Is it time for retirees to take another look at reverse mortgages?

U.S. housing prices have risen during the pandemic, and average home prices reached $ 375,300 in March, a record high for 1999, according to the National Association of Realtors. Although mortgage rates have risen sharply and sales have recently weakened, the market is likely to remain resilient with housing supply for at least 20 years.

Beneficiaries of the strong housing market include almost retirees and retirees, as almost 80% of adults aged 65 and over own their home. Even more suggestive, most people 62 years of age or older without retirement savings or pensions are homeowners, said Shai Akabas, director of the Economic Policy Project at the Washington, DC-based Bipartisan Policy Center. Congress at the end of last year. Home equity is the biggest asset for people of retirement age.

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Economic security later in life can be improved by converting the wealth of illiquid housing into money for living. There are a number of ways that homeowners tend to convert their home into cash. Sell ​​and reduce the size to a smaller, less expensive place; take out a second mortgage; or secure a home equity line of credit. However, the math of downsizing is becoming less and less attractive with rising prices for smaller homes. A second mortgage means taking on a monthly debt obligation to pay off. Home value lines of credit are usually reserved for those with high incomes and stellar credit scores.

Another alternative is the reverse mortgage, a loan contracted against the value of your primary residence. Unlike a regular mortgage, do not repay the loan amount and accrued interest until you no longer live in your home, usually when you move or die.

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I’ve never been a fan of reverse mortgages. It is a complicated high-priced product with a cloudy history of bad actors taking advantage of the economically vulnerable. Consumers have never accepted the main reverse mortgage product dating back to 1989. Less than 1% of eligible homeowners have purchased one.

“Consumers are right,” says Laurence Kotlikoff, an economist at Boston University who is president of and author of “Money Magic: an Economist’s Secrets to More Money, Less Risk, and a Better Life.” “It all seems nasty to me.”

Reverse mortgage abuses are of poor quality. Period. But the real problem with the legitimately made product, for the most part, is that it always looked like a niche product. The dramatic rise in house prices suggests it’s time for many large homeowners to take another look. The record shows that older homeowners are more likely to take out reverse mortgages when home prices are high, perhaps as a way to block capital values. Higher home prices will also mean that more people will be able to apply for the loan. While I still can’t get excited about the product, reverse mortgages are worth the time to research and consider.

“Most retirees don’t have a lot of money in their purse,” says Christopher Mayer, a finance professor and chief executive of reverse mortgage firm Longbridge Financial, LLC. “Home equity is huge. Why wouldn’t they use the value of housing in retirement?

The key to reviewing reverse mortgages is that the product has improved since the 2013 renovations. For example, one of the ways borrowers can lose their home is if they don’t pay their home insurance. taxes and maintenance costs. A series of reverse mortgage scandals involved elderly homeowners living on low, unstable incomes who could not keep up with these payments. The 2013 reforms, such as mandatory credit checks on borrowers, greatly reduced the risk of default.

The great attraction, of course, is that most close and retired seniors have no pensions and little savings for retirement. A reverse mortgage is a way to strengthen your home balance and income stream if included as part of a comprehensive retirement strategy. For example, a reverse mortgage can make it convenient to delay Social Security filing, a smart way to increase benefit payments. “Reverse mortgages are becoming a more viable tool for many homeowners,” says Stephanie Moulton, research director at John Glenn College of Public Affairs in Ohio State.

Reverse mortgages are tricky, but here are the basic features. In order to qualify for the most common reverse mortgage, a home equity conversion mortgage (HECM) with federal support, you must be 62 years of age or older. You have to live in the house and own the property or pay off much of the mortgage.

Just like taking out a conventional mortgage, you need to show that you can afford the ongoing costs of home ownership: homeowners insurance, taxes, and maintenance. Unlike a conventional mortgage, you are not required to make out-of-pocket payments over the life of the loan, even if interest is added to the loan. A reverse mortgage has a high initial cost. The value of the loan is calculated using a formula that takes into account your age, the value of the home, and interest rates. You must attend a mandatory counseling session. Borrowers can access their funds in a variety of ways, with global lending and credit line distributions being the most popular. A loan without recourse, you are not responsible for the balance that exceeds the value of the home for sale.

Market economists point out that it is increasingly being used to pay off existing mortgages and other debt. It is not surprising that the proportion of households headed by a person aged 65 or over with a household debt has doubled in the last three decades to more than 30%. Taking advantage of home equity with a reverse mortgage can ease the financial pressure.

“You’re replacing one form of debt with another,” Moulton says. “But the way it’s structured you end up with more cash flow.”

Reverse mortgages without additional reforms are probably too complicated to move from taxpayers of retirement income to mainstream finance. However, reverse mortgages are likely to play an increasingly important role in generating income for homeowners who are poor in cash and rich in assets. “I really think home value is an important part of retirement security for older Americans,” Mayer says.

He is right.

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