Once widely seen as money of last resort, reverse mortgages are fast entering the mainstream of retirement income. Boomers are turning to reverse mortgages earlier to pay off debt or improve their lifestyle, according to a report from MetLife Mature Market Institute. Increasingly, those approaching retirement view home equity as a key source of future income.
Boomers have always thought differently about their homes and debt. They moved and remodeled, and they borrowed like no generation in history. Popularizing the reverse mortgage, maligned in the past for high fees and high risks, seems a natural evolution. The good news is that reverse mortgages are now far more consumer friendly, though they are not for everyone.
Boomers aged 62 to 64 now make up 21% of likely reverse mortgage borrowers—up from just 6% of that age group in 1999. Nearly half of those considering a reverse mortgage are under 70. The most common age of borrowers in 2003 was 74. By 2006, the most common age had dropped to 71, and it fell to 63 in 2009.
Boomer acceptance of debt is part of the reason. According to the MetLife report:
“Boomers are more willing to take on debt to fund major purchases, pay for their children’s or grandchildren’s college tuition, or to pursue their lifestyle dreams. Between 2004 and 2007, households headed by someone age 56 to 61 increased their debt by 38%.”
Another explanation is that hard times have forced people to look for income alternatives. From the report:
“Younger homeowners may be interested in these loans [because] they have over-extended themselves financially. When the recession hit in 2008, about 59% of people age 50 to 64 cut back on their spending; a much higher proportion than among those age 65 and older (36%).”
Still, the growing interest in reverse mortgages among homeowners under 70 is somewhat alarming. Age plays a big role in how much money you can get from a reverse mortgage. That’s because the amount is determined by your remaining life expectancy. At today’s rates, a 65-year-old with a $250,000 home that’s free and clear could choose a lump sum or line of credit of $103,000, or monthly payments of $687 for as long as they live in the house. An 85-year-old in the same situation could get $141,000 in cash or a credit line, or nearly double the monthly income.
New reverse mortgage products like the Department of Housing and Urban Development’s Home Equity Conversion Mortgage Saver (HECM Saver) have brought down costs. But there are still risks. If you burn through your home equity you’ll lose a valuable safety net and may have nothing to leave heirs. Meanwhile, if you find that you cannot afford the property taxes, insurance and upkeep on your home, the lender may foreclose and you’ll lose your right to stay in the house as long as you live.
For all their seeming appeal, reverse mortgages remain a tricky financial consideration. A good place to start is with this reverse mortgage calculator. It may make more sense to sell your home, take the proceeds and downsize. But if you want to stay put and need the income this is a decent option — and you’ll have lots of company.