB concluded that mortgage debt is “threatening the retirement security of millions of older Americans. Older consumers are carrying more debt, including mortgage, credit card, and even student loan debt, into their retirement years.”
It’s clear that the classic image of retirement—a well-earned respite with more recreational activities and fewer worries—doesn’t line up with today’s reality for most people. The debt crisis that has gripped America is often hardest on the eldest, who must cope with rising healthcare costs, property taxes, home insurance, and personal debts on a limited income.
The question: why aren’t more older Americans using their home equity?
In 2016, a Fannie Mae® National Housing Survey® (NHS) indicated that nearly 37% of all senior homeowners were concerned about their financial situation in retirement. So what can be done?
Those who are physically able can delay retirement and work longer. And some may be able to delay taking their Social Security benefit to maximize the monthly amount they receive. But a shocking number are simply ignoring the largest portion of their retirement assets. In 2017, the Urban Institute estimated that homeowners age 65 and older have access to more than $3 trillion in home equity. Yet despite the challenges facing older adults, the NHS found that only 6% of senior homeowners said they were interested in tapping into home equity to help meet their retirement debt needs.
Alicia Munnell, director of the Center for Retirement Research at Boston College, says that “In the past, people saved their home equity to leave it for their children or some other purpose. I think that’s a luxury many people are not going to enjoy in the future.”
And in that future, it’s likely that a staggering number of older Americans will be affected. The Population Reference Bureau, in its “Aging in the United States” report, calls the current growth of the population aged 65 and older “one of the most significant demographic trends in the history of the United States.” It predicts that the number of Americans 65 and older will nearly double, from 52 million in 2018 to 95 million by 2060.
A solution: a reverse mortgage.
As Munnell says, it seems clear that at some point people will need to start tapping into their home equity. But many people don’t know how to do so—or don’t fully understand the concept. Truth is, there are many ways to tap into your home equity—but only one is part of a government-backed program: Home Equity Conversion Mortgages (HECMs), also commonly known as reverse mortgages, only available through Federal Housing Administration (FHA)-approved lenders.
In the 2016 Fannie Mae® National Housing Survey, only 49% of older homeowners reported being familiar with reverse mortgages as a way to access equity from their homes. While they’re not for everyone, more senior homeowners may want to consider them as part of their strategies to reduce retirement debt.
There are several ways to use a reverse mortgage to help with retirement debt. The most popular have been to pay off an existing mortgage and eliminate that debt, or to increase cash flow in retirement to help pay down credit card balances, auto loans, healthcare costs, or other debts.
The issue: myths and misconceptions about reverse mortgages.
So why do so many older adult homeowners simply dismiss this financial tool that can potentially help with retirement debt? According to the National Housing Survey, some of the top concerns respondents had were misconceptions that have been spread about reverse mortgages—or, were things that may have been once true, but have been addressed with recent changes to the program by the FHA.
Let’s examine a few of these in greater detail:
“The bank will take my home.”
With a reverse mortgage, the title stays in your name and you own it. Like with any home loan, the bank simply adds a lien onto the title so the lender can guarantee that it will be repaid. The loan doesn’t come due until the last borrower permanently leaves the home—and it’s often repaid by simply selling the home.
“I won’t be able to pass on the home to my kids.”
Your heirs can still inherit the home. When the loan comes due, they have options to repay it. They can arrange their own financing, pay off the loan and keep the house for themselves. If they don’t wish to keep it, they can sell the house, pay off the loan, and keep any excess funds. Or, they can simply deed the home to the lender. And even if the loan amount is more than the value of the home when it’s sold, not to worry—because a reverse mortgage is a type of loan known as “non-recourse,” neither you nor your heirs are liable for paying the difference.
“They’re too expensive.”
Actually, reverse mortgages don’t require large out-of-pocket expenses. Mortgage loan origination costs and interest rates are comparable to traditional mortgages. There are FHA insurance costs that some traditional mortgages don’t require, but the insurance benefits are well worth the relatively modest cost. And typically, any lender closing costs and fees can be financed into the loan, so there’s little that’s required out of pocket.
