Reverse mortgages used to be something elderly widows considered when they were desperate to pay the bills in their waning years. Today -- for better or worse -- these complex loans are becoming a key factor in many people's retirement planning.
The demographics of reverse mortgage borrowers have changed significantly in the last decade. The average age of borrowers in 2003 was 74. By 2009, the average age had dropped to 63. Of the homeowners who went through the Home Equity Conversion Mortgages, or HECM, counseling program in the fall of 2010, 46 percent were younger than 70, and 21 percent were leading-edge baby boomers ages 62 to 64.
The MetLife Mature Market Institute in partnership with the National Council on Aging has analyzed this and other data related to reverse mortgages and concludes that younger applicants are signing on for these loans even though the program isn't particularly attractive for younger borrowers. The report offers this illustration:
At today’s rates, a 65-year-old with a $250,000 home that she owns mortgage-free can expect to receive about $103,000 as a lump sum or line of credit from a HECM Standard reverse mortgage. Or she can choose to receive regular payments of $687 per month for as long as she continues to live in the home. By comparison, an 85-year-old who takes out a reverse mortgage on a $250,000 home at the same interest rate will be eligible for $141,000 in cash or line of credit, or he can receive about $1,320 per month from this loan. The upfront fees will be a hefty $14,721 in either case.
The study suggests that a younger person who is considering a reverse mortgage to help him pay for retirement should first figure out how he'll handle these likely problems 20 or more years down the road:
- The rising costs of taxes, insurance and maintenance. When these bills are double what they are now -- and they very likely will be in 20 years -- where will the money come from to pay them?
- What happens when one half of a couple dies before the other? Can the surviving spouse continue to live in the home and pay the bills? If not, where will that person live, and how will he pay those living expenses?
The report concludes that while reverse mortgages can be helpful for young boomers hoping to navigate a financial crisis, it will be resolved by an later influx of cash -- a defined benefit retirement plan kicks in, for example. For most people, reverse mortgages still make much more sense as late-in-life buffers against inflation or health crises.