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| Don’t Regret “Reverse” @Bruce Laurance |
The MetLife Mature Market Institute published a study of how aging homeowners use reverse mortgages. Reverse mortgages are available to homeowners age 62 or older. In the past, many older homeowners took out this loan as a way to enhance their quality of life. But now, people who consider these loans are more concerned about urgent financial needs, including lowering debt.
By refinancing borrowers:
- borrowers can defer making principal and interest payments on their existing home mortgage until they move out.
- must also meet all of their other reverse mortgage obligations including making timely property tax and homeowners insurance payments.
This strategy, however, can also increase financial risks if borrowers do not manage their spending or rapidly draw down their home equity.
Their study is based on responses to questions that U.S. Department of Housing and Urban Development (HUD) approved counselors must discuss with older homeowners as part of mandatory counseling for all reverse mortgage applicants. 21,240 of these counseling sessions and related data were analyzed for the study. Here are key results:
- Older homeowners are looking for solutions to help manage their often precarious financial situation, and that a reverse mortgage can play an important role.
åÊ - More reverse mortgage borrowers are applying at earlier ages. While the average age of borrowers is about 73 years old, the average age of home-owners who went through counseling between September and November 2010 was 71.5 years old.
åÊ - 46% are under age 70.
- One in five (21%) are leading edge Baby Boomers (age 62 to 64). In 1999, this was 6 percent.
- Most of these homeowners (67%) wanted to lower household debt.
- Only 27% were considering a reverse mortgage to enhance their lifestyle.
- About two-thirds (67%) of recent counseling clients have a conventional mortgage that will need to be repaid if they decide to take out a reverse mortgage.
- About one in four (27%) reported having both housing and non-housing debt. Borrowers with sizable existing debt may rapidly deplete home equity by accessing the equity to repay debt.
- For about one-third (32%) of counseling clients, their existing mortgage may exceed 50% of the value of their home. They may not have enough equity to qualify for a reverse mortgage, or may have to wait several years until they qualify for a loan to meet their financial goals.
Met Life concluded that older homeowners can use assistance and additional consumer education to ensure that they make wise decisions about the most appropriate use of their ÛÏnest eggÛ of home equity.
This is especially needed to:
- enable potential borrowers to compare the pros and cons of different loan options, features, and costs.
- foster understanding that in paying off an existing mortgage loan, they are not eliminating their housing obligation, but only deferring the repayment.
- encourage borrowers to involve other professionals, including, as appropriate, legal advisors, financial planning and tax advisors, and medical advisors.
The study suggests that as the Baby Boomer generation ages, reverse mortgages may be part of a growing trend to include home equity as a natural part of retirement planning and addressing income shortfalls in retirement.
And that to me is plain scary. Because however you slice it, you still have debt. It is not magic, free money here. Obviously, the idea is to age-in-place and should you do that successfully, when you die, your estate will have to pay the difference if there is a shortfall between what you received in your reverse mortgage money versus what the house is sold for. And ÛÏreversingÛ the situation, if the house covers the reverse mortgage, it will lower the estate for heirs. And that is without factoring whether you may need long-term care and that is a whole other discussion.
Proceed cautiously and get great counseling.åÊ
I would love to have a pro and a con argument for this. Any guest bloggers want to take me up?