We have some 77 Million baby boomers in the U.S., yet somehow about 25 Million of them have a net worth of less than $4,000, excluding the equity in their homes! (Source: Age Wave)
Does this data tell us that some of these folks will need to tap that equity at some point for retirement income?
Enter stage left: The Reverse Mortgage (Referred to in this article as “R.M.”). Lets explore:
R.M.’s used to typically be a last resort for the “little old lady” who needed some cash for a caretaker and to stay in the home for a few years before passing. And she would usually get a raw financial deal from the bank in the process. But today, Boomers (Who just started turning 65) are increasingly considering these “backward” loans to pay debts and/or provide “Bridge funding” for their early years of retirement.
An R.M. is simply that: the polar opposite of a traditional mortgage. A lender pays a certain amount of monthly income to a homeowner and this loan is re-paid when the house is sold. In 1990 the average age of an R.M. borrower was 76. Today it’s 73. (The minimum age to qualify is 62)
Here are 3 important considerations:
1) It’s a Non-Recourse loan: You can’t owe the lender more than the price of the house – even if the loan eventually outstrips it.
2) It can bridge gaps: As touched on earlier, one can take a reverse mortgage in order to defer social security payments so the payout increases. A couple on the fence about downsizing can pull some cash via an R.M. to buy a few years to decide, then repay the loan when they sell.
Sounds good so far so what’s the real problem?
3) They are still too expensive!: Lets be clear: Banks don’t offer these loans because they are moralists! Closing costs can approach $20,000 or more and, as usual with any type of financing, the pink elephant in the room is your interest rate. Rates on R.M.’s typically run higher than on traditional loans. And because you are not making payments, the loan grows as interest is assessed and accrues.
Still, as the mammoth size Baby Boom generation continues to migrate through retirement – with so much equity in their homes – I imagine that R.M.’s will continue to evolve, improve and become more competitive. So keep them in mind. But as always, buyer beware! Do your due diligence and consult advisors you trust that know this stuff before getting involved.
