Reverse mortgages: the Rodney Dangerfield of retirement
Aging boomers probably remember Rodney Dangerfield as the comedian who lamented, “I don’t get no respect.” Are reverse mortgages the modern equivalent in the retirement planning world?
According to a recent brief from the Boston College Center for Retirement Research (CRR), middle-class Americans age 65 to 69 have more or equal wealth in their home equity than in their financial assets. (For this purpose, middle class is defined as the middle 60 percent based on total wealth.) Yet few retirees are taking steps to utilize this significant asset to help them finance their retirement.
The CRR brief said downsizing is the main way retirees tap home equity. Yet it also cites a study that found only 30 percent of homeowners approaching retirement move and that more retirees move to a home that’s more expensive than the one they left. Those who do move to a less-expensive home generally do so in response to a negative financial shock, such as high medical expenses, the need for daily or medical assistance (precipitating a move to assisted living or a nursing home) or widowhood.
Another way to tap home equity is through a federal government-insured Home Equity Conversion Mortgage that’s available to homeowners age 62 and older, commonly known as a reverse mortgage. Despite its availability, only about 2 percent of eligible homeowners have taken out a reverse mortgage. Cost is cited as the most common impediment, although reverse mortgages gained a bad reputation in the past for many other reasons.
However, retirement researcher Wade Pfau’s book ”How to Use Reverse Mortgages to Secure Your Retirement” does an excellent job clearing up some of the common misconceptions about reverse mortgages:
- High costs. Just like conventional mortgages, reverse mortgages have both up-front and closing costs that can be reduced by shopping around for competitive lenders. If a reverse mortgage is the best or only way to buy your retirement freedom, it might be well worth the cost.
- Family misunderstandings. Given stories about angry children who thought they were inheriting a mortgage-free home, some older homeowners are reluctant to burden their children. A carefully designed strategy using a reverse mortgage, however, has the potential to increase the total legacy to adult children, or it can help prevent the unwanted legacy of a retired parent who has run out of money and needs to move with an adult child.
- Home title. It’s simply not true that the lender owns the title of a home with a reverse mortgage. The homeowners keep the title and aren’t required to pay off the debt until they move or die. Heirs also have the right to keep the house and pay off the debt.
- Desperate borrowers. Some borrowers spend the proceeds of a reverse mortgage too quickly or can’t keep up with required property taxes, insurance and maintenance. The U.S. Department of Housing and Urban Development now requires a counseling session for potential borrowers and has enacted rules to discourage taking too much debt too soon from a reverse mortgage.
- Nonborrowing spouses. In the past, spouses younger than age 62 were taken off the home title to allow a reverse mortgage to proceed. Then they were surprised when the borrower died and they had to immediately repay the loan or leave the home. But in 2015, new protections were put in place for nonborrowing spouses: They can remain on the home title and stay in the home even after the borrowing spouse has passed away, without having to immediately repay the loan.
Reverse mortgage expert Shelley Giordano’s book, ”What’s the Deal with Reverse Mortgages?” describes four reverse mortgage “nevers” to help alleviate common misconceptions:
- You never give up title to your home.
- You never owe more than your house is worth.
- You never have to leave your home as long as you maintain the property, the taxes on it and the home’s insurance.
- You never have to make loan repayments in advance of leaving the home unless you choose to do so.
Pfau’s book explores several viable uses for a reverse mortgage, such as using it to:
- Generate a lifetime monthly paycheck that supplements Social Security and other financial resources, like an annuity.
- Provide payments for a fixed period to pay for living expenses while you’re delaying Social Security as a purposeful strategy to optimize that benefit.
- Pay off a conventional mortgage to reduce monthly housing expenses.
- Fund remodeling costs that help you age in place.
- Create a liquid asset through a reverse mortgage line of credit that can be tapped for emergencies or that grows to be used late in life for medical or long-term care expenses.
- Pay for premiums for long-term care insurance.
- Design a strategy to reduce “sequence of returns” risk with invested assets. With this strategy, when the stock market drops, you tap the reverse mortgage line of credit for living expenses, which buys time to allow invested assets to recover. After the market rebounds, you can switch back to withdrawing from your invested assets.
- Pay for living expenses if your financial assets become depleted.
Pfau’s book contains analyses that show it’s best to take out a reverse mortgage line of credit early in your retirement, before you might start tapping it.
Of course, reverse mortgages aren’t for everybody, particularly if you don’t plan to stay in your home for many more years. In this case, it may not be worth incurring the up-front expenses.
On the other hand, if you have substantial home equity, if your financial resources aren’t sufficient to enable you to retire and if you really want to retire, you’d be wise to explore all of your options to deploy your home equity. The two books mentioned above are great resources to help you get started.
