More Seniors Using Reverse Mortgages to Raise Cash
Senior Editor, CNBC
Finding themselves financially strapped, more seniors at an earlier age are trying to get reverse mortgages on their homes in order to survive, according to a new report.
The study says the percentage of people aged 62 to 64 applying for reverse mortgages has increased 15 percent since 1999.
The reason for the dramatic upswing among 'younger' seniors is simple, the report concludes: They need the money.
"The average age for taking out reverse mortgages has been around 71," explains Sandy Timmerman, director of the MetLife Market Institute who conducted the survey with the National Council on Aging.
"But with job losses, higher debt and living costs, more and more of the 'younger' seniors are looking at reverse mortgages as a way to pay their bills and keep their homes," Timmerman adds. "It shows the devastation some seniors have gone through since the financial downturn."
Reverse mortgages—which allow homeowners to borrow against the value of their homes—have been around since the early 1960's, but have grown in popularity. TV commercials with celebrities like Henry Winkler, Robert Wagner and Fred Thompson promoting reverse mortgages, are rampant during weekends and late night viewing hours.
But whether it's the ads, the financial necessity, or both—reverse mortgages have become attractive to more seniors. In 2010 alone, more than 80,000 Americans over 62 years old finalized a reverse mortgage.That's up from 25,000 in 1995.
'It's not surprising that more seniors are doing this at an earlier age," says Karl Byrd, CFP, vice president at Security Ballew Wealth Management. "We live in a time when people are not planning for their retirement or can even get out of debt. Some seniors can't even buy groceries right now."
The increase in the number of reserve mortgages may simply be due to the growing number of seniors, poor or not, says Gregg Smith, COO of the lending firm, One Reverse Mortgage.
"We've noticed the age range for reverse mortgages getting 'younger' for us," Smith says. "But when you figure that some 10,000 people a day reach 62 in the U.S., we're seeing this grow among all seniors and believe it will get even bigger in the next ten years."
Another selling point for reverse mortgages is the gain of respectability.
"Those ads aside, reverse mortgages are getting rid of the bad reputation they've had in the past," says Mark Goldman, a real estate professor at San Diego State University and a real estate investor, who's handled reverse mortgages for some of his clients—including his in-laws.
"The loans are backed by the government and more financial planners are looking at them as a viable option for their clients," Goldman goes on to say. "With mortgage rates low, and reverse loan fees dropping, they can make good sense."
How a reverse mortgage works is fairly simple. Designed for those 62 or older, a homeowner gets a lump sum or a payout for the equity in their house. The loan, with interest, does not have to be repaid until the last surviving homeowner moves out of the property or passes away.
There's no income or credit check and even if a senior is in foreclosure—and as long as the house has equity—they are eligible. All who apply must meet with an independent home loan counselor to discuss the ins and outs of getting a reverse mortgage.
Reverse mortgage loans are not taxable, and generally don’t affect Social Security or Medicarebenefits. Most loans have adjustable rates and can be re-financed, while some have fixed rates.
But they do come with a price tag and tight restrictions. Previous loans have to be paid off. Closing costs can add up—the average is about $2,000—$3,000 depending on location. And there's no free ride when it comes to property taxes and mortgage insurance—they have to be paid by the homeowners to keep the house.
Homeowners must use the house as their main residence, and if the homeowner dies or wants to sell, the proceeds must go to pay off the loan.
Another warning signal—reverse loans can use up all or most of the equity and leave seniors with fewer assets as they grow older. And the loans are geared toward older seniors. The older someone is, the more credit is available. That's why most reverse mortgages have been taken out by people in their 70's. That is until now.
"Weaker economic conditions are pushing 'younger seniors' to go for any amount of money they can get at an earlier age," says Timmerman.
"The people we surveyed in the younger age range applying for the loans were clear about their needs for financial help," Timmerman says. "They didn't seem like they could wait."
At a time when more seniors in the U.S. are facing poverty—some 15.9 percent are considered poor— it's not surprising to see the move to reverse mortgages, says Mark Goldman.
"I saw a an older woman at the drug store the other day, asking her pharmacist to please cut the costs of her medicine," Goldman adds. "When you see seniors facing rising health care costs, and as they lose jobs and see 401(k) returns shrink, it's going to be tough not to look at a reverse loan."