Reverse Mortgage: Yes or No?
The older people who either consider a reverse mortgage or actually get one don’t have much else to fall back on. Their primary assets – outside of their homes – are a car worth no more than $7,000 and about $2,000 in a checking account.
This was one salient fact unearthed about reverse mortgage users – or people who’ve looked into them – in a 2014-2015 survey led by Stephanie Moulton at Ohio State University. This supports a later study by Moulton that found that people who take out the loans tend to be in worse shape financially than other homeowners. The survey provides a more complete picture of who is turning to reverse mortgages – and why other people find alternatives to solve their financial issues.
Federally insured reverse mortgages, known as Home Equity Conversion Mortgages, or HECMs, allow homeowners over age 62 to borrow against their often-substantial home equity. These loans do not have to be paid back until the older homeowners sell the house or die.
Despite these attractive financial features, reverse mortgages are not popular: fewer than 60,000 were sold in 2015. Many elderly homeowners are appropriately wary of a complex financial product. The fees and interest rates are also higher than on a standard mortgage. But the idea behind HECMs is to allow cash-strapped seniors either to pay off their existing mortgages, eliminating house payments, or to create a readily accessible pool of cash or a new source of monthly income. Either way, they free up money that retirees can use to meet their expenses, emergencies, or medical bills.
The researchers interviewed some 1,800 older households after they had received the counseling required under federal law to apply for a HECM reverse mortgage. About two-thirds of those counseled proceeded with the loans, and one-third decided against it. Here’s what these two groups look like:
- Widows and single women made up a disproportionate share of those who received HECM counseling.
- The counseled households were also mainly white, with an average age of just 70 and average retirement income of about $2,400 per month.
- Among those who took out reverse mortgages, the average amount owed was $156,500. The mortgage debt of the typical person who went through counseling was about 30 percent of the value of their homes, but those who decided against taking out a HECM tended to owe more.
- Their primary use for the proceeds was to help pay daily expenses, either by paying off mortgage or non-mortgage debt. Some also used the proceeds to make home improvements and for health or disability expenses.
- Three out of four borrowers said reverse mortgages “improved the quality of life.” One out of four said the money they received didn’t last as long as they had anticipated.
- A small minority of those surveyed felt pressured by a counselor to obtain a loan.
- The reasons for deciding against reverse mortgages included HECM’s relatively high fees, not having enough equity to make it worthwhile, wanting to own their homes free of any mortgage, and wanting to leave their homes to their children.
- Many said they found other ways to solve their financial issues, either by reducing their expenses or refinancing their primary mortgages.
- Those who instead decided to sell their homes said they did so to avoid maintenance costs (50 percent); because their property taxes or homeowners insurance were too high (42 percent each); and because they needed a more accessible or smaller home (39 percent each).
The full survey can be read here.
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