While a reverse mortgage can be a viable option for senior retirees to supplement cash flow that mainly comes from Social Security benefits, for some seniors it can be a costly way to delay receiving Social Security benefits until a later age. This does not mean that the product is devoid of potential benefits for some people, but such a tool should be viewed with full understanding of the potential benefits and drawbacks.
This was announced by Paul Brandus, financial columnist in a new article published by MarketWatch. According to him, a reverse mortgage is associated with a certain baggage of reputation, but this does not mean that such an option should be immediately abandoned.
“Given how heavily millions of older people depend on social security (the average monthly check this year is a modest $ 1,543), reverse mortgages can make a big difference to many people,” he writes. “Of course, that’s not all, and while a reverse mortgage may be a wise decision for some seniors, it may not work well for others.”
For example, advertising for reverse mortgages aimed at seniors does not include information about what constitutes a maturity event for a reverse mortgage, Brandus says. If the borrower dies, moves in, or sells the home, the negatively amortized loan balance is payable. The borrower is still required to continue to pay for maintenance, property taxes and homeowners insurance, which the columnist said does not make it into industry advertisements.
Nor does the reverse mortgage industry’s advertisements explicitly state that obtaining such a loan could negatively impact the borrower’s ability to transfer the home as an inheritance asset, depending on how the balance is settled after maturity, he says. …
One source of information you may find useful is the Boston College Center for Retirement Research (CRR), which recently posted information on the habits of older people in relation to the use of equity capital at retirement.
“Addressing both sides of the problem, [CRR] notes that “home equity has great potential to alleviate the financial problems of retirees – after all, about $ 8 trillion of wealth is locked up in the homes of the elderly,” Brandus writes, citing a CRR study. “It can really reduce the financial stress that many retirees can experience as they continue to age.”
One of the reasons reverse mortgages have yet to catch on among older populations may be due to persistent reputation issues, Brandus says, citing the CRR study. The social security angle could also encourage older people to look into reverse mortgages, he said.
“The longer you wait to get social security, the greater the benefit,” he says. “Why not take a reverse mortgage at, say, 62, and use that money while your Social Security benefits go up? It looks like a temporary loan. But [Consumer Financial Protection Bureau] (CFPB) have calculated that this is generally not a good idea due to the aforementioned interest and fees. “
The costs of this option, as outlined in 2017 report published by CFPB, cited by Brandus, whose results have been criticized by officials from the National Reverse Mortgage Lenders Association (NRMLA) and retirement researcher Jamie Hopkins.
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