Some say this misunderstood financial tool can be a smart solution
The housing market may be struggling, but one thing has remained steadfast: Home equity levels have moved steadily upward until recently. This summer, aggregate home equity in the U.S. reached the highest level on record, jumping 20% in the first quarter to $27.8 trillion, according to the Federal Reserve.
For older homeowners shouldering the rising cost of, well, almost everything thanks to inflation’s nearly 10% bump, could tapping this massive asset be a smart solution? Reverse mortgage lenders say yes, and a number of well-respected financial planners and retirement experts are backing them up.
The reverse mortgage has been around since 1989
But before you get all nervous at the mere mention of reverse mortgages, rest assured – they are legit. These federally backed loans have been around since 1989 and they’ve helped hundreds of thousands of senior homeowners “age in place” – a term coined to describe an older person’s ability to remain in their home, and pay for the care and services they need at home, as they age.
Here’s how it works: A homeowner age 62 or older can withdraw a portion of the equity in their home without having to pay it back until they pass away or leave the home. It’s called a reverse mortgage because, unlike a traditional mortgage in which the borrower makes payments to the lender, the lender makes payments to the borrower. So, what’s the catch? Well, the home has to be the borrower’s primary residence, and they still have to maintain the home and keep up with tax and insurance payments. At no time does the homeowner give up the title to their home (a very common misconception).
Reverse mortgages are not for everyone
Of course, reverse mortgages aren’t for everyone. If you plan to sell your home in the next couple of years, or you if you’re living with someone who will not be a co-borrower, it’s likely not a good fit. Also, there could be fees associated with the origination along with closing costs and mortgage insurance. Meanwhile, you’ll end up owing interest on the money you “borrowed” (even though it’s the equity you already paid into your home) and those interest payments are not tax deductible (as they are with a mortgage). Finally, funds from a reverse mortgage could complicate your eligibility for Medicaid, Supplemental Security Income, etc.
Traditionally, a reverse mortgage has been viewed as a loan of last resort reserved for people who had no other resources aside from their home equity. But in recent years, these loans have been heralded as a smart financial planning tool for senior homeowners who want to tap their equity for cash rather than drawing down on other assets at inopportune times. Whole strategies have been laid out in academic journals exploring and validating this concept.
Home equity is high, will reverse mortgages gain traction?
Now, with home equity levels so high they’re grabbing headlines – and inflation worse than it’s been in four decades – one has to wonder if reverse mortgages will gain traction as a solution for senior homeowners who have watched their home values surge well past the original sale price. Or, will younger relatives or heirs frown on the concept of letting their loved ones participate in a reverse mortgage for fear of losing the home after the family member passes?
A recent Forbes article touched on this very concept, pointing out that seniors are not only shouldering the weight of inflation, but many have also seen their retirement investments plunge in the stock market. While this “double whammy” has left some older homeowners feeling the pinch, there is one bright spot, according to Forbes: “Their home equity has appreciated significantly, which could be a tempting target to tap to help make ends meet.”
For its part, the reverse mortgage industry continues to push, but of course, it hasn’t been untouched by the interest rate hikes that dampened mortgage lending this year. Time will tell if this product can push past the obstacles in its way. In the meantime, one thing is for sure: Every time national home equity levels make the news for ticking up yet another notch, more people will expound on the ways homeowners can utilize what may be their largest asset.