The Reverse Mortgage: A Well Developed Tool Ready to Serve
Reverse mortgages have come a long way from their inception in 1961 in terms of improvements to product safeness, consumer protection and awareness, along with innovative product expansion for their optimization.(1) Their popularity has significantly grown over the years; however, reverse mortgages are still surprisingly under-utilized particularly in light of some of the different challenges faced by seniors today. (2) A Reverse Mortgage is a loan available to homeowners 62 and older that allows them to borrow against the equity (wealth) in their homes while still holding title to their property. It is the “reverse” to a traditional mortgage since the borrower does not make payments to the lender, but vice versa. The lender charges interest which is added to the amount borrowed and when the last borrower moves out of the home or passes away, the loan becomes due.
The most popular reverse mortgage in the U.S. is the government administered Home Equity Conversion Mortgage (HECM), representing more than 94% of the market. (3) This program is insured by the Federal Housing Administration which is part of the U.S. Department of Housing and Urban Development (HUD). Mortgage companies, banks and other lending institutions offer HECM loans that comply with the rules established by HUD.
At the end of 2015, 24 million homeowners were aged 65 and older with this number growing annually by 1 million, so why are only 60,000 HECMs written each year? Moreover, according to the Center for Retirement Research at Boston College, more than half will not be able to afford their pre-retirement standard of living.(4) The answer to this is complex as it involves older adults making difficult and long term decisions based on a future of uncertainties. And with your home being your most valuable asset, using home equity to pay everyday expenses can be emotional to many as the home is a personal space and an egg nest they would prefer not to touch. (5)
One of the main advantages of a HECM that older adults may not be aware of is the ease of tapping into their home equity while still remaining in their homes. Unlike a traditional mortgage, there is no income, employment or credit qualifying restrictions and interest rates are not based on credit history. If you have a remaining mortgage balance, the HECM can pay it off and free up some cash flow to help with every day expenses. Emily Allen of the AARP Foundation expressed in a recent speech this year “One thing is abundantly clear: Older adults want to continue to live at home as they age. Surveys conducted by AARP have found that the overwhelming majority of Americans want to age in place – to stay independent and in their own homes. Quality of life improves. Both individuals and governments realize cost savings when institutional care is avoided. And, communities benefit from intergenerational engagement.” (6) Times have changed and older adults have many more options besides having to move to a nursing home or move in with family. This is thanks to innovative supportive services and medical technology to help those with more complex challenges. (7)
In examining the long term benefits of reverse mortgages, those that stay in their homes the longest benefit the most. (8) So for seniors who don’t feel their current home will be ideal for their “aging in place” needs, the HECM for Purchase becomes a viable option. It was introduced in 2009 allowing the purchase of a new primary residence with a reverse mortgage loan all in one single transaction. This makes the whole process so much easier for seniors who want a reverse mortgage but desire to move to a home that better suits their needs such as ease of livability and safeness, community, and access to support services.
Considering that by 2030, 1 in 5 people will be 65 and older and as the public comes to better understand reverse mortgages, we could see an increase in their utilization. (9) Fortunately, it has already passed many important milestones from 1961 to become a safe and valuable tool thus making it an excellent option for seniors utilizing reverses as part of retirement income strategy. (10) The challenge is the public’s accessibility to more knowledge based information versus just scattered information in the media and by word of mouth. It’s a major decision and one that requires much consideration to be able to make informed decisions in planning for the post retirement future. Tapping into home equity is an emotional decision for many as home owners would prefer not to touch their nest eggs, however, for those seniors who are struggling to stay in their homes and maintain financial independence; reverse mortgages could be very beneficial in the long term.
(1), (10) Guerin, Jessica. “The History of the HECM: A Detailed Timeline of the Product’s Evolution”. The Reverse Review. October 2012: pp. 40-45.
(3), (5), (7) National Council on Aging. “Use Your Home to Stay at Home”. The official reverse mortgage consumer booklet approved by the U.S. Department of Housing & Urban Development. 2015: pp. 3-21
(8) Nakajima, Makoto. “Everything You Always Wanted to Know About Reverse Mortgages but Were Afraid to Ask”. Business Review. Quarter 1 2012: pp. 19-30.
(2), (4) Guttentag, Jack. “The Mortgage Professor: How to Unleash the reverse mortgage market”. Tribune News Service. July 7 2016: pp. 1-4.
(6), (8), (9) Allen, Emily. “Remarks by Emily Allen Senior Vice President, AARP Foundation Metropolitan Housing Coalition 2016 Annual Meeting Louisville, KY”. Housing-The Linchpin of Well-Being. June 9 2016: pp. 1- 20