There is a financial product that does allow seniors to borrow for retirement. If seniors have substantial equity in their homes, they can take out what is called a reverse mortgage.
Unlike a traditional mortgage, with this loan product, you don’t have to make monthly payments. Reverse mortgage borrowers don’t pay back their loans until they move, sell or die. Once the home is sold, any equity that remains after the loan is repaid is distributed to the person’s estate.
There are many folks who have most of their wealth tied up in their homes, which is often referred to as being “house rich, cash poor.” A reverse mortgage gives people another way to get at the equity in their homes.
Typically, homeowners who want to access equity they’ve built up have to sell their home or take out a home-equity loan or line of credit. But selling isn’t an option if they want to stay put, and they would have to make payments on the line of credit or the loan. Given those options, a reverse mortgage can seem very appealing.
To qualify for a reverse mortgage, you have to be 62 or older. You have to have paid off your mortgage or paid down a considerable amount so that you have equity to tap. Your home must be your principal residence. Most importantly, borrowers have to maintain the home and pay property taxes and homeowners insurance.
Borrowers can take the reverse mortgage loan as a line of credit, a lump-sum payment, fixed monthly payments or a combination. The loan size depends on the borrower’s age and other factors.
An overwhelming majority of borrowers get a reverse mortgage through the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) program. Reverse mortgages through this program are insured by the federal government and are available through FHA-approved lenders. FHA requires all HECM borrowers get housing counseling.
A February paper by researchers at the Center for Retirement Research at Boston College looked at whether a reverse mortgage is worth it for older homeowners who need money and have equity in their homes.
“For many households, particularly those with less wealth, their home equity is larger than their financial assets,” the researchers wrote. “Tapping home equity in retirement could provide millions of retirees with a way to make ends meet or to maintain their standard of living.”
But people have to consider the cost of a reverse mortgage. A HECM loan on a $300,000 house costs about $13,500 up front and 5 percent on amounts borrowed in January 2020, with the rate adjusted annually, according to the paper.
Given higher upfront cost, a reverse mortgage works best if you plan to stay in your home for a long time.
The vast majority of households rarely change residences, even over several decades. “Households either stay in the home they were in during their 50s, or they buy a new home around retirement, where they generally remain for the duration,” the researchers found.
The researchers concluded that for many older homeowners — with the exception of people who frequently move — tapping home equity through a reverse mortgage could be a good financial strategy. In essence, they can borrow for retirement.
Still, this financial product may not be appropriate for you. Here are some issues to think about before taking out a reverse mortgage.
— Understand the rules involving a non-borrowing spouse. An older spouse will often take out a reverse mortgage in his or her name only, because older homeowners can borrow against a greater percentage of the home’s equity. Under certain conditions, some spouses may be able to stay, but others may not be able to hold on to the home.
— Be sure you can maintain the property. Many seniors faced foreclosure after taking out reverse mortgages, either because they fell behind on property charges or failed to meet other requirements of the complex mortgage loans, according to a 2017 report in The Washington Post. A 2012 report from the Consumer Financial Protection Bureau found a large proportion of borrowers — nearly 10 percent — in the federally-insured HECM program were at risk of foreclosure because they had not paid their property taxes and insurance.
If you have adult children or other relatives living in the house, be sure they understand what could happen if the reverse mortgage becomes due.
— Be careful about draining your home equity. I’m concerned that some seniors will use the money from a reverse mortgage not to supplement other income or to make needed home improvements, but instead as a pot of money that they will too quickly deplete.
The Department of Housing and Urban Development has a lot of fact sheets about reverse mortgages, including ones on the rights of non-borrowing spouses and people who inherit homes with this type of mortgage.