If you’re a homeowner who’s considering retiring, you may already be in possession of your most important source of retirement funding: your home.
Demand for reverse mortgages—a type of loan that allows you to borrow against the equity in your home, if you’re 62 or older—is expected to increase as a retirement planning tool, finance and economics experts say.
“Having alternative sources of retirement income is critical for those who are currently retired, those retiring in the near future, and those planning to retire in the next 30 to 40 years,” write David W. Johnson, Ph.D. and Zamira S. Simkins, Ph.D., professors of finance and economics, respectively, at the University of Wisconsin—Superior, in an article published in the Journal of Financial Planning. “One alternative available to many Americans is a reverse mortgage.”
The federally-insured Home Equity Conversion Mortgage Program allows qualified borrowers to draw down the equity built up in their homes in the form of a non-recourse loan. This means you will never have to repay more than what your home is worth at the time your loan term ends.
Borrowers can access their loan proceeds in a few different different ways:
- Monthly term or tenure payments
- Lump sum
- Line of credit
- Some combination of these options
Money received through a reverse mortgage can be used however you see fit as long as you adhere to program requirements, such as fulfilling certain obligations and remaining current on property tax and homeowners insurance.
Your house, your nest egg
Because most American homeowners’ wealth is tied up in their homes, housing as a retirement asset will grow in importance, say Johnson and Simkins, particularly among baby boomers who have high homeownership rates and available home equity.
“With the first wave of baby boomers beginning to retire at a rate of more than 10,000 retirees per day, a trend expected to continue for the next 18 years, the demand for reverse mortgages should increase,” the article says.
If you’re about to retire or have already retired, there are some challenges you might be facing stemming from the Great Recession and housing market crash, along with other factors such as increased longevity.
The housing market crash decreased the value of homes in many areas, and the recession also lowered the value of investment portfolios—particularly harmful to retirees who don’t have the time or ability to wait for their portfolio to recover.
In addition, people are living longer, the United States’ aging population is booming, and the Social Security program is facing solvency issues. Add to that a lack of planning and unrealistic expectations about future health and long-term care costs, the professors write, and many retirees are looking at an insecure financial future.
Favorable reverse mortgage conditions
But while the Federal Reserve’s current monetary policy is keeping interest rates low and limiting significant returns on retiree savings, it has an upside for those considering a reverse mortgage. That’s because adjustable rate mortgages benefit from LIBOR rates that correlate with the historically low federal interest rate, increasing the amount of money you could get through a reverse mortgage.
If there is a surge in demand for reverse mortgages, the article continues, a rebound in home values must occur first, as the equity lost during the housing crisis may make the loan unattractive to some. Home value is indeed gaining back ground, up 5.6% in February annually according to Zillow Real Estate Research and another 3% of appreciation expected by next year.
And, further down the road, reverse mortgages and a retirement funding alternative will become “significantly” more important, Johnson and Simkin believe, especially after recent changes to the federally-insured Home Equity Conversion Mortgage program meant to ensure its long-term financial stability.
The three traditional legs of the retirement “stool”—Social Security benefits, pensions, and personal savings—no longer make for a stable future because of economic and demographic factors, the article says.
“Current and future retirees need to… consider including a reverse mortgage as a part of their retirement plan,” it concludes.
Are you concerned about financial security in retirement and want to know how a reverse mortgage could help?