I keep seeing Tom Selleck and Henry Winkler on TV hawking reverse mortgages. I’m pretty sure “Magnum P.I.” and “Fonzie,” now 76 and 75, respectively, don’t personally need the product they’re peddling—but what about you?
What is a reverse mortgage, anyway? It’s a loan that a bank makes to you, backed by the equity in your home. Here’s an example. Let’s say your mortgage is paid off and your house is valued at $285,000 (about the price of a typical home in May, according to Zillow). Generally speaking, if you’re 62 or older and the home is your primary residence, then you could borrow against that amount—giving you additional cash to live on during your golden years. If your house is worth $285,000 but you still owe, say, $100,000, you could, potentially, borrow against the difference.
You could get money in a variety of ways, including a lump sum, a certain amount each month, or as a line of credit. Also: Reverse mortgages generally do not require you to make any payments back to the bank.
Given how heavily dependent millions of seniors are on Social Security—the average monthly check this year is a modest $1,543—a reverse mortgage could make quite a difference to many folks.
Of course, there’s much more to it than this, and while a reverse mortgage could be a wise decision for some seniors, it could be a poor one for others. Here’s what the commercials don’t tell you:
- The entire loan balance becomes due if the borrower 1) dies, 2) moves or 3) sells the home.
- You’re still responsible for major expenses like property taxes, maintenance, and insurance.
- Taking out a reverse mortgage means spending perhaps a significant amount of the equity you’ve built up on loan fees and interest, which can pile up.
- You may not be able to pass your home down to your heirs.
A reverse mortgage is a major financial move. As always, the best advice is to discuss it fully with a trusted adviser. And certainly don’t be swayed by what some smooth-talking TV star says.
Some additional perspective that much be useful, both pro and con, can be found in a new report from the always illuminating “Squared Away Blog,” published by the Center for Retirement Research at Boston College.
Addressing both sides of the issue, it notes that “home equity has great potential to ease retirees’ financial problems – after all, roughly $8 trillion of wealth is locked up in older people’s houses.” Tapping into this can indeed reduce financial stress that many retirees may feel as they continue to age.
And yet, few seniors choose to go this route. The blog adds: “While extracting equity could be a viable way to get more income, few retirees are convinced they should do it. Only about 42,000 federal insured Home Equity Conversion Mortgages (HECMs) were sold in 2020.” You may be surprised to know that twice as many seniors went the reverse mortgage route a decade earlier.
Why haven’t reverse mortgages caught on? The paperwork and fees that are an inevitable part of any reverse mortgage is a turnoff;the report also notes a lack of trust concerning reverse mortgages, “which are more complicated than standard mortgages.”
Meanwhile, another report, this one from the Consumer Financial Protection Bureau (CFPB) offers another reason, namely that seniors understand that a reverse mortgage simply isn’t viable for any homeowner who plans, at some point, to sell their house.
There’s also a Social Security angle here. The longer you wait to take Social Security, the bigger the benefit. Why not take a reverse mortgage at, say 62, and use that cash while your Social Security benefits grow? Sounds like a bridge loan. But CFPB number-crunchers calculate that this generally isn’t a good idea because of the above-mentioned interest and fees. “Reverse mortgages are an expensive way to delay Social Security,” the CFPB says, adding that “the costs of a reverse mortgage loan are $2,300 higher than the additional cumulative lifetime amount the typical borrower will expect to gain from an increased Social Security benefit.”
Tom Selleck and Henry Winkler are great actors and I’m sure they’re good guys. But you won’t hear them uttering those lines in their commercials.
As usual, consider that a reverse mortgage could be helpful. But it also could be harmful. Turn off your TV, do your homework, seek trusted advice and proceed carefully.