The facts: today’s reverse mortgages give homeowners options.
If you’re a senior homeowner who still carries mortgage debt in retirement, the best part of a reverse mortgage is that the proceeds must first be used to pay off your existing mortgage, relieving you of that monthly financial burden. This can free up the funds that normally would go to paying the mortgage to cover other retirement debt—such as credit cards, healthcare costs, car loans, or personal debt.
The other major benefit of a reverse mortgage is that you aren’t required to make monthly mortgage payments—all you must do is continue to pay for home insurance, property taxes, and home maintenance. Keep up with those, and you won’t have to make any monthly mortgage payments on the loan.
Once the existing mortgage is repaid, you can choose to take the remaining home equity as a one-time, tax-free* payment; steady, tax-free* payments; a line of credit as a “safety net” for later use; or any combination of these methods.
*Consult a financial advisor and appropriate government agencies for any effect on taxes or government benefits.
But the best reason to consider a reverse mortgage might simply be peace of mind. According to a 2010 National Reverse Mortgage Lenders Association study, 94% of the older homeowners who had taken out a reverse mortgage reported enjoying improved peace of mind as a result of the loan.
So what exactly is this financial tool that can help with retirement debt? Here are some answers to questions people ask most about reverse mortgages.
What is a reverse mortgage—and why do they call it that?
It’s a government-insured loan program for homeowners age 62 and older. It allows them to convert part of the equity they’ve built in their homes into cash. It was designed to help retirees with limited income remain in their homes longer and get additional cash to help pay expenses. It’s known as a “reverse” mortgage because rather than making monthly payments to the lender, as with a traditional mortgage, the lender makes payments to the borrower. The loan doesn’t have to be repaid until the last borrower permanently leaves the home.
Who can get one?
You must be age 62 or older and live in your home as your primary residence. The home must meet minimum property standards set by the U.S. Department of Housing and Urban Development (HUD), but you can use the proceeds of the reverse mortgage to pay for any necessary repairs.
How much can I get?
It depends on your age and the value of your home—the more it’s worth, the more you can borrow. Since home values have started to recover in many parts of the country, you may be surprised at how much equity you have. Also, the age of the youngest borrower on the loan affects the amount you can receive, with older borrowers getting more.
How can I use the money?
The short answer is, any way you wish. You can pay down your retirement debt or cover bills and everyday expenses, help with healthcare costs, establish a line of credit for the future, make needed updates to your home, or even help out family members who need it. It’s your money, and you can use it in the ways that make the most positive impact on your retirement.
How do I know if it’s right for me?
It’s important to find a lender that will assess your financial situation to ensure that it’s a good fit for a reverse mortgage—and tell you if it’s not. The lender should take the time to ask questions about your goals, your home, and your finances and give you all the facts you need to make an informed decision. It’s a good idea to gather information and explore your home equity options early on, so you can discuss important financial decisions with your family or trusted advisors.
Plus, everyone who applies for a reverse mortgage is required to complete a session with an independent, government-approved counselor. It’s for your protection—to make sure that you fully understand the program and your options and responsibilities.
What are the changes to the program?
The FHA, which insures most reverse mortgages, adjusted the rules to protect senior borrowers and ensure the overall financial health of the program. Restrictions were placed on the amount of money that can be taken upfront, encouraging borrowers to use the total proceeds more judiciously. Protections were put in place for non-borrowing spouses who are not on the loan documents or the home title. And a financial assessment tool was introduced to help seniors plan for their spending with a reverse mortgage.
How do I learn more?
Longbridge Financial specializes in reverse mortgages to help seniors meet their retirement debt and other financial challenges. For more information, visit our home page, or you can consult with a reverse mortgage specialist by calling 855-523-4326.
There’s also a free quote calculator that can give you an online estimate of how much cash you may be able to receive through a reverse mortgage—with a full, in-depth analysis by phone or email.
At Longbridge Financial, we pledge to assess your financial situation to ensure that it’s a good fit for a reverse mortgage. If we think it’s not the best option, we’ll tell you so—a promise that not all lenders make.