For those who’ve saved — but not quite enough — for retirement, there’s a potential solution right underfoot. According to the Federal Reserve, household equity in real estate for Americans is about equal to their combined retirement savings: more than $18.5 trillion in the third quarter of last year.
Yet most older homeowners remain uninterested in a reverse equity mortgage, which is specifically designed to allow older homeowners to borrow against the value of their equity, without having to pay back a penny until they move or die. The dominant reverse mortgage you can get is called a home equity conversion mortgage, and it is insured by the Federal Housing Administration. In fiscal year 2019 there were fewer than 32,000 new HECM loans issued.
Why? A historically flawed product, and program, have generated plenty of healthy skepticism.
For years, reverse mortgages were marketed as easy ways to meet any financial goal — wipe out credit card debt, buy an RV — without sufficiently vetting borrowers to make sure they could actually afford to do this. While a reverse does not require any payback until a borrower dies or moves (and the amount owed can never exceed the market value of the home), homeowners must still make all property tax payments and are on the hook for maintenance and insurance. Not carefully vetting borrowers to see if they could keep up with these costs led to some reverse borrowers being forced to sell their home and having no equity for their next home.
Another black eye was that many older reverse mortgages put spouses at risk. Many earlier reverse mortgages only listed one borrower. When that borrower died, or had to move to a care facility, repayment of any borrowed money was due. If the other spouse didn’t have the cash to pay back the borrowed amount, the only solution was to sell the house to settle the reverse mortgage, leaving the surviving spouse in a precarious financial situation.
That risk has been pretty much eliminated with regulations that went into effect a few years ago. That change is part of a number of tweaks to the FHA reverse mortgage program that make it less likely that unqualified homeowners will be able to get a reverse mortgage, or be able to borrow a big lump sum, which is often the beginning of problems. (Most reverses are now a line of credit that can be tapped on an as-needed basis.)
But even a cleaned-up program with more consumer protections built in can’t overcome what is believed to be a major hurdle in why equity-rich homeowners aren’t interested: the prospect of tapping all your equity and then having to move later in life. Without any remaining equity, the well-founded fear is that you won’t have money to pay for assisted living or a nursing home.
In new academic research, it’s estimated that just 16% of homeowners who stayed put, or who proactively moved in their 50s or 60s, then made a move to a rental or care facility in their 80s. (The remainder are “frequent movers” in retirement, who would not be good candidates for a reverse mortgage.)
Granted, a nearly one-in-five chance of needing to move is not nothing. But the message of the academic research is that many households would not be at a risk if they tapped a portion of their home equity in retirement.
That said, the safest and most effective way to generate retirement income off your home is to make a move, meaning downsizing. Consider exactly how much retirement stress would melt away. The bigger your capital gain on a home sale, the more this can work in your favor.
You might be able to buy a new place and still have cash left over that can be invested to generate more retirement income. (Renting is an option worth considering, too.) At the same time, even if you don’t pocket a big capital gain, run the numbers on how reducing your carrying costs could alleviate a money crunch. Even if you have the mortgage paid off, there’s always maintenance and insurance and, in most states, property tax to contend with. Reducing your monthly housing costs by 20% to 30% frees up a lot of dollars for other spending needs and wants.
How to reverse safely
If you refuse to consider a downsize and yet are concerned about cash flow, the safer/saner reverse mortgage program may be worth consideration.
To qualify for an FHA-insured reverse you must submit to a meeting (it can be over the phone) with a counselor to discuss the loan mechanics, costs, etc. This is a well-intentioned move by regulators to increase consumer awareness, but it is insufficient.
Long before you even get to the counselor stage, you would be wise to hire a financial planner.
A planner can help you take a clear-eyed look at the pros and cons of a reverse mortgage and how it fits into your total financial strategy. Are you looking for a reverse to cover a big chunk of your monthly income? That’s a dicey move. Or are you interested in using a reverse to fill a small income gap, or set up a line of credit so you can sleep better knowing you have access to the money if the need ever arises? That can make sense.
A fiduciary financial planner will lay out all the moving pieces and explain the risks involved. That’s the best way to home in on whether a reverse mortgage makes sense in your retirement income plan.