At the Housing Wealth in Retirement Symposium in Washington, D.C., researchers met with policymakers to discuss topics related to seniors with home equity in retirement. This included a discussion on reverse mortgages, during which there were suggestions that reverse mortgages were not being used to their full benefit by retired seniors.
Reverse Mortgages May Be Underutilized
Currently, only an estimated 1% of people eligible are taking advantage of a reverse mortgage. Research suggests that around 10 times as many seniors could potentially benefit from a reverse mortgage. According to Jamie Hopkins’ article in Forbes, presentations at the conference indicated that seniors were underutilizing reverse mortgages, even in those instances where a reverse mortgage could greatly benefit the senior.
The reason for the underutilization is unclear, although it’s thought to be related to a lack of understanding about reverse mortgages.
What is a Reverse Mortgage?
According to Mary Carchur, with a reverse mortgage homeowners takes the cash value of their equity and postpones payment of the mortgage until leaving the home, typically at the time of death.
Reverse mortgages are exclusively available to seniors over the age of 62 who meet certain loan requirements. If used appropriately, a reverse mortgage can help a retired senior preserve their financial security and stay in their home.
Repayment generally happens after the senior permanently leaves the residence, through death or moving, or if the terms of the loan are violated. A reverse mortgage is usually repaid through sale of the home, with the loan holder or their heirs receiving the difference if the home value is greater than the loan principal and fees. The FHA insures reverse mortgages, so holders or heirs will never owe more than the value of the home upon sale, even if the loan principal is higher than the home value.
Reverse Mortgages as a Retirement Supplement
Appropriate use of reverse mortgages can help retired seniors avoid financial insecurity if their pensions, retirement funds, or portfolios are not able to support them through their retirement. They can also be a valuable tool to eliminate a traditional mortgage and create more flexibility of home ownership.
A reverse mortgage, however, is not a good option for seniors who have certain estate planning objectives. But, it can be a useful tool to help seniors avoid running out of retirement funds. As longevity increases for many seniors in the United States, a reverse mortgage allows for a certain amount of financial security for seniors.
Although many seniors have traditionally used reverse mortgages as a last resort, seniors today should investigate them sooner than later to understand the financial security and life options they can potentially provide.
Increasing Awareness and Understanding
At the symposium, it was suggested that more education on the topic of reverse mortgages is needed to help seniors gain a full understanding of the benefits, risks, and terms of this type of loan. Reverse mortgages have existed for a long time, but past versions of the government-insured program were not as beneficial for the homeowners as the current program. Presenters at the meeting stressed that consumers should take a second look at reverse mortgages.
Above all, reverse mortgages are designed to help seniors remain in their own home after retirement. With the increased consumer protections in the program today, it may be easier for more seniors to take advantage of the program with a positive outcome.
When appropriately used, reverse mortgages offer another option for seniors to have more security in retirement. As a government-backed program, there may be more reasons for some eligible seniors to investigate the possibility of a reverse mortgage, especially in cases where they already have an existing mortgage on their home.
